A month and a half ago, I wrote about Expenses: Where Are They Going and Why it Matters. The personal finance community has, for the most part, treated expenses as one immutable number, carved in stone. Because our personal situation is very different, I wanted to present that alternative view. Reading that article isn’t necessary, but I encourage it if you find this topic interesting.
The FIRE (Financial Independence, Retire Early) story has typically been, “Do a 4% rule calculation on your nest egg and if it is more than your expenses you are financially independent.”
It may be impossible to over-simply anything more than I just did in those 21 words. (If that was confusing, I recommend reading my guide to financial freedom.)
Our expenses are likely going to be changing by dozens of thousands of dollars over the years. When I see a lot of up and downs, I immediately think, “Let’s do an average and plan for that.”
With that in mind, I present you:
Our Expenses Over the Next 45 Years (version 1)
The only way I know how to present this is through a spreadsheet. So you’ll want to click on this Google Spreadsheet and follow along.
(Seriously, you need to click that to have any of this make any sense.)
These are our “necessary expenses.” They don’t include going out to eat, travel, or any of the fun discretionary items and experiences. Maybe I should have included that? There’s a reason why this is version 1. I need to leave some room for improvement for version 2.
As you can see, I have the expenses in columns across the top of the spreadsheet (the “average kids age” was just to help me plot their school expenses). I have years for each row. I went to age 85 because that seemed to be reasonable stopping point given life expectancies. As you can tell the numbers stay mostly the same for 27 years, so it’s easy enough to add or subtract some years. Unfortunately this means I didn’t give you the full 45 years, I promised in the title. I hope you’ll find it in your hearts to forgive me.
I’m going to walk you through column by column and write a little about each.
With two boys age 3 and 4 now, day care has been a cost for several years now. Many people look forward to that cost going away as their children attend public school.
We’ve chosen to send our kids to private school… and here’s why.
I’ve budgeted $30,000 a year for the two of them through high school, which includes summer camp. I feel very confident in the number through the 8th grade as I know the school and the costs. High school is a question mark. We’ll have to cross that bridge when we come to it. We could go back to public school or look to another private school. Hopefully, they’ll be far enough ahead academically that even if we do public high school they can take some courses at a local community college.
In any case, I have $30,000 budgeted for high school for them as well.
At age 18, I bump our expected expenses to $80,000. I have no confidence in this number because college planning is impossible. However, it seems good to have $40,000 budgeted for each one. I’m not sure that $40,000 covers college in 2032, but they can get loans or go to a state school. Maybe their academic background will earn a scholarship or something.
You’ll notice that I only have them going to school for 2 years. That’s because they’ll obviously get all their credits in those two years. Just kidding. My wife’s GI Bill is good for 4 years of tuition and expenses. It can be divided up in all sorts of ways, but for the sake of this example, each boy gets 2 years free.
If you follow the column down, we may spend $610,000 in education over the rest of our lives. This is an average of $13,864 a year. We could significantly cut this expense and go to public school if we need to.
If they become unmanageable teenagers, I plan to show them this spreadsheet and a calculation of how much dog poo I have picked up with my dog sitting gig. That should be convincing.
We bought our primary home and refinanced our condos for 15 year mortgages near the bottom of the market in 2012. As a result, 2027 becomes the magic date when the mortgages get paid off. (They aren’t all at the same time, but reasonably enough around that time). We go from paying PITI (principle, interest, taxes, insurance) of ~$31,000 to $4,800 (just the taxes and insurance).
I’m purposely not including inflation in these numbers. We know that taxes and insurance will go up. In the next section, I’ll explain why.
The next three columns are our investment condos. They are our real estate “empire”. Two of the condos my wife and I bought independently to live in. They weren’t suitable for our growing family so instead of selling them for a loss, we decided to become landlords. They have similar 15-year mortgages to our primary home which leads to that magic 2027 date.
In column O, you’ll see condo income. It wasn’t my intention to add income to this spreadsheet, but investment properties need to be balanced with that. I was surprised that after rounding the numbers, our PITI on the condos are about the same as our income.
In version 2 of this spreadsheet, I need to include maintenance of all real estate properties. I feel safe setting aside another $10,000 a year.
The reason I didn’t account for any inflation is that the condo income doesn’t grow as well. I’ll pay more in taxes and insurance, but I’ll also be able to charge higher rents over time. I’m going to make yet another presumption that they balance each other off.
On great thing that you’ll notice is that once school and mortgages are paid off, the condo income covers more than the rest of our expenses.
I budgeted $900 a month for transportation. This comes out to nearly ~$11,000 a year. This covers both cars, insurance, gas, etc. I didn’t exactly pull this number out of a hat. We are paying $1500 now, but the cars will be paid off soon and we’ll drive them into the ground for at least 5-6 years. This $900 is an average that I had already calculated.
Maybe in version 2, I’ll price out the payments more specifically. I imagine it will be something like $1500 for 5-6 years… $200 for 6-7 years.
I’m budgeting $8,400 a year simply because I imagine two boys will eat more than whatever I can imagine. I lower the price significantly when they leave the nest.
Healthcare is always the biggest question mark. It seems to be changing from week to week. Fortunately, my wife’s military retirement will give us access to one of the largest plans in the country… and one that people are naturally sympathetic towards.
Years ago, I had cobbled together a number of $272 a month from some sources. I went with $500 a month or $6000 a year, because I needed some number to put in the box. I probably shouldn’t have included any expense for the next few years as it comes out of the wife’s paycheck. When she decides to retire, we’ll look into that.
In version 2, I’d like to be more confident in this number.
I have utilities at $300 a month or $3,600 a year. The key to this low number is that we have solar panels eliminating our electric bill.
Home and car were insurance were included in those expenses. This leaves some property insurance, life insurance, and things like that.
In version 2, I’ll need to eliminate the cost of life insurance as I get older. I have term-life, so that will disappear when the kids get to college-age.
Final Expense Numbers
My hope was that you could see how expenses drop off a cliff as we get through schools and mortgages.
Overall we’ll have 3.4M in expenses over the next 44 years, but we’ll collect 2.3M in rental income. That leaves us with about 1.1M to pay over 44 years. The average expenses there come out to $24,820.
You can see our expenses range from -$6,200 to $90,780 depending on the year. You’ll get wildly different results when you plug -$6,200 vs. $90,000 as expenses in any retirement calculator.
However, now I have an average. My not-so-immutable, carved in whip cream, number for expenses is about $25,000 a year. This is something that I can work with. Even if I decide to plan for $35,000 at least there’s a starting point.
What do you think? Does this make sense? Are your expenses all over the map? If so, would this exercise help you plan you expenses?
P.S. I’m seeing some small other miscalculations (like the average insurance being $798 instead in $780, despite it being $780 every year.) I’ll try to fix those in version 2 as well.