Lazy Man and Money

Here Are Our Expenses Over the Next 45 Years

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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.

School

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.

Primary Home

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.

Investment Condos

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.

One 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.

Cars

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.

Groceries

I’m very frugal with my grocery shopping. Read about my cheap chicken and my cheap pork.

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

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.

Utilities

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.

Insurance

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.

Projecting Retirement Expenses

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Last week, I reviewed my necessary expenses and finally formalized them into a spreadsheet. What I found was that our expenses, on average, were around $6600 a month. That’s before entertainment and a bunch of other things. That number was quite distressing to me.

However, in an attempt to put things into perspective, I realized that sometimes we are paying more now, so that we can less in the future. For example, the mortgages on all of our properties are 15-year mortgages. I could pay less now if they were 30-year mortgages, but I choose to pay more now, and have that scary number, in order to eliminate 15 years of payments.

The same is true for our car payments. We recently bought new cars, so the number looks bad right now. However, we drive them for a long time, so if we amortize the payments over the projected life of the car, the number looks much better. (I should use this to amortizing maintenance on the house (the roof, appliances, and furniture for example), but that will have to be version 2.0. I’m going to live up to my Lazy name and include some rough kind of home maintenance budget.)

This exercise really started bearing fruit when I looked at it from a retirement perspective. I like to look into what I can do to eliminate these expenses. It turns out that some of the expenses are disappear with time. While I may always have a need for transportation, I can look into my crystal ball and envision 20 years from now when the kids are in (a mostly paid-off) college and the primary residence is paid off. Some of the expenses I have now, I won’t have in the future.

Combine these expenses with the retirement income blueprint that I’ve been working on… and suddenly it is the foundation of a retirement plan. I want to stress that it is simply a foundation, because at age 37, I know that there will be more bumps in the road before I get to retirement (even if I struggle to define what retirement really means.)

With that in mind, let’s look at my expected necessary expenses. Since these are all rough “guestimates” the numbers will be round. The numbers will also be in today’s dollars because I’ve already adjusted my retirement income blueprint to reflect the same “today’s dollars.” Adding inflation to each side, income and expenses doesn’t change the math.

Primary Residence – $400/mo.

In 14 years we’ll have mortgage and interest paid off. So this covers the remaining taxes and insurance. Yes, I should add some maintenance for this, but I don’t really know how to even estimate it.

Transportation – $968.50/mo.

(So much for the nice round numbers.) This number represents our current car payments amortized over an estimated 10 year life of our cars… plus gas, maintenance, and insurance. I break out a little of this math in the aforementioned necessary expenses article.

Day Care – $0/mo.

This happily disappears in retirement. Sorry, Little Men, but we’ll be tossing out of the nest.

Groceries – $400/mo.

This is still nothing but an estimate. We are frugal. With access to a military commissary (if they still exist in retirement) we should be able to keep this pretty low.

Utilities – $400/mo.

Gas = $134.92
Electric = $90.08
Water = $27.49
Cell Phones = $90.00
Internet = $52.00
Landline = $3.00
Total Utilities = $397.49

It’s hard to know what our utilities will be in 20 years. If we look back 20 years some of these expenses we just becoming more common like cell phones and internet. On the other hand, landlines were a lot more money. I imagine we’ll always be paying for a data pipe into the home, gas, electricity and water. That data pipe may be wireless or combined with wireless.

I didn’t include cable television as it isn’t really “necessary” in the way that the other things are to run my business.

Dog Care – $133.33/mo.

I’m going to just leave this as my necessary expenses now as detailed in my previous post. Since I have the world’s only immortal dog, that’s reasonable, right?

Insurance – $10/mo.

My term-life insurance policy should be expiring and with our income, we can probably look to whether it makes sense to get more insurance. We’ll also review whether it is worth getting life insurance for the wife after she exits the military. The $10/mo. above represents the insurance policy we have on her diamond.

Health Care – $272/mo.

We are fortunate in that we’ll have the military’s TriCare for Life. That covers a lot of health care. When eligible for Medicare Part B we’ll have to pay those costs which is the $272/mo. represented above (which is based on being in a high income bracket). This area in particular will probably have a billion and a half changes in the next 30 years. The only thing we can count on is that it will be a crap shoot. We can also guess that we might be better off than most because of the TriCare for Life program.

Adding it all up

When I put it all together it comes to nearly $46,000 a year in necessary expenses. Going back to our conservative/best-guess retirement income blueprint, it looks like our retirement accounts now will grow to a point where it will be able to pay that off using the 4% rule. The wife’s military pension would pay for it with $20,000 to spare. Social Security and rental income from our properties would combine to cover it. Social Security and my websites would combine to cover it. Our five main income streams can be mixed and matched in numerous ways to cover it.

Together, the estimated $213,000 would be enough to give us $114,000 to spend annually after taxes. This is why I don’t sweat the rounding of food estimates or life insurance costs.

Insights Behind My Necessary Expenses

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Yesterday I wrote about my necessary expenses detailing what our spending obligations are every month.

The final number may have been staggering to some — $6,593. It was staggering to me. That’s approximately $80,000 a year… in after-tax dollars… without stepping in a restaurant or including any entertainment. I didn’t even include buying a stitch of clothing (no, I’m not a nudist.) And this doesn’t include saving a dime for retirement.

Yesterday I said, “It’s one piece of the financial picture, but I feel it is an important one.” It’s a damn good thing it is only one piece because it looks like a depressing piece.

Today, I’d like to broaden the scope of the financial picture with one key thought sometimes we pay more now than we are going to in the future… and we can predict exactly how much.

All the mortgages and real estate investments are 15-year mortgages to grab the lowest interest rate possible. Typically people have 30-year mortgages which allows them to make smaller payments. If I had done this, I’d believe I’d shave off a couple of thousand dollars from the nearly $7,000 we pay in mortgages (PITI). Some of the investment properties would actually be making money.

In addition, we’ll be making car payments for the next 5 years on average. However, we expect to continue driving the cars for around 10 years, so the car loans will drop off this report. When I amortize this expense across the expected life of the cars, it halves the cost of the car loans, which is a savings of another $600 a month.

Finally the day care number will only get cheaper as the kids enter school. I’ll be adding other expenses (school supplies come to mind), but as that goes to zero or necessary expenses get cut further.

I did a little math taking out the day care, amortizing the car loans over 10 years, and giving myself a $2000 mortgage discount to account for the difference between 15 and 30 year mortgages. With those numbers, admittedly rough numbers, the necessary expenses come out to just under $3000 a month or $35,000 a year.

An interesting thing happens after the 15-year mortgages are paid off. At that point, the mortgage calculation with PITI becomes just TI (taxes and insurance). (Okay, there’s maintenance as well.) The income from the investment properties (hopefully) continues to be at least $4000 a month. It is impossible to accurately project how all our expenses will shake out in 15 years, but did a little back of the envelope calculation. It turns out that the $4000 rental income would likely cover taxes and insurance for all the properties, including our primary residence, transportation, dog care, groceries, and utilities. In fact, it looks like it will cover all that, with $500 a month left over. I’m not expecting that $500 to really exist though… it will get eaten up by inflation and the maintenance of the properties that I glossed over above.

We’ll hope that everything goes according to plan. It won’t. It never does. However, paraphrasing words that the great Bill Belichick has said hundreds of times, “We’ll make the decisions that we feel are best for the team and go from there.”

Reviewing My Necessary Expenses (February 2014)

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It’s been far too long since I’ve reviewed my monthly necessary expenses. For those who aren’t well-versed in the term, it’s expenses that we have to spend every month… things like heat, electricity, car payments, mortgage payments, insurance. The idea is that as we minimize these expenses, we lower our financial obligations and get closer to financial freedom.

It’s one piece of the financial picture, but I feel it is an important one.

Real Estate (Residence)

Mortgage – $2,622.82

This is a PITI number. Pity it isn’t smaller, right? Sorry, I couldn’t resist. PITI is short for principal, interest, taxes, and insurance. Since it bundles all that in, it is a good basis for determine how much we pay for housing. It is worth mentioning that I should tack on another 10% to account for maintenance.

Transportation

Car 1
Loan = $430.86
Insurance = $98.01
Gas + Maintenance = $100.00

Car 2
Loan = $753.19
Insurance = $78.46
Gas + Maintenance = $100.00

Total Transportation = $1,560.52

We recently bought a Subaru Forester and a Acura MDX. Prior to the purchases, we had cars that were, on average, more than 10 years old, and not well-suited for our growing family.

Our average interest rate on both of them combined is under 1%. I consider that very good debt. Even if I won the lottery tomorrow, I probably wouldn’t pay them off early.

The gas is an estimate. It may seem low to you, but I work from home all the time and the wife does much of the time. The plan is to get my credit cards registered with Mint and/or Personal Capital and get a better view of our spending on these variable costs.

Day Care

$1,096.00

Technically, it is less than that now since our youngest son is only about 4 weeks old and not eligible for day care yet. When he is though, this will be the monthly number.

Groceries

$400.00

Much like gas above this is an estimate. It is probably more than we actually spend as we are pretty frugal and the military commissary’s prices are very good. Additionally, if we were to take the view of necessary expenses, this number could be much lower. We could subsist on beans and rice for awhile (but then we’d have much back, right?)

Utilities

Gas = $134.92
Electric = $90.08
Water = $27.49
Cell Phones = $90.00
Internet = $52.00
Landline = $3.00
Total Utilities = $397.49

Remember when I said the above gas and food were estimates? These aren’t. I went through our gas, electric, and water bills for the last year added them up and divided by 12 to come up with a monthly cost. The cell phone number is price for two monthly all you can use Straight Talk plans as detailed in my Best Cell Phone/Plan Savings Today article. The $52 is what our cable company charges for internet and our landline is around $3 in Federal Taxes with our Ooma VOIP. Okay, I estimated that $3 number.

While some may argue that internet is a necessary expense, it is extremely necessary for me to earn my income. For the amount that we spend, it is one of the best bargains around.

Dog Care

$133.33

I should break this down a little more, but it includes the cost of food (again estimated), nail trimming, vet visits, emergency care (it happens sometimes), and boarding costs when we are on vacation (the biggest expense). At least we do save money with DogVacay.

If there’s interest in me breaking this out in the future please leave a comment.

Insurance

$65.64

I really need to beef up my insurance. Over the last few weeks, I’ve mentioned this a couple of times. Right now my insurance category includes life insurance and valuable insurance. This expense is mostly life insurance as the valuable insurance is just my wife’s wedding ring.

That said, I’ve included multiple home insurance policies in the mortgages and car insurance in the transportation section. So I have more insurance than it might initially appear if you look at this section.

Real Estate (Investments)

Rental Property #1

Expenses = $1989.93
Income = $1500
Profit = -$489.93

Rental Property #2

Expenses = $1296.18
Income = $1250
Profit = -$49.18

Rental Property #3

Expenses = $1031.48
Income = $1250
Profit = $218.52

Total Rental Property Expenses = $4317.59
Total Rental Property Income = $2500 ($4000)
Net Rental Property Losses = $1817.59 ($317.59)

There are multiple ways to look at this part of my necessary expenses. From a purist standpoint, it is $4317.59 in monthly obligations. That’s a huge number. However, when the properties are rented, which is a vast majority of the time, the net necessary expense is $317.59.

I should make a couple of clarifications. Expenses are “all-inclusive”… they include: mortgage, taxes, condo fees, insurance, etc. It’s worth noting that all the mortgages on these are 15-year mortgages. I could have lowered payments and been cash-flow positive by going with a more traditional 30-year mortgage, but I want to get these properties paid off sooner and working as part of our retirement plan. The overall bigger picture trumps the necessary expenses snapshot.

For more detail on my real estate “investments” (we are somewhat “reluctant landlords”), see about our real estate “empire”. Since that article we bought the third rental property which, you can see, is cash flow positive.

Concluding Thoughts

If you add up all those expenses, our monthly obligations come to $6,593.39. I’ll save my reaction (which included multiple four letter words) for tomorrow’s post where I give a little more insight to these numbers.

Determining Your Retirement Expenses

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Determining Your Retirement Expenses

Last week, I detailed my necessary expenses. These are expenses that I need to cover to live and protect my income. There’s always a little fluidity to these because while transportation is a necessity for some, a new Acura isn’t. Even recognizing that fluidity, it was extremely worthwhile putting it all down on paper (yes, virtual paper counts!). Here’s a reminder of what I came up with (and if the prices seem odd, you may need to click on the original article to see why some may appear much less than what you have to pay):

  • Housing: $1500
  • Transportation: $200
  • Groceries: $150
  • Internet: $25
  • Gas and Electricity: $75
  • Water: $20
  • Cell Phone: $25
  • Home Phone: $3
  • Dog Care: $50

What I didn’t mention at the time was that I planned to take it one step further. When I read Can I Retire? by Mike Piper, he made a great point that I hadn’t thought of: My expenses in retirement won’t be the same as they now. For example, though we rent now, we are on pace to own three properties outright before we reach retirement age. So when planning for retirement, factoring the money we spend on housing now doesn’t make sense. (Note: Of course, we’ll still have to account for taxes and maintenance.) If we were saving money for our kids college fund, that would presumably be an expense that we don’t need to include either.

With that in mind, I thought it was worth taking out a crystal ball and attempting to predict how some of the costs may change in 30 years. In many ways this is a fool’s errand, I’m not going to get it right and something so far in the future is nearly impossible to guess. For example, would my parents have been able to fathom paying $3 for their home phone service with no long distance charges as I do with Ooma? I can’t imagine so.

With that in mind, here is a wacky stab at what my necessary expenses may be: (I’m using today’s dollars for simplicity – trying to factor in inflation will only make the prediction more murky.)

  • Housing: $400 – This may not be the most accurate number. I could probably be more accurate with this, but I don’t currently have access to the paperwork or files.
  • Transportation: $300 – My transportation costs now are pretty low. I expect fuel prices to continue rise, even more than typical inflation. However, at the same time, I predict we’ll be more efficient in creating transportation vehicles in general. The big question will be how much travel will we do when we retire. That seems to be something that depends greatly on our finances at that point. Travel will be more for entertainment than necessity.
  • Groceries: $300 – Life fuel prices, I expect food prices to rise in the future. Perhaps I’ll have time to take up extreme couponing, but I’d rather not count on that.
  • Internet: $10 – I’m going to predict that internet access is everywhere in 30 years… and in many places I expect it to be free. A few years back there was a prediction that cities would have it for free, but that’s died down. In 30 years, I could see that pick back up.
  • Gas and Electricity: $300 – We won’t likely be living in northern California, our heating and air conditioning bills will rise in New England
  • Water: $40 – Let’s factor in water becoming a rare resource in 2040. On the other hand, advances in desalination, could help stem the costs
  • Cell Phone: $100 – I expect that people will pay more for mobile communications (which I’m throwing under the “cell phone” tab here). I figure you’ll be able to do more, and hence they’ll charge more.
  • Home Phone: $3 – If these still exist…
  • Dog Care: $100 – Let’s expect Fido to cost more money.

Total it all up and it comes to $1553 a month in necessary expenses. That doesn’t factor in any extras or fun, but it’s a start at knowing how much things will cost.

How are your costs expected to change in retirement? Let me know in the comments.