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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35345  
Subject: Budgeting Date: 8/30/2006 2:18 PM
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I, and others, often urge people, in thinking about what kind of returns they need, to start by estimating expenses. I think it would be useful to see how we think through expense categories, so I'll give a try, with running commentary. Because I feel I am living comfortably within my means and putting enough away, I really don't budget line by line, which would be important if I was looking for where to cut, and I have found, though it varies from year to year, I usually overestimate expenses by about 10%.

1) Federal and State Income Taxes
2) Social Security and Medicare Witholding

[I separate out these items and do not include them in retirement years' expense projections, instead adding on a Federal and State Income Tax projection based on likely taxable income at that time, which will be much below current income.]

3) Medical

[This includes share of premium, co-pays, and uncovered expenses. I expect this to go up, not just through inflation, after retirement.]

4) Long Term Car Insurance.

{Mine is inflation adjusted with a constant payment, i.e. I chose to pay more now and less later, so as a percent of expenses this will go down with inflation.]

5) Other insurance (home, car, life, disability).

[Disability will end with retirement, and we will go down to one car. However, in projections, I gloss both this and Long Term Care as inflating the same as other costs, figuring if I do the same with medical and other expenses, it will come out in the wash.]

6) Property Taxes.

[We paid off our mortgage about 10-years ago, so this is the slot where others would enter mortgage payments. In Michigan, as long as we stay put, property taxes can only increase with inflation, even if assessments exceed inflation. It is a law that is very helpful for those whose incomes do not go up as much as assessments. It has also killed the public schools.]

7) Big Ticket Items/Home Repair and Improvement.

[This varies a lot from year to year. I budget a new car as a two year's worth.]

8) Travel and Entertainment.

[This also varies from year to year. We don't eat out much, and cheaply when we do, except when travelling, so I don't have a separate budget category for that. Entertainment is for tickets, not home entertainment costs. I used to have a separate category for books and records, but I no longer buy many books, beyond some paid for stuff.]

9) Utilities (electric, water and sewage, gas, telephone, broadband, long distance, cable).

[There's nothing to watch on TV, but I did get to see Heddy Lamar doing a 1931 nude scene, a couple nights ago, which was actually slightly more revealing than a typical day on campus, even if not in technocolor, so I suppose the cable bill is worth it.]

10) Food, clothing, and incidentals.

[This is a very lazy category, and includes wine and beer, occasionally eating out, cash expenditures, gasoline, minor repairs, calling the plumber, computer accessories, etc. Basically, anything that goes on the credit card or gets paid in petty cash or by check that doesn't get its own category gets lumped into this one. I would guess about half actually goes for food and household supples, like toilet paper and cleanser.]

For retirement projections, I take this current buget, minus the income tax and social security component, then add income taxes and use different inflation estimates. I think this somewhat overestimates actual expenses (inflation adjusted) from these categories.

What this approach to retirement budget projections fails to account for is added life-style continuation expenses with age and any desired additions, such as more travel. I've said before that I think those who claim retirees will have lower expenses fail to consider the need to hire help to do chores younger people typically do themselves. My guesstimate is to hire people to do yard and housework we now do ourselves would cost almost as much as what I budget for big ticket items. Some kind of high quality cooking service would more than make up for savings of eating out less and eating less in general.]
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Author: Bobcatkitty Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18065 of 35345
Subject: Re: Budgeting Date: 8/30/2006 4:20 PM
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Interesting topic. I'll toss out my thoughts on this.

First, we're 62 y/o and have just started taking our reduced SS benefits. My DH has been retired for 11 years.

We have an personal escrow account that is adjusted each January. All major expenses including set &/or variable are accounted for and include:

Real estate taxes
Home insurance
Vehicle insurance
Medical deductible
Travel
CPA (does taxes)
Vehicle repair (in is out of warranty)
A yearly amount given to my Mother for support
Xmas expenses for trip to see kids and gifts for same
Quarterly income tax payments

Totalling what was actually spent during the previous year gives us the new escrow amount for upcoming year. Therefore, for us, this is a set dollar amount that CAN'T be adjusted thru the year.

As for the rest of our living expenses and a written budget projection, let me clarify by saying....we have far more monthly income than we need. Therefore our budget is simply a yearly projection of what our expenses truly are so that we can tell if something has really managed to slip by unnoticed. That said, I already know that our monthly amount for dining out is excessive, as is what we are spending on gasoline for 2 cars.

Now, onto what is actually tracked using Quicken:

These are considered by Quicken to be discretionary spending
Clothing
Computers
Dining
Discount stores
Gifts
Hobbies
Subscriptions

Non-discretionary are as follows"
DHs monthly cash in billfold (he says he really needs that)
Escrow account
Gasoline
Groceries
Hair salon
Homeowners dues
Home repair
Health Insurance
Medicine
Telephones: land & cell
Cable TV
Electric bill
Water bill


It's certain that few bills lesson during retirement, and those that do are quickly replaced by others that increase.

A few years ago was when I attempted to formulate a "budget". I had no idea how to do it and Quicken did help. Do we pay much attention to it today...no. Monthly medicine bill goes up, we pay it. Same for increase in monthly gas costs. We're not driving more, just paying more to do it.

This is a good exercise though for others looking forward to retirement as a way to insure adequate funds will be available.

Thanks for bringing this up.

Kitty


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18067 of 35345
Subject: Re: Budgeting Date: 8/30/2006 5:12 PM
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Kitty,

I left out charitable donations, and I think you did too.

At this point, I find entering the details in Quicken too much of a pain, and broad estimates by category work fine.

A couple of things I don't see in your budget (besides charity) are long term care insurance (not everyone thinks it is worth it) and a broader big ticket item category (there is computer, one such item, but new cars are sometimes required as are new appliances).

I don't consider clothing "discretiionary," but I don't do designer. (My impression from new campus year is last year's over the top (and under the belt) outfits, which I suspect cost a lot, have been replaced with the traditional designer hip-huggers and t-shorts.)

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Author: Bobcatkitty Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18069 of 35345
Subject: Re: Budgeting Date: 8/30/2006 5:41 PM
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Lok....as for charity donations, I tend to "go with the flow". A donation to Salvation Army was made during Katrina, and misc. household goods & clothing are usually given to the local Habitat for Humanity thrift store. But for a regular donation, no, we don't normally do that.

LTC insurance is not needed for my DH as he is a disabled Vet. For me...I've had cancer and feel that is what is likely to get me, not a long drawn out medical problem. Choices, it's all about choices.

We currently have a 2 y/o Town & Country van, and a 4 y/o Honda Accord. We're planning on years before either need to be replaced.

As for Quicken, I d/l all transactions from our bank and our credit cards into it, so it automatically keeps track of things for me...each in it's own category. As I mentioned before, great topic!

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18180 of 35345
Subject: Re: Budgeting Date: 9/6/2006 5:27 PM
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Like BobCatKitty I have found Quicken very useful in determining exactly where the funds are going. To project my expenses, I don't just use last year, but go back a few years to get a more realistic 'average'.

Just like investing choices, I think each individual has to look at their individual numbers and circumstances. For example, my current car is 6 years old and has only 19,000 miles. I fully expect to still have this car when I retire in 6 (she said hopefully) years. Since it's a minivan, I expect it to be the workhorse car used to transport gardening supplies, groceries, etc. during retirement. I have one new car budgeted in the first year or two of retirement, but that one should last even longer than 12 years, considering its projected extremely low mileage.

What this approach to retirement budget projections fails to account for is added life-style continuation expenses with age and any desired additions, such as more travel. I've said before that I think those who claim retirees will have lower expenses fail to consider the need to hire help to do chores younger people typically do themselves.

I budget travel expenses in at the same level as my current pre-retirement travel. I don't anticipate being able to afford any long or luxurious trips, but I would like to get away somewhere for a week or two once or twice a year (like I do now).

I anticipate that at least some of the 'life-style continuation' expenses you foresee will be covered by lower expenses in other areas. For me, if I'm not well enough to handle my own yard care or household chores, I'm probably not well enough to travel very far comfortably either. At the same time, I probably won't be doing much dining out.

I have many older friends who don't travel at all, because with heart conditions, etc., they never want to be very far from their own doctors, and they would never consider leaving the country.

As for cooking, most of the elders I know cook for themselves way into their 80s and 90s. The trick is they treat cooking as a 'hobby' instead of a chore. An added advantage is that it takes up time which is then not utilized spending money elsewhere (i.e. golf).

In short, I think the reductions in expenses in other areas might help compensate for the additional expenses. Each person has to decide at each stage of their life, and according to their financial capability, what their priorities are for spending money.

2old


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