We are coming up on a year of living in California and are now largely accustomed to this new lifestyle. We have our routines and most things are on autopilot, including our spending.
With our big move I had framed out a rough budget and recently reviewed our expenses to make sure it was at least in the right ballpark.
Below I answer some frequently asked questions:
- how much do we spend?
- where does the money go?
- where does the money come from?
Let’s go.
California Dreamin’ Budget
We now live full-time in the Sacramento area, home to good schools, lots of sunshine, and a ton of farmer’s markets, with easy access to snowboarding, bike trails, and water sports.
We live a simple life – we spend a great deal of time at home, enjoying the amenities (pool, hot tub, sauna, hammock, etc…) Our garden and finely tuned cooking skills provide endless joy and entertainment.
Times away from home are often adventure focused, kid activities or the aforementioned snowboarding, biking trails, and water sports. We spent spring break in Hawaii, started summer with a coastal road trip, and will end it with a camping trip near Yosemite.
With that context, our core cost of living is about $75k/year. Somehow that is about average for us.
Here is the breakdown
Housing
We own a 4-bedroom (pseudo 5-bedroom) house with a large garage and a pool on a big lot with an abundance of greenery (photos here.) There is a small mortgage.
On a monthly / annual basis, we spend:
- Property taxes: $835 / $10,000
- Utilities: $600 / $7,200 (natural gas, electricity, water/sewer/garbage, internet, cell phones, pool care.)
- Mortgage interest: $565 / $6,780
- Maintenance: $375 / $4,500 (estimated, ~1% of structure value)
- Insurance: $90 / $1,100
- Total: $2,465 / $29,580
Our solar panels bring down the utility bills a bit (bill has been $0 or negative the past 3 months.) We are in the process of switching to a heat pump which will bring down natural gas prices ($15 in August, ~$500 in January.)
We use Google Fi for cell phones, it is great. Get $20 off when you switch (affiliate link, we also get $20.)
Food
We eat most meals at home – ribs on the smoker, home made bread, amazing salads from the garden, etc…
The restaurant scene isn’t that great in the burbs, but we do eat out on occasion. Lunch at one of the “steak and seafood” places near here is pretty good and there are $100 gift cards at Costco for $80. On our recent coastal road trip and trip to Hawaii we ate out for all meals which brings up the average (free “breakfast” in the hotel most days though.) I think of meals on vacation as vacation expenses, but all expense tracking software automagically lumps them into the food budget and I’m too lazy to change it.
- Groceries: $1,000 / $12,000
- Dining out: $500 / $6,000
- Total: $1,500 / $18,000
garden salad with shrimp and chicken with home baked bread (greens and tomatoes from our garden)
Car / Transportation
We get around by walking, biking (e-bike and old skool, both), and car (EV.) Winnie is grocery shopping at this very moment with our e-bike, for example.
We will put over 7,000 miles on our EV in a year, most from bigger excursions – 150 miles round-trip to snowboard, 300 miles round-trip to Yosemite, etc… It costs $6-$7 to “fill the tank” at home, but we got 3-years of free charging with vehicle purchase. Spent $0 on fuel for recent 500-mile road trip. Costs <$0.10 to charge the e-bike.
- Interest on car loan: $100 / $1,200
- Maintenance: $100 / $1,200 (estimated, so far $0. Includes tires.)
- Insurance: $85 / $1,020
- Fuel: $20 / $120
- Total: $305 / $3,660
Health / Health Insurance
Health insurance is a big expense in the US. We have a silver plan via the ACA with a low-deductible. The kids are on a Medi-cal plan through the State of California.
- Health insurance for 2 adults / 2 kids: $75 / $900
- Health care: $100 / $1,200 (deductibles, co-pays, dental, etc…)
- Gym membership: $150 / $1,800 – lap pool, “free” childcare – also have home gym in garage
- Total: $325 / $3,900
Taxes
As US and California residents we have to pay a bit more in taxes than we paid before. Thankfully California is a low-tax state.
- US Federal government: -$200 / -$2,400 (refundable child tax credit for 2 kids)
- California: $83 / $1,000
- Self-employment taxes – $500 / $6,000
- Total: $383 / $4,600
Property taxes included in housing.
Travel / Vacation
We will have an annual +/- trip to Taiwan to visit friends and family and to provide some Chinese immersion time for the kiddos, plus the odd vacation / getaway / road-trip / excursion.
I enjoy the travel hacking game so we get some good deals – a recent 7-night trip to Hawaii was $630 plus food, for example (4 flights, a big hotel suite, etc…) Our coastal road-trip was free-ish (4 free night certificates plus free fuel.)
Our travel / vacation budget is above and beyond what we are able to get for free-ish.
- Travel – $500 / $6,000
Hawaii is nice
Entertainment / Kid Expenses
We are simple folk – entertainment is food, friends, and family, with a bit of travel.
Kid expenses are highly variable – sports cost $150 or so plus gear, boat camp this year was $400 for a week, swimming lessons cost $150 for 2 weeks.
We have zero childcare expenses as we are with our little one 24/7, except for the occasional visit to the gym.
- Entertainment / Kid expenses – $500 / $6,000
Another Double
Misc
We spend money on other things that don’t fit into the larger buckets – gifts, donations, random stuff.
- Misc: $375 / $4,500
Summary
| Cost of Living | Monthly | Annual |
|---|---|---|
| Housing | $2,465 | $29,580 |
| Food | $1,500 | $18,000 |
| Transport | $305 | $3,660 |
| Health ins/care | $325 | $3,900 |
| Taxes | $383 | $4,600 |
| Vacation | $500 | $6,000 |
| Entertainment / Kids | $500 | $6,000 |
| Misc | $375 | $6,000 |
| Other stuff I probably forgot (round to $75k annual) | $280 | $3,360 |
| Total | $6,250 | $75,000 |
Cash Flow
In addition to the expenses listed above, we are paying down several low/no interest loans. The interest portion is a real expense and is included in our budget.
Contributions to IRAs / HSAs / 529s / etc… just involve moving money from account A to account B. Net worth remains the same before and after. These transactions may impact taxes but are otherwise a neutral event.
Principal pay down on debt is similarly net worth neutral.
These transactions do however require cash flow.
Total debt ~$300k. My expectation is that inflation helps erase these debts, e.g. our 2.75% 30-year fixed mortgage is basically free money.
- Mortgage principal: $455 / $5,460 (fairly flat in first few years)
- Car loan principal: $645 / $7,740
- Credit card 0%: $375 / $4,500
- Traditional IRA contributions: $500 / $6,000
- 529 contribution: $25 / $300 (will cancel soon, just did this to get a $25 Target gift card.)
- Total: $2,000 / $24,000
When combined with our $75k annual expenses, we need to somehow have access to 99,000 dollars to make it through a year.
Not included: vehicle replacement value, future big expenses (e.g. kids’ college, my 50th birthday party), home improvements that are above and beyond maintenance, perhaps a 2nd car or a boat, etc..
Where the money comes from
We have some income, fortunately:
- Blog profit: ~$40,000 +/- $5k (details here.)
- Blog “expenses” that are already factored into the budget: $5,000 (home office deduction, etc…)
- Dividends in taxable account: $30,000
- Total: ~$75,000
This provides sufficient income to cover our core expenses, but is ~$25,000 short of our cash flow needs.
$25k is roughly equal to dividend income in our tax-deferred accounts, which is roughly equal to our debt maintenance + IRA contributions. Completely by coincidence, I’m sure.
This $25k gap will be covered by:
- selling stock – I’ve sold stock most years of our retirement
- debt
- earning extra money somehow (related: Everyone should blog)
- maybe spend a little less
- any combination of the above
Oh… and I plan to make a full contribution to my Roth solo-401k this year, so that is another $20,500 stock sale for 2022.
Summary
We spend about $75k on core cost of living and another $25k ~$45k on debt pay-down and retirement contributions.
Most of this is covered by various side hustle and investment income. The remainder is covered by debt and stock sales.
At the end of the day we spend less than 4%.
Addendum:
We have debt by choice. Since rates were so low and inflation so high, we chose to buy assets (house / car / house furnishings) with debt rather than sell stock.
Had we chosen differently, our cash flow needs would be $1.5k/month / $18k/year lower and our cost of living would be $665/month / ~$8,000/year lower, or about 20% lower in both cases. The interest portion will decrease over time as we walk down the amortization table.
The expectation is that this approach will result in greater net worth in the long run.
How do your kids qualify for Medi-Cal? Aren’t the income requirements quite low?
Income requirements are low for adults.
For kids 0-18 they are on Medi-cal if household income is less than 266% FPL. For a family of 4 that is ~$75k in 2022.
Are you finding quality pediatricians and specialists up there? Some counties in the Bay Area contract with Kaiser at least for adult services and the quality and depth of care is not good.
What does it mean that quality and depth of care is not good?
Winnie and I are on Kaiser and for the kids we had 3 options but chose Kaiser. Care seems fine, I’ve been to a GP and physical therapist. Jr needed about 6k worth of dental care, which started off bad but got a referral to a kid focused dentist that was great, final cost $0. (not Kaiser, as no dentists in Kaiser network.)
It would take too long to go through the history of Kaiser here. It’s fine if all you need is preventative care (that’s why it’s called a health maintenance organization). Something complicated and expensive? Prepare to be offered a cheaper, inferior solution and have to fight to get the best care. Kaiser is all about saving money, not about care quality.
Exactly, Another Investor. Great for kids, the young.
Kaiser is great for kids, great for preventive care, in which it specializes. It’s great if you need your appendix out, or ongoing asthma care, or a knee scope- bread and butter stuff.
It’s less great if you need specialty care, mental health care, organ transplant care, trauma care or if you travel to a non-Kaiser region for healthcare.
Kaiser is neither academic nor highly paid, so docs interested in research (ie subspecialists) or in earning a ton don’t work there.
Patients like Kaiser because it’s easy. There is a clinic for everything. They like it less if they suddenly get really sick and need things Kaiser simply doesn’t offer.
The number of patients I have had who should have been treated locally here but who the Kaiser overlord person said to send back to Kaiser is not small.
If I were 25 I would get Kaiser because it’s easy, great kids care, decent Ob. I would not want it if I had any underlying health issues or were of an age to be concerned about chronic illness.
Can you elaborate on the dental costs and what was covered by insurance? We are trying to decide if we should use insurance or cash since we likely won’t meet the deductible for the year. With cash, it is still $2,500. I believe our daughter as the same age as Jr. (We are not in CA)
Jr has Medi-cal for dental and health. Kaiser manages the health portion and another insurance company (Access?) manages the dental.
Our dental experience started with some inflamed gums / infected tooth.
We first had to go to a public health dental office to get a referral and a prescription for antibiotics. After a long delay (5-6 weeks?) they sent us to a dental office 45 minutes from home (twice) and the 2nd time the dentist kicked us out – said Jr was difficult to work with (which was true.) They then referred us to a dental surgeon not far from where we live that was great – a quick meet and greet and then a couple weeks later all work done in 90 minutes in one go under general anesthesia.
Jr had a root canal, a crown, a couple of fillings, and a tooth pulled with a spacer. Medi-cal paid 100%. I think they actually paid ~$2500 vs MSRP of ~$6k.
Thank you for the helpful response. It sounds like the Medi-Cal program has good benefits. Our daughter needs about as much work so they will do it all at once. $3,000 with applying both (private) health and dental insurance. $2,500 cash. We will do cash since we likely won’t meet the deductible for the year ($12K or so). We just went straight to a local pediatric dentist and they are dental surgeons as well.
Can you explain what you mean by “California is a low cost state”? I’ve lived here my whole life at multiple income ranges and I would not call it “low cost”. And thanks for the honest grocery bill, I feel so discouraged when I see someone feeding a family of 4 with $400…. : )
We eat well :)
We will have taxable income this year of ~$53k.
Tax in various states:
Oregon: $3,325
Colorado: $2,400
Minnesota: $1,500
Idaho: $1,100
Kentucky: $2,500
Virginia: $2,150
California: $700
~$50/month is pretty low
I know that this doesn’t apply to you (yet!) but given the right set of circumstances, Oregon can be a pretty decent place for a “conventional” retiree because Social Security isn’t taxed at all. So a couple living mostly off their SS checks isn’t going to pay too much in state income tax. And since there’s no sales tax, the overall tax burden is going to be on the light side.
I really miss not paying sales tax. :-)
The people who live in WA and shop in OR got it figured out. Then you just need a friend in OR to collect the Amazon packages
Those people do have it figured out! I actually pushed a bit for doing just what you describe. I didn’t get very far with that strategy, however.
We even have family in Portland ready and willing to accept packages. But alas, it wasn’t to be. :-)
I found this more similar to our own budget than I would have expected. We are the same sized family but 53, 53, 20, and 17.
We have less housing as we living in a paid for house with a third the property tax.
We have more transportation costs as our cars are older (repairs), use fuel, and we insure two teenagers.
We have transferred ~$850 a month from to elder offspring’s checking account from a 529 to pay his rent and buy groceries. It is now depleted but kid finished school and starts new job on 7-11-2022.
Honestly, not sure where we shook out on the taxes most recently. The general trend is negative federal and ~$2500 state as our state taxes capital gains as regular income.
Thanks for this additional context! I’m thinking of moving out of state because I make a lot of money and pay a ton of taxes. I didn’t stop to consider that while $50k income in CA is on the lower side of our progressive state income tax scale, it may actually be mid-range for states like Idaho. Something to consider when thinking of moving when I FIRE!
Once you factor in property taxes, some places with low income/high property taxes like Texas look even less favorable for high asset/low spenders like you compared to Cali assuming you buy a house for the same price in both places.
Thanks for posting this. It was interesting.
I aim to please, good sir.
Truly sounds like a dream setup.
Any state can be a “low-tax” state when you set yourself up to avoid what is taxed. (i.e. gas, income, etc.)
I think we are even going to get a gas tax rebate check even though we don’t buy gas
Heard biden’s original plan for gas tax rebate checks (actually cards) was dead on arrival due to a shortage of chips for such debit/credit cards. He is pushing today for a gas tax holiday which wouldn’t really affect you if you are driving an EV.
I heard similar. The state of California might do a $400/person rebate separate from whatever plays out at the federal level.
A gas tax holiday seems a poor choice when demand is high and refinery capacity is low. But here we are.
BTW, while I think we have some of the best songs written about a state here in TN (who doesn’t like “Tennessee Whiskey” as a more recent example, both the song AND the beverage), I have to admit that California had some of the best in the 60s. The two best, in my opinion, are “California Dreaming” and the outstanding “If You’re Going to San Francisco”. John Phillips wrote them both; okay, co-wrote the first with Michelle Phillips. Speaking of Michelle, she was a very good singer regardless of what people tried to say, but Mama Cass’s voice tended to dominate the female parts. Regardless, Phillips was quite the looker, both during their singing heyday and beyond.
John Denver has that timeless West Virginia song too – really enjoyed my time there mountain biking and whitewater rafting on the Gauley in my youth
Excellent post and detail thorough – as usual.
Thank you for all of these great details and the relevant links to your other content.
Keep up the great work!
Thank you, Dan.
I have another post coming which I think you will find interesting. Next week, maybe.
Thank you. It’s so helpful to see concrete examples like yours, and you are the only person I know of online who “shows all their cards.” I find it interesting how you change too. You could do a post on what you thought your life would be like ten plus years ago when you started your FIRE journey vs what it actually became (kids, mortgage, marriage, CA, less travel, etc). It’s funny what we get right and wrong in our predictions.
Thanks Dan
Our original plan was that we would be return to (and be able to afford our desired lifestyle in) Seattle, where we were living at the time. Then we did the global travel thing, had a couple kids… and decided we didn’t really want the gray and rain of the PNW again. We thought we might travel a bit longer and home/world school, but we got tired of the nomadic lifestyle (6 years or so of go go go was enough.) Otherwise things are pretty close to what we expected.
Just semi retired here in Ontario … this is a great snapshot of how you handle your expenses and a great example to use as a model/reference for us… it helps reduce my stress … we live by the lake here. Mostly free health care here but some insurance for dental and medicine… rent parents old house for now for low cost … walk on the beaches etc every week … will need to adapt your travel hacking ideas to a Canadian context … but I get the general idea … trying a vegetarian diet for longer life?, health and saves money on meat … PS here is link to an interview to Dr Dean Ornish a world famous researcher on diet and health – Time Magazine cover I believe and from California too … worth a look imo … https://www.youtube.com/watch?v=RKmIxkBxtGg …. thanks 😊
Boy, 3 years of free charging sounds really good right about now. Glad you are enjoying some of those savings other ways to live that CA lifestyle.
Thank you for the post. There is definitely a lot to learn from the way you and your family have optimized your income and expenses. I have also found California to be surprisingly low-cost after moving to SoCal from Minnesota several years ago and am working towards a setup similar to the one you’ve outlined in this post.
Thank you for all that you’ve taught me over the years!
the heating bill is definitely lower!
Love these posts! I also live in the Sacramento area and seeing how you manage everything really gives me a lot more confidence that I can retire early here too despite the reputation that California is too expensive. Now if I can just get over my OMY syndrome!
OMY syndrome is real. I have a friend who has been ready to retire for 10 years :)
(He has an ideal setup, I wouldn’t quit either.)
Hey! I heard that! ;-).
Why do you think this is about you? ;)
Enjoy the detail of the post and budget. What did you guys do for furniture in your new home – did you get most on decent prices from Craigslist? I imagine you had little existing stuff coming from your fully-furnished apartments previously?
If you didn’t have the blog for income, do you think it is more ideal to have just investments covering all expenses, or do you think having a hobby/side project in FIRE for some expenses is the ideal situation? Any downsides to blogging for you?
Thanks for the indepth budget, great to see that Cali / HCOL area can work so well for FIRE =)
Furniture is a big mix – some cheapo online stuff that you self assemble, some from garage / estate sales, some from furniture stores. We had a pile of cash set aside for “house stuff” and just burned through that when we got here.
>do you think it is more ideal to have just investments covering all expenses
No, this is overly restrictive and can lead to poor choices (trying to only buy high dividend stocks, for example.) As long as you are spending less than 4% then you have a robust setup.
I think it is important to have a creative outlet, but it doesn’t need to generate income. Blogging became that outlet for me. For Winnie it is paining / baking / cooking / gardening.
Having income does help with cash flow but that only saves me 3 minutes per quarter that it would take to sell some stock. 90% of bloggers never make money so no guarantees.
Gosh your boy is getting so big!!! Or we’re getting old!!!
Just finished 1st grade!
I’ve always thought California is a high tax state. I had no idea.
I live in Illinois, and property taxes are ~3% of property value annually. Ouch! Even though we can afford a much nicer home (3-4X or current home), we can’t bring ourselves to pay property taxes more than our current mortgage payment.
California can be a high tax state if you make a (very) high income.
Illinois is a very high tax state for everyone – I lived outside Chicago for a few years after school.
Property taxes in CA are ~1% and are limited in how fast they can rise. Houses in IL are less expensive though.
Funny story – the house I sold in IL is worth less today than what I sold it for in the year 2000, inflation adjusted, even though it now has a new roof.
I know people who bought in the mid 2000’s in Chicago and their price only passed their 2007 un-inflation adjusted high in the past year, 15 years later. With inflation adjustments it dropped by 40%!
“can’t bring ourselves to pay property taxes”:
Wise non-move. Your rates dissuade both prices and people from moving up.
ACT, Australia; on house $1,200,000 our (residential) rates are $A2,869 (0.25%) / y but on sale conveyancing (‘stamp’) duty would be $A48,710.
Our rates dissuade moving at all. So government offers Downsizer incentives.
Hi Jeremy. Great to see that you guys have been enjoying your life in California. I know it took you guys a while to figure out where to settle down.
Now that you’ve experience Sacramento for a year, would you have done anything differently? You mentioned not having a great restaurant scene around you, is there anything else that you wish might be better?
We are considering Europe for our home based, and if we could Costa Brava. I remember you liking the part of Europe. Why did not ultimately decided not to go there?
Cheers!
Mr. NN
Life is balance. We would have lived in downtown Sacramento but the school system was not great. Schools are more important than restaurants and now we are 30 minutes closer to snowboarding.
Costa Brava is nice. We concluded kids juggling 2 cultures was enough.
I’m always glad to read your latest. Thanks for blogging and getting into the very interesting, very detailed methods you use to have a great life. Love seeing the whole family and hearing what they are up to. Cheers!
You are living the dream. I aspire to have the kind of success you have had. Thank you for sharing!
Congrats on moving to the suburbs of Sacramento. They are great places to live in.
You are in a good location. Two hours or less to Tahoe and Reno. About the same to SF Bay Area. Access to a lot of outdoor activities and a lot of food choices. California is a great place to live and I have lived in the Bay area my whole life. Appreciate the budget details, will be helpful to many readers. Enjoy your summer.
One plus of Calif is over time say 10 years, the real estate usually will appreciate.
I also very much appreciate the realistic fat FIRE cash flows. As I was reading through it, I was thinking “wow, this seems very similar to our spending”. Some of the categories differ a bit both directions but last year our spending came in at $98k (excluding Federal income taxes due to dreaded employment – still fighting OMY syndrome although it has now turned into One More Contract syndrome as I can’t seem to do permanent employment anymore – FI has given me serious commitment issues). I live in middle America.
Yeah I don’t think our spending is much different from a typical 4-person household beyond taxes, health insurance, and debt/interest.
You may like this one – working is hard when it is optional: Retirement Has Completely Ruined Me
Since I do a budget for our all-in costs every year, yours looks spot on accounting for the differences in state expenses. We have higher vacationing expenses since we travel so much but have lower costs elsewise.
We purposely moved to TN before I retired and we have extremely low property taxes, no state income tax, low utility costs, and a state government that runs a surplus of hundred of millions of $ every year. Although if you move to a big city here like Nashville and its surrounding burbs your expenses will be higher since they tack on a lot of extra taxes and fees there. We moved to a smaller populated area and we are pretty immune from those costs. Best wishes.
It is nice being near a hydroelectric plant – living in Seattle our electricity was some of the cleanest and cheapest in the country, and we live near a dam here also. I assume your utilities are TVA?
TVA is the required (by federal law) provider to all the electric cooperatives in TN. First time ever working with a cooperative and they are great; hobbled by price increases in their product from TVA, though, which should be outlawed by now.
Hi, I have really enjoyed your posts over the years, and have learned a lot from you-thanks!
One question-what brokerage would you recommend for the solo 401k with Roth option? I have looked into this, but it seemed a little complicated, and I haven’t taken the time to figure it out yet. Thanks!
Vanguard, TD, or E*Trade. All 3 work
Thanks for pulling back the curtain and letting us take a peek. It’s great to see your family has established a life you’re enjoying in NorCal! Last month I got my wife to jump ship from her ancient VZW plan to my Google Fi account; our cell bill has dropped forty bucks as a result, it’s wonderful. And as much as I love the idea of an electric car, we rack up maybe 5k miles a year total and my wife’s Golf gets 40mpg. At this rate our internal combustion car will last us twenty years and sip $50/mo in gasoline to do it. I’m delighted to pass on an EV if someone else would get more use out of it.
Google Fi is great and they lowered the price recently.
Have you seen the VW ID.3? Nice little machine. Not worth replacing a perfectly good Golf, but nice.
I think we are going to hit 7k miles on the car in 12 months. I was a bit surprised that it was that high, but most of it is from longer trips – will add ~300 miles in the near future going to Yosemite, for example. Our gas bill on an ICE version would have been about $1,200 for the year but charging at home the electric bill is closer to $280 (and near zero for us since we got 3 years of free public charging.)
I have seen the ID.3 and it makes me angry. There’s something to be said for always being prepared, but Americans take that to mean “buy the biggest thing you could ever possibly need” instead of “buy something sensible and rent a truck only when you need one.” So we’ve got 31 flavors of full-sized pickup truck but we don’t get nice small cars in this country. Hence the anger — we would’ve bought an ID.3 last year instead of the Golf in a HEARTBEAT if it were offered this side of the Atlantic. >:(
You’ve got solar panels too, yeah? Seems to me you’ve got it all set up just right!
Yeah… I rented a truck recently at home depot to bring home a bunch of 4’x8′ panels, cost me $20 plus about $0.50 worth of gas. No need to have a truck 24/7/365 for 99% of people.
We do have solar – it is saving me about $15/day right now as we run the AC through all of the peak hours. It is old and inefficient but we are in the process of switching to a heat pump (should reduce our AC electric usage by 50%(!) and bring our winter natural gas bill to near zero.)
Hi GCC – thanks for sharing this update and all the detail, it’s very interesting and informative.
I’m curious about you still “spending” less than 4%, and how you broke out debt paydown separately as “cash flow”. Do you not include debt paydown in this 4% spending, since it’s “net worth neutral”? I get that “neutral” concept but for me, considering using debt as a tool, it seems like spending is spending when I have to withdraw to service it.
Now that you have a house, do you include that in your portfolio? Doing so would align more with the paydown being “net worth neutral” to my mind. Do you like to calculate 4% from your original portfolio, or the portfolio value now? With the big drops this year, right after we retired, I am reconsidering how safe it is to calculate our percent from the amount before the drop, so I’m curious how you handle this. Thinking it through, I guess the drops are what the 4% SWR is designed to tell us not to worry too much about. Reading these questions, they seem a little nosy, but then, you put all this detailed information out there in the first place, so hopefully follow-up questions aren’t “off”. All best to you.
correction – when I say “debt paydown” I mean principal paydown, not the interest portion.
Please do ask questions, that’s what I’m here for. If I didn’t answer all of them, please let me know.
I do include the payment of debt principal in the math when I say we are spending less than 4%.
But… principal pay down is not the same as spending. If I pay $500 for a night on the town that money is gone forever. If I pay $500 towards mortgage principal, I have the option of spending that money later (either via home sale or refinance.) If the net worth neutral idea doesn’t sit right with you (a perfectly reasonable choice) you could instead think of it as shifting your asset allocation over time, moving some $ from stocks to home. (Or maybe not if stocks grow faster than home equity.)
That said, I don’t include the house in our net worth for purposes of calculating 4%. Otherwise, in the worst case drawdown scenarios, it would be possible to draw all other investments to zero and be left only with a house. A reverse mortgage or home sale could be forced at that point. It is fine to have the option to spend home equity, I just want the decision to be mine.
Just as an example, if somebody had a $250k mortgage-free house and $750k in investments, I would say spend $30k (4% of $750k) not $40k (4% of $1kk.)
Maintenance, property taxes, utilities, etc… is included in 4%.
We have increased our spending over time as the portfolio has grown. This is higher risk than spending only on the original portfolio value according to the numbers, but our portfolio is still worth more than when we started even after pulling out a big chunk to buy the house. There is such a thing as being too conservative.
Were the reverse true (the market dropped right after we retired, as is the case for you) I would have been more conservative. A core principal I recommend is to spend way less than 4% in the early years so the portfolio can continue to grow – This is why we started traveling in Mexico/Guatemala/Thailand vs Paris/UK/Japan. Our first few years we were even spending less than dividends in our taxable account as far as I recall.
There is a strange paradox in the 4% rule – if you retire Jan 1, 2029 with $1 million it says to spend 4% of $1 million. If the market drops in half and inflation is zero, it says to spend 4% of $1 million again starting Jan 1, 2030. Another household retiring on Jan 1, 2030 with $500k the 4% rule says to spend only $20k… if the former is fine, why so conservative for the latter?
Because the former probably isn’t fine. The 4% rule is a decent guide. When you add social security it is incredibly robust. However… just because a portfolio lasted 30 years to be considered a “success” in the trinity study doesn’t mean it was a fun ride. In some historical cases the portfolio was worth half just a few years into retirement (I wrote about the worst case example) – that would give me some serious indigestion if I truly needed 4% to live. If I had the option, I would strongly consider spending less if I retired straight into a recession / significant market downturn.
hi, Jeremy: a while back you said you took out a mortgage on the house and shopped around with 6+ mortgage brokers. from what I know even for pre-approval letters they would do a hard pull on your credit reports which will reduce your credit score, right? should we worry about those? Thanks
I don’t know what the right answer is but I personally didn’t worry about it.
I think my credit score dropped a bit for a month or so. I just checked again and it is 804.
I only got a pre-approval letter from one company (one I didn’t use.) I think hard pulls were only done once I picked the best offer and moved forward, but I can’t remember exactly. I remember they asked what all of the recent credit report activity was about (“I’m shopping around different mortgage options.”) so maybe there were multiple? In any case, it didn’t seem to affect anything.
Jeremy, I’m from Sacramento originally and seriously considering moving back to the area next summer to FIRE (pretty much anywhere in Sac and Sutter counties). I’ve been trying to run some math on energy/water costs, but it all looks like calculus. Any tips or hints on predicting those numbers?
Not really, no. Our neighbors spent $450 on electricity last month. We spent $23. It’s going to vary a lot.
Hey,
Thanks for the transparency. I’m surprised about $30k in dividends from a taxable account because you don’t like getting them (if my memory serves me OK per your writings in the past). Are you invested in individual dividend stocks or dividend mutual/index funds or is $30k strictly from a SP500 or total stock index fund?
This is our portfolio: GCC Asset Allocation 2022.
We don’t have any individual stocks.
Having recently FIREd, I’m realizing two things- it’s much harder to swing it if you have uncovered healthcare expenses to the tune of a few k a year (which I do) and that having non dividend/employment income of 30k a year would make things MUCH easier.
My expenses rose significantly in retirement (utilities since I’m home more, gas since I actually go places instead of just riding my bike to work, food since my job provided unlimited free food and some groceries, health insurance is huge and it doesn’t cover many of my significant out of pocket health expenses, gym since I can’t work out at work, clothes since I’m not wearing free work clothes all the time). I had not anticipated how $$$ retirement would be in my situation. I spend 1-2k more a month than I did while working, and I’m living much less large.
I could still make it, perhaps, but coasting right at 4% or so, which I had not anticipated. I’d feel way more comfy with some sort of income, and while my job was underpaid, wow were the perks $$$.
That sounds stressful. What is the reason for the big gap in expected vs actual spending? What (if any) changes are you considering?
What do you think would be better, stress wise:
a) some “work” that earns $30k/year
b) an extra $750k in equities ($30k/4%)
1. Random huge home maintenance stuff- we are not DIYERs, and we have a unique crawl space containing furnace, water softener, and water heater making it that we simply could not replace any ourselves, it would be impossible. It’s also really hard to get appliances that fit in this space, so I can’t just go to Home Depot and I can’t really negotiate. My county is one of the fastest growing in the US, so it’s not as though tradespeople are begging for work. I was expecting these to last a few more years, but of course they didn’t. And they all went at once, costing us more than our annual maintenance budget.
2. Unforced error with taking COBRA vs ACA; I thought I would want to work this year as a transition, and boy was I mistaken. Obviously I can get the ACA next year, so that won’t be an issue.
3. Out of network medical bills. In network medical bills.
4. Driving a ton more than when I was working. Also concerned as to what I will do when said car dies. Your budget assumes (not unreasonably) that your car will last; mine has a couple more years at most. It eats more gas and requires more financial love than I had anticipated.
5. More time for leisure activities. Skiing is not cheap. I didn’t get the best deal on a ski pass because I thought I’d be elsewhere this winter, but with this snow how could I pass it up?
6. I really had my job situation optimized financially. I biked to work much of the year, they supplied clothing and free, unlimited food as well as a gym and some free groceries. Some people complain about work clothes/commute costing them, but I had mine dialed in, and it didn’t cost me any money to work.
-Obviously I can fix the ACA issue and I can more aggressively decline out of network care. It’s hard to negotiate costs ANYWHERE lately, all that’s available is a payment plan.
-I can do better with planning skiing, but it won’t save more than a couple k, if that because of what’s available near me.
I thought I was fatfireing and not so much. With luck, I could be right around 4% (which is a six figure sum) if I cut my budget to groceries, car stuff, and health insurance. But also…maybe not. I had hoped for 3-3.5%, that’s not happening.
I really, really don’t want to have to go back to work. I haven’t figured out anything low stress that pays in the 30-50k range. So I’m not sure what I’m changing, if anything. I might just ignore it and exist on hopium until the hopium runs out.
Hopium isn’t a terrible strategy as long as you are enjoying life.
That transition from accumulating wealth to withdrawing is a mind fuck like none other, and it hits particularly hard for people who are natural savers… (as people who read blogs like this one tend to be.)
It takes time to adjust…
A lot of this spending you could maybe consider as one-time transition costs. I spent probably $50k extra last year transitioning from ex-US to US… that could mean spending way more than 4% in one year, but since it isn’t recurring the 4% rule doesn’t apply. (Other one-time expense examples: child birth, IVF, taking Grandma on a cruise, etc… having lumpy expenses and short-term excesses isn’t automatically bad.)
While it might feel better to be spending 3% rather than 4% (although maybe we would just worry about something else) it is called the 4% rule instead of the 5% rule because there were some really bad times in the past. The odds that we are in really bad times again (compared to WW2, the great depression, etc…) seem low. You will also get social security down the road, which (if added to total net worth) would mean spending a lower percentage of the total portfolio.
Thank you for the wisdom!
I agree, and there was a ton of deferred maintenance on myself, my house, my relationship, my skiing that is costing various amounts of money and that I hadn’t entirely anticipated.
Many FIRE folks seem to be hardcore DIYERs, have some sort of income, spend their first years of retirement in a cheaper locale, or find ways to economize; none of these seems possible in my current situation- it’s a pricey year, and I hope it doesn’t stay that way.
But you are right…I *should* be OK as long as the house doesn’t become a money pit and as long as I manage the car situation decently.
Thank you for the thoughtful reply.