I was looking at my retirement budget calculations. Just a quick glance at the planned long-term numbers I used pre-retirement to ditch the rat race at the age of 51 on December 17, 2009. I’m happy to see that after 9 years of monthly retirement budget tracking I made an early retirement spending miscalculation. Happy because it’s in my favor.

Overestimating early retirement spending is certainly a good thing. When we plan for retirement we have to figure out how much retirement income we need. It comes down to estimating what our retirement budgetary needs will be and applying inflation to the equation. To get our starting number we guess what costs will go up and what costs will go down once we dance our way out of the workplace. But it’s all an educated guess. We won’t know until we are actually living our desired retirement lifestyle and the real inflation rate is revealed down the road.

Photo by Andre Hunter on Unsplash

It’s Easy To Make A Retirement Spending Miscalculation

The default advice is you’ll need 70% to 80% of your salary in retirement. That didn’t make sense to me as I was saving a high percentage of my income for retirement. I also expected to pay less taxes. I took the approach that I needed 100% of my pre-retirement frugal living budget minus estimated savings of work related costs like commuting, clothes, and the alcohol I had depended on to counter work induced stress. Then I added 10% to cover my tax obligations. That final estimated figure was far less than using the salary based calculation.

Once I settled on the budget amount I then applied a reasonable yearly inflation factor of 3%. That is except for healthcare. I pulled that amount aside and applied a 6% inflation factor against it to get a closer estimate. Running the numbers through a retirement calculator and coming up with good results is the green light to take the leap.  

The high level retirement spending miscalculations –  

My early retirement spending reality is that healthcare went way up over that 6% inflation amount each year while some others were less than the 3% I used. Some things I initially budgeted for have even disappeared. That’s because things change as we live and experience retirement doing the things we want to do. We settle into an entirely new way of living and our taste for certain things changes over time. Here’s some of my early retirement spending findings.

Healthcare – Medical Insurance

Nobody should be surprised that this went way higher than inflation for everything else. It’s my biggest retirement spending budgetary item and pre-retirement miscalculation. When I retired in December 2009 my retirement health insurance benefit cost $476 a month. For 2018 it was $1,064 and in 2019 it will rise to $1,340. Ouch! The difference between 2010 and 2018 is 123%. That’s a huge healthcare cost increase over 9 years. It should be easy to see how this one will skew anyone’s retirement spending calculations.

I thought doubling to 6% would be high enough when I separately calculated inflation costs for this item from everything else. I figured it was a reasonably obscene inflation percentage to make sure this expense item was covered. The reality is it should have been calculated using a 12% inflation rate. Aside from the company killing this retirement benefit (as they occasionally threaten) and our going on ACA if it still exists, I see little relief from this until our medicare years. I have adjusted future budget projections to reflect that realization.

Cable TV and Entertainment

When I retired we had a basic cable plan. That was our family’s frugal living compromise. Our retired parents all said with more time in retirement you will want to have a good paid TV package. Thinking our basic cable plan was plenty, I included it in our retirement spending calculation. When I retired my cable cost $35. Over the first 6 years of my retirement the same cable service slowly climbed to $92 a month with all their higher channel and fee increases. That increase was well above the 3% inflation rate I used.

We found in our retirement the opposite of our parents retirement experience. We were satisfied with local TV viewing and really only watched a handful of cable channels. It didn’t justify the cost. The nationwide analog to digital TV transmission upgrade and new antenna designs made cutting the cord easy to do. Streaming development also made paid cable or satellite service an easy retirement cost to eliminate.

We have also eliminated other entertainment cost.

We’ve started using our library where DVDs are free to check out. We also connected to our community’s event online calendars to get event email notifications and have enjoyed free concerts near us. Having time also allows us to go to the movie theater or other venues during off hours at a discount.

Retirement brings more spare time but it didn’t raise our TV and entertainment cost. It instead lowered them.

Mortgage

I retired with a modest mortgage still on the books. I calculated our monthly payment into our retirement spending calculation without thinking I would ever pay it off. But then I started a short but sweet encore career. Since I was basically living off of my retirement funding I simply directed 100% of my paychecks to the mortgage and cleared it within 18 months. This move is what made the insanity of rising healthcare cost a near wash for my early retirement spending miscalculation. This is a case of you won’t know what will impact your retirement budget until you are retired. You simply don’t know what you will do until you do it. I had no idea this would happen when planning my early retirement.

Eating Out

Even with all the free time, restaurants didn’t call our name any louder than they did before. In fact they are even harder to hear. Initially we took advantage of happy hour discounts but soon got over it. We prefer home cooked healthy meals and we now have the time to make them. We spend 50% of what we initially modestly budgeted for this.

Travel

We had a decent travel budget. We try to save money when we travel and have done that for decades. With retirement we have time to look for deals and can travel off-season. We also can make reservations and lock into deals months in advance. Another thing we have experienced is our appetite for travel has decreased over the 9 years of retirement. We simply like where we live and play. As far as travel goes we prefer quality experiences to quantity of travel. Although the cost of travel has increased over the years, I’ve found that we travel as much as we want to but are spending the amount we started with. Our travel spending has seen a near 0% inflation increase over these 9 years.

Fuel

I calculated a 50% drop in fuel cost once I retired. Simply thinking that I would be using some of my extra free time to go places but also subtracting out my 20 mile (200 miles a week, whoa!) work commute costs. In actuality the drop has been closer to 75% of our pre-retirement cost. We shop local and travel shorter distances and prefer to spend most of our time outdoors, not driving somewhere. We are lucky that we have outdoor recreation and everything needed within 5 miles of our home. Not only is fuel cost down but so is all auto maintenance like tires, brakes, oil changes, etc.

Taxes

I was paying a large percentage of income in taxes when working so I calculated 10% for my retirement income tax obligation. The reality is when I am not working it is actually only around 5% of total retirement income. Some of that is due to using a more tax efficient withdrawal strategy that I hadn’t considered before I retired.

The Takeaway From This Early Retirement Budgetary Exercise

This exercise wasn’t a yearly spending study.

I merely looked at our initial retirement budget at the end of 2009 with my planned yearly projected increases using our applied inflation estimate. Then I compared that to our spending for 2018 to see how it tracked.

I was happy to see that we are 14% less than what our calculated long-term 2018 budget projection was.

2018 was a year where we did everything we wanted to do. It was also a normal year without any catastrophic events.

For the between years there was one that did go over budget projections. It was a bad year due to a medical crisis. But the other years came in under spending calculations, some much more than others depending on retirement life events. For instance the year we paid off our mortgage and a couple of the following years before health insurance had risen so high came well below the earlier budget calculations.

Having a plan matters.

I believe this shows that having a reasonable plan along with purposeful living and spending discipline, even crazy stuff like obscene healthcare increases won’t necessarily derail one’s retirement plan.

It’s good to have an emergency fund or access to other funding in retirement.

Having the means to carry us through a bad spending year is important. The medical crisis year that we experienced could have caused problems if we only had a fixed monthly income to depend on. We need funds beyond our sunny day budget projections to get through any rainy years.

Retirement life happens and things can change.

During retirement we will do things, stop or decrease doing other things, and make decisions that we couldn’t know to plan for. In my case starting that encore gig and casually paying off my mortgage was a decision that had huge implications in the outcome of this exercise. Had I instead invested my salary, my retirement spending would have been ratcheted higher by healthcare. I would however have more money in my portfolio. Hopefully doing that would have provided higher income to counter the retirement healthcare spending increase. I think I made the better choice.

Inflation is tricky to predict but plays a huge role in planning and outcome.

I admit that my first nine years of early retirement came with many lifestyle cost items having an actual low inflation rate. Healthcare’s massive increase ate solidly into what should have been a stellar lower than expected retirement spending amount. However, had I correctly applied the higher 12% inflation rate to my healthcare calculation the results of this exercise would be off the charts in my favor. The opposite is also true. If we begin to see hyper inflation increases across the board then we have to recalculate our budget going forward. Hopefully investment income can keep up but if it can’t then spending control or possibly returning to a paid opportunity is our best defense.

Having more free time doesn’t necessarily mean spending more to fill it.

I thought we would spend more than we are for travel, entertainment, and all else we do when we are out and about. Although this was partially true in the first couple of years of our retirement, it didn’t stick. In our case having time allows us to save money while still doing everything we enjoy doing.   

Retirement Comes With All Kinds Of Spending Variables

Everyone’s retirement experience will be different. Things like retiring with a child at home that causes spending changes as they age, experiencing a health crisis, or finding out during retirement that you are a passionate travel freak, can throw all projections out the window. If that happens it will hopefully be short-term and you can find yourself back on track or find a way to adjust your budget to meet your retirement’s new spending needs.

Retirement lifestyle cost is a concern for most people when they decide to retire.

What I have found is that as long as there is a reasonable plan based on the lifestyle we want to live and can afford to live, we have a retirement funding cushion available for any bad years, and we  monitor our spending, we can overcome most challenges before they become a huge retirement financial nightmare.

There are no guarantees in life or budgets, but worrying too much about things does no good. Instead know that planning well and tracking our spending gives us the best chances. If the worst should happen then it won’t be due to head-in-the-sand financial recklessness.