The Budget

I wasn’t sure how retirement was going to work.  It was all based on guesstimate, projection, a wish and a prayer.  I pretty well knew what I was spending a month while employed about $13,500/mo and that went to 2 kids in college, funding retirement. the cost of being employed, my wife’s side business and charitable giving.   Retirement brought a lot of changes.  One kid graduated and launched, the other continues in college, we went through a hurricane and sustained some damage from that, I stopped funding retirement and reduced some charitable giving, and settled into a lower cost life style.   After doing some reading I found people do well with 75-80% of their pre-retirement income so I built around $10,000/mo.  I could easily “afford” my old number based on all of the calculators so I had some leeway up if necessary.  

There were a couple initial expensive months.  Months where insurance on 4 cars came due, tuition for my daughters last semester had to be paid, a car for her launching had to be purchased, an escrow for her to get an apartment where she was working needed to be funded, property taxes and home owners insurance,  I had to replace 2 air handlers and compressors in my A/C system etc.  Much of it I had pre-planned and funded prior to jettisoning the W2.  My daughter also spent a semester abroad and my wife and daughter toured 5 cities in Italy last Christmas.  Making a plan for the pre-pay was critical.   Pre-pay takes some heat off of early SORR risk.

 A few months into retirement after all the dust settled, Christmas was over and college was paid for I ran an experiment to see what belt tightening felt like.  You always read “we’ll just tighten out belt if the bad times come!”  So what the hell does that mean?  I was living on less than the $10K I had allotted somewhere around $8K/mo or 20% less than the 25% less I settled on as my “Budgeted amount of $10K.  We took it down to about $6400/mo.   At this level I needed to start planning payments like car insurance and the travel budget was curtailed.  But neither I nor my wife felt particularly constrained we just had to be mindful.  This was an important data point for me.  At this point my biggest line item was insurances and insurance was a number that could not be contracted, same with taxes.  Food had some flexibility as did driving, so I could tell there was a lower limit where “belt tightening” became not only uncomfortable but debilitating.  

After a few months of that we loosened up again but never to $10K/mo on the average.  Over the past 16 months the average has been a little under $8K/mo even with fairly generous kid related expenses.  By operating in the 8K/mo zone If we want to splurge we simply save up the $2K/mo differential between $8K and $10K till we have enough otherwise we just bank that differential.  Initially I was very anal about watching the cash flow because I didn’t know what to expect.  After a year and a half I do know what to expect and anal-ness has given way to automaticity in that the budget largely runs itself without much need for input.  Big expenses now are related to Roth conversion and taxes will dominate the line items for the next several years but all of that is already accounted for.  In addition I’m living off cash during conversion so stock market swings are not part of my day to day thinking.  After Roth conversion SS commences and I will leave some money in the TIRA as opposed to total conversion to the Roth.  This reduces the tax bill while still dramatically streamlining taxes going forward.

It turns out the tax code seems to be written around a RMD on an approximately $600K portfolio.  If you have $600K in bonds @ 3% the first RMD is $21K rising to $28K in the 10th year and $31K in the 20th year.  If SS generates 42K taxable the first year and grows at 2% inflation it will generate $63k taxable 20 years in the future so the age 90 taxable income is about 94K still in the 12% bracket married filing jointly, and cap gains on money you extract from a taxable account is zero up to $104K and only 15% on dollars over 104K.  If you have some tax loss harvested you can write off the TLH against the 15% for zero tax,  highly efficient.  If you have a $3M TIRA @ 6% it will RMD $109K the first year, $189K the 10th year and 290K the 20th year.  Mixed with SS in year #1 your taxable income becomes $151K the first year well into 22%, $241K the 10th year well into 24% and just below where the Medicare surtax kicks in.  At this level they charge you triple for medicare parts A & B as well.  20 years in you are paying taxes on $350K into the 32% bracket plus the surtax.  Your tax bill is almost $70K/yr.  If you die at the same SS level your wife would pay 95K/yr in taxes on $350K of RMD.  So you can see taxes are quite progressive and the rich definitely get soaked.  Those are some of the moving parts.  You can combat much of this bracket creep by Roth converting for a few years prior to RMDto get the TIRA down to about $600K and putting that $600K at least in part as the bond portion of your portfolio.  

With this kind of well funded and tax streamlined plan SORR is reduced.  By living on cash during Roth conversion the portfolio is pretty closed to SORR and by controlling taxes as well.  Roth conversion does constitute some SORR on it’s own but that risk is overcome later in retirement due totax savings.  In addition living on cash reduces the AA which is a good thing to combat SORR early in retirement.   As cash gets spent down for living and taxes your AA glides back up in aggression automatically also desirable.  I figure you already owe those taxes so getting uncle sam out of what little hair you have ASAP is a good thing. I never budgeted formally while saving but I was a diligent saver and investor.   Now that I’m retired and deflating my portfolio I find some pretty well defined budget knowledge invaluable.  It doesn’t run my show but it gives me a quantitative picture of cash flow.

Casey Jones you better watch your speed.

2 Replies to “The Budget”

  1. Know thyself and know thy money. No point guessing something as concrete as what ones spends. Almost everything with personal finance is woo woo and voodoo. This is one area where you can control to an extent. At least one has more options.

  2. Ya! woo woo! exactly, that’s what Casey Jones said! I’ll just tighten the belt! Wait, let’s travel to Tahiti and tour China wait a minute where did that $20K go? Waddya mean mom’s got lung cancer and her treatments are 40K/yr? The roof’s leaking? HONEY, the roof’s leaking!! 4 x 25 I just spent 7! What is it Bob Dylan said, the man wants 11 dollar bills and you only got 10.

    tnx MB

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