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Monday, April 24, 2017

Large Purchases and Retirement

Posted by Dave on July 20, 2010

Cashflow management is very important in early retirement, but is significantly more important when retirement is reached and large purchases need to be made, such as a car, a new roof on your home, furnaces etc.  Most of these large purchases can be anticipated well in the future, for example my car will last approximately ten years (give or take a few years).  To buy a large item, I’d prefer to pay cash rather than finance as I have a large aversion to paying other people interest.

The ten years between car purchases can be used as an example of a large purchase that our household will budget for.   After retirement, it will be difficult to come up with the $10,000 to $20,000 needed to purchase a new car (this would be a large capital divestment from your portfolio).  So to solve this issue our household has implemented a long-term savings plan for our next car.  The same kind of system will likely be employed for other large items, but for us a car is the largest and most pressing purchase that will need to be made in the next year or two (but hopefully longer, as this would allow further savings to accrue).

If, for example, I retired at 45  that would mean purchasing 3 or 4 cars (anticipating our household’s ability to drive until approximately 85 years old).  To pay for that I would rather save $150 per month as part of my budget for the next car rather than finance it.  I personally don’t like financing because I don’t want any liabilities in retirement or alternatively taking the capital out of investments.

Planning like this when you are going into retirement, whatever your age, is very important.  Too often it appears that  people go into retirement with a huge pot of money and assume that everything will work itself out.  If plans are made ahead of time that would mitigate foreseeable emergencies (loss of heat from a broken old furnace) retirement will go much smoother than going in with just a pot of money.

I will admit I may be an over-planner on purchases like this.  Perhaps having a large pool of money sitting around would be easier.  But I would rather know that I have a specific “necessary expense” covered so that if several of these things needed replaced in a short period, I would know that financially I would be okay.

So, that’s my plan to deal with large purchases in retirement– do you have something similar in your spending plan now or in your retirement?  If not, how do you plan on making large purchases (I’m always open to ideas)?

Comments

5 Responses to “Large Purchases and Retirement”
  1. I don’t know Dave, there’s lots of people that do this “pots of money” thing – kind of like the envelope system I guess. I’ve got by fine over the years with the one pot for normal spending and one big pot for the “everything else”. When I was saving up for retirement, that’s what I did – live off one paycheck, giving myself a fixed income and the other paycheck plus all consulting income, bonuses etc. going into another account. Then I only used that other account for home renovations and one major trip a year. If my furnace blew (and it did), I just cut back on my monthly spending that month. Right now if something happened, I’d just work for a bit to pay for it.

    In retirement, one year it might be a roof, one year a car, nothing for a couple of years… I’m not sure how I’m going to do it, but I seriously doubt I’ll be segregating money into different funds. But maybe just having ~$100k in a secure mutual fund earmarked for stuff like that would be a good plan. Hopefully by the time I’m 85 it will be spent down and I probably shouldn’t be on the road and probably won’t be living in a situation where I’d have high maintenance costs.

  2. deegee says:

    I made sure to buy a new car back in 2007 (while I was still working) so I would be set for many years into the early retirement I took in 2008 at age 45. I drive only about 3,000 miles per year, so it is not unreasonable for it to last at least 15 years like the car it replaced. Similarly, I made sure to have some costly dental work done in 2007 and 2008 while I still had dental insurance coverage. So I am set there, too.

    I do not use all of my mutual funds to supply me with the dividend income I use to pay my bills, so I consider the excess funds to be like my own personal “slush funds” to cover any large and/or unforseen expenses until I can have full access to my IRA. If the car doesn’t need to be replaced until I can tap into the IRA that would great (and within reason).

    As for my large co-op apartment complex, we just underwent extensive interior and exterior renovations in the last 5 years, so it is not likely we will be having any assessments to pay for large expenditures. My share in the complex is only 0.3%, so even a $1M expense will cost me only $3,000, hardly one which would bust my budget.

  3. George says:

    Heading towards ER, I’ll be doing as deegee… take care of potentially large expenses while employed and then just take my lumps if something really unexpected happens. One exception is computer upgrades, which are just in the overall budget.

    Even if I were doing ERE, I wouldn’t set up specific accounts unless it’s something very important for me (e.g. like the computer upgrades). Instead, I’d plan to take my lumps in the form of returning to work for a short while.

  4. Dave says:

    Because my retirement fund will be based more on cash-flows (dividends) vs. capital, the cash flow method will work better for me than significant withdrawals once in a while.

    Right now we are budgeting for a car that we need to buy in the spring (I was going to drive my car into the ground, but my wife is learning how to drive and is just not comfortable driving my 5-speed). It would have been easier to save for a decade+ for this purchase rather than over a 10-month period.

    I’m not sure I will specifically segregate the funds, but there will be a portion going to savings for large “asset” purchases.

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