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)?