The Shiny and New Theory

In the typical obsessive compulsive theory of retirement planning I’ve heard of a few people suggest that I should attempt to ensure I have everything shiny and new prior to actually quitting my day job.  The idea is if you spend an extra year working you can afford to replace your appliances, car, upgrade your computer and anything else you might want and can afford at that time.

The upside of this particular method of planning is you can hopefully avoid the problem of having a really bad spending year within your first five years of retirement.  If you ever had a bad spending year you know what it can be like.  As an example, you might need a new furnace, new singles for your roof and you car dies all in the same year.  Depending on how much of this you need to contract out  and your particular tastes in cars you can be looking at an extra $15,ooo to $40,000 in spending for that year.

While this can feel like bad luck there is an additional issue with retirement to consider, you don’t want to drawn down your capital if at all possible during your first five years of retirement.  Why?  Well in a nut shell you can potentially send you portfolio into a tail spin from which it will never recover.  How? Well for example, if you plan on taking out 4% of your portfolio a year and your average five year is only 3.5% you have a problem.  Next you add in your bad spending year and before you know it you have spent too much of your money upfront in your retirement.  Now you have to either go back to work for a while to replace the lost cash or accept you will run out of money sooner than you expected.

So on the risk planning side of the equation, I understand the logic of this idea.  Yet there is a big downside as you can be setting yourself up for a big spending year further down the road.  Let’s say you do replace all your appliances in the same year.  The odds of all of the breaking down around the same time increase by a fair bit or you might shift it into the same year as some major work that needs to be done to your house.  So yes you avoided the big spending year during your first five years, but you might get nailed hard about year 25 of your retirement.  This again could cause a problem by taking too much cash out at once (not to mention the issue of taxes owning if all of this had to come out of your RRSP in a single year).

So while I like the idea I personally won’t do everything prior to quitting work.  Instead I will replace stuff that is close to being required anyway, like singles for my roof if I’m within a 2 to 3 years.  Yet beyond that I will only setup a bit of slush fund for things to go wrong during those first five years of around $25,000.  That should absorb the majority of any big costs that come up and also means I can continue to use what I already own to the end of its useful life.

How do you plan to deal with unusual expenses during your first five years of retirement?  Are you going to do everything shiny and new or not?

9 thoughts on “The Shiny and New Theory”

  1. Shiny and new, for me, is reserved for the extremely durable goods that provide shelter: siding & roofing & windows & septic & well. We would rather feel safe for 20+ years on those items.

    New car? New used car? Only if the current one is showing signs of being worn out. 10-15 years of hard use seems to be possible on cars when new. Or 2-10 years of use for used cars that I perform the maintenance on.

  2. Being no where close to pulling the plug myself, I can only speculate what I’ll do.
    I think I’ll have an easily accessed slush account for incidentals like these, and gauge when I pull the plug based on the condition of my stuff, and the size of that fund.
    Or another idea, when you have enough to be FI, live like you are FI, but continue to work and bank that income as a fund to replace the major things that can go wrong.

  3. This is an interesting theory. I personally really like it. Assuming I could ER I would really consider working one more year where that entire year’s salary could go to buy new appliances and things such as roof, water heater, furnace, etc… I wouldn’t buy everything new but if something was withing a few years or the technology had improved a lot I would pull the trigger.

    You seem to be assuming that everything you buy in that last working year would break down or otherwise need replaced in the same year in retirement. I think it is pretty safe to say that, in your example, the car, roof and furnace will not all last the exact same duration. Your examples all seem to last 15-20 years (estimate) but assuming could maintenance they could last longer. You could just as easily spread out the replacements and repairs over the course of a couple years near the end of their lifetimes.

    This does not take into account emergencies but how can you plan for those? This theory seems to prepare for emergencies as well as or better than anything else I’ve read or heard.

  4. It appears to me that the most obvious problem with this plan is that the one extra year could easily turn into two or three (or more). For example: I’m going to retire but before I do I’m going to buy a nice new car. An all-wheel drive Audi A4 will do nicely for, say, $45,000. At $1500 per month you’re looking at 30 months. New roof is $8,000, new windows at $10,000, new water heater is $1200. On top of that, every year you work earns you more RRSP contribution room and additional TFSA contribution room which you know you should take advantage of.

    A much better solution is the one discussed above: retire at a time that’s right for you with a sufficiently large emergency fund then live within your means. The idea of purchasing all new items before retirement is a bit of a suckers game.

  5. being the way I am, I will work longer than necessary because I am risk-averse and therefore less agressive in investments. The same streak will also extend my work time by at least 2-3 years to build up even more of a safety margin.

  6. I had a 16-year-old car back in 2007 as I was planning my ER. It as on its last legs (wheels?) so I expected to replace it before I ERed (which I did), taking that issue off the able. I drive little so this new car (now 5 years old) should last me 15 years, too.

    As for unusual expenses in the first 5 years of ER (I am already nearly 3 years into mine), I haven’t had any. But I have a “slush fund” I can tap into in case I have a large, unforeseen expense. This is part of my “cushion mentality” which I use to generate a monthly surplus to cover smaller, unforeseen expenses.

  7. It just seems really strange to me to replace a bunch of stuff that isn’t at the end of its life yet, to avoid the expense of having to replace it when it does reach the end of its life in another 1-5 years.

    Where’s the logic in that? You’re still paying for it. You haven’t avoided any expenses. In fact, you’ve likely spent money that didn’t need to be spent!

    Why not just keep the money you were going to use to replace everything, but not actually replace anything? Then if and when something actually does break down, you already have the money earmarked to replace it.

  8. In preparation for my partner’s retirement this week, we have been slowly replacing (one per year) our appliances that were aging, our cars that were nearly at the end of their useful lives, and saving up a slush fund of $25,000 for home repairs, so I think we have things pretty much covered.

  9. I agree with Darren on this.
    As long as things are accounted for,it wouldn’t really matter when you actually replace stuff.
    The money used would probably just be diverted from your saving anyways,so whats this difference?

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