Overly Optimized Spending

As many of you already know I have a very optimized plan when it comes to us spending our money each year.  I don’t spend more than I have to on my water bill, we borrow books from the library prior to buying them and will gladly spend money on buying a wine kit to brew at home instead of buying a bottle from the store.  Over all this results in us having a very good life on far less than most people would for a similar lifestyle.  Our spending is highly optimized to our particular wants and needs.

So for years I’ve generally considered optimized spending a strength of our plan after all when you are reducing your spending the you have more money for savings each month and you also can reduce your overall retirement goal.  For example, if you need $1 million to retire with a $40,000 per year expenses, if you drop your expenses to $30,000 you only need $750,000.  So you don’t have to save that extra $250,000 in the first place.  I always considered this a good thing.

Except when it isn’t.  Oddly enough I came across the idea it can also be a weakness to your retirement plan.  Which I thought was a bit silly at first until I realized what they were getting at (sorry I don’t recall where I read this or I would link back to the source).  Having overly optimized spending also means you don’t have much fat in your budget to cut as the core spending (like your property taxes, home heating, power or water) takes up a greater percentage of your overall budget.  It also means any jumps in those core expense have greater impact on your budget as you have less optional spending elsewhere that you can cut to cover it.  After all, when you are overly optimized you already cut most of the optional spending out years ago.

So let’s compare two cases to demonstrate this:  let’s say family A is spending $40,000 a year and they retire with $1 million saved.  Then the stock market drops 40% and inflation spikes so their core spending goes up $1000 per year.  So being reasonable people they look to cut $1000 per year out of their spending (or 2.5% of their yearly budget) and they go after a few things they haven’t optimized before and make up the difference.  Then we have family B with $30,000 a year spending and only $750,000 saved.  They have the same event and $1000/year increase in core spending from inflation.  Now they have less to cut in the first place and they have the added bonus of the increase being a higher percent of their spending at 3.3% of their yearly budget.  Over all family B’s ability to cut spending is more limited and the increased core spending dollar amount has a greater impact overall.

Hence the point that overly optimized spending can also be a weakness during your early retirement beyond being a help to get you their sooner.  So how do you deal with this issue?  Well me personally I don’t plan on changing my plan because of this, but I would suggest the idea of making sure you do have some buffer in your budget.  You might not really need that buffer most of the time, but even if you don’t use it initially that extra money could be spent on a one off event later on if you aren’t using the buffer.  For example, take an extra trip every five years if you aren’t using that buffer amount.  The size of that buffer is a personal choice and will shift with how much slack you have in your overall budget.  The more optional spending you have, the less buffer you may need and vice versa.

So do you have overly optimized spending?  What would you do to resolve the risk of higher inflation and a lower market?

13 thoughts on “Overly Optimized Spending”

  1. There’s always fat that could be trimmed, always. In your situation you could downsize your house, sell your car, cancel cellular plans (free options exist), downgrade internet connection, reduce travel (you said extra trip, that means you’ve budgeted some trips) and grow more food. These options are all uncomfortable but they exist, I’m not saying you should do any of these (we share similar budgets and I wouldn’t want to).

    The argument is basically that people like their comforts (I do too)and want to justify it needlessly to others by pretending its purposeful so that their future selves have budget breaks. The same risk mitigation is achieved through higher savings, but then people don’t get to have their creature comforts.

    If people wish to work longer for the extra safety, that’s cool. But its better to be honest why, its more about security than anything.

  2. One tactic that I am looking at is to get to FI then instead of ER I will instead keep saving and then add a little fat into my budget in areas that increase my enjoyment of life. So right now I never go to the spa and barely get my hair cut. I went with my friend to a Korean spa that only cost $20. I would love to add one trip a month into my budget, but FI comes first.

  3. I’m glad you’ve brought this up. I’ve been tracking Every. Single. Cent. Spent. in 2016 and a year end review shows there’s not much there to be cut. It’s pretty bare bones now and if I had to cut more, it would hurt. But I have another problem that I’m wrestling with. When I quit working, I’ll need more money than I need while I’m working. That’s because the hours spent at work prevent me from doing other things e.g. DIY projects around the house. Even though these projects are not big $$ items, they do cost some money, money that I’m not spending now because I have limited time for DIY projects. So I have a suspicion that I will need more income when retired, than I live on now.

  4. Very interesting and realistic post. I often think about it, which bring me looking at reaching FI and then stop almost saving and switch to semi retirement working part time only at a fun job to cover the base plus some extra expenses (the fat) like traveling etc. And have plenty of time to do these thing. And the nest egg continues to grow (rapidly with compound interest) and put on some fat over the meat all by itself. 🙂

  5. I think the fundamental problem with your hypothetical scenario is it contradicts the characters psyche and doesn’t use a standard basis for assumptions.

    Comparing “$40K spend saving $1M” vs. “$30K spend saving $750K” doesn’t make sense.

    Assuming both scenarios are the same level of income; it’s more realistic to assume the $30K spend will have a LARGER savings than the $40K spend.

  6. When I was getting ready to ER 8 years ago, I built into my budget a cushion, or surplus, so that my SWR would be very low. To use your example, Tim, I have expenses of $30k and a portfolio of $1M, so that if there is a downturn or some unexpected inflation, I can handle it without disturbing my lifestyle.

  7. That may be a bit overkill to reach 1M, that’s good, but not necessary to have a great retirement. And it means more years working and saving

    The thing is that you may be able to rise your style of living with more luxury, which doesn’t lead to more happines. A little cushion like Tim is building is easy and fast to reach, , and than cut the cord and enjoy your load of time, which is the real wealth

  8. I like the idea of a buffer for retirees. Especially with the unknowns in the current environment like health care. You don’t want to be stressing about a big jump in one of your core expenses and potentially have to go back to work.

  9. Interesting point. I think for me the answer is to go back to work if I I had to. But I mean something like teaching part time or something that doesn’t feel like a 8-5 type job in the corporate world. Maybe a seasonal job.

  10. For a while we thought our spending was overly optimized, but we always find areas that we can cut, like food or energy expenses. It’s tough to actually arrive at this point, but it’s definitely devastating when you’re left with increasing core expenses with nothing left to cut. At that point it becomes an issue of increasing income.

  11. Good post. I don’t think a totally optimized spending is good for FIRE planning and execution purposes. Life is full of uncertainties. It is better to get into early retirement based on a budget that you KNOW has some fat (say 10-20%) in it, which makes it easy to cut should the future financial returns require it. Living at an extremely optimized spend level leaves no fat, only flesh to cut, which is not fun at all.

  12. I think having a buffer in your savings is important. One way to do this is have a travel budget. It’s easy to postpone a vacation if the markets slow down a bit.

    If your spending is very lean, with nowhere to cut, it will be kraft dinner for a year if something goes wrong!

  13. Hi, A great article.
    I’m retired, got a pension and a savings pot to boost it when needed. However I am really worried about rampant inflation coming back, like I experienced in the 70’s, 80’s and 90’s. Between 1978 and 1988 effectively everything tripled in price. Houses, rent, groceries, fuel. A salary buffers you from that, but a pension pot doesn’t. It will grow, but might not keep up.
    If today’s average FIRE retiree is aged about 45, then by the time they get to 90, there is a good chance there will be a period of high inflation to live through. So having a buffer is essential.

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