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Reserve for One-Off Expenditure

Including Financial Independence and Retiring Early (FIRE)
stevie1912
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Reserve for One-Off Expenditure

#522765

Postby stevie1912 » August 16th, 2022, 8:16 am

I am honing in on my goal of a 3% SWR to cover expected regular expenditure with a 10% contingency.

Aside from this I am looking to build a separate reserve for one-off items. This could cover things like significant medical expenses (instead of private medical insurance), unusual home improvement (such as new kitchen), car upgrade etc. I also may want to help my kids who are currently financially dependent on me - perhaps helping with a deposit or a wedding gift, etc.

So some of this one-off expenditure may be short term and some long term. The expenditure is unknown on timing and amount.

I am really keen to understand whether or how others allow for this. Do you have a separate reserve or did you just target a lower SWR so that you could accomodate one-offs as they arose? How many years of regular expected expenditure do you hold in a reserve? Do you run as a separate pot or do you have a nominal amount of an overall pot allocated to one-offs? When you spend or gift, do you aim to bring your reserve back up to the original level - do you top up from investment returns or if you spend is less than your regular withdrawl amount?

Any insight, thoughts or experience would be welcome. Thanks

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Re: Reserve for One-Off Expenditure

#522772

Postby JohnB » August 16th, 2022, 9:05 am

I'd just look at 5 years of bank statements and average the withdrawls that were expenditure/gifts. Tweak if you thought the period was light or heavy on holidays/new roofs/weddings. That gives you an accurate expenditure, which your 3% SWR needs to cover. I'm not a fan of cash reserves unless you actually plan to draw them down during slumps or wedding seasons. Too many people have the mantra of 3 years in cash, whatever, which is a lot of money going backwards.

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Re: Reserve for One-Off Expenditure

#522773

Postby TUK020 » August 16th, 2022, 9:06 am

An awful lot of this is about mental earmarking of different asset pools and income streams.

The amounts I withdraw from pensions (both DB & SIPP) are geared around taxation thresholds, and what is 'efficient'. Most of my income is taxed at basic rate, but a combination of tax thresholds & LTA mean that any extra withdrawals would be at a marginal rate of 65%. I hope to be able to live on this, but this has yet to be challenged by a sustained burst of inflation. I am very unlikely to empty the SIPP of money (particularly when I replace most of the funds withdrawn with state pension). Any unused amount then becomes a tax efficient means of passing inheritance to kids.

Lots of ideas for 'help the kids get started' funds were tied to a future house downsize freeing up of funds. This downsizing has been put on hold - although we have had a couple of kids move out, they have been back-filled with Ukrainians. Not sure what the longer term outcome of this is yet.

My S&S ISA income is earmarked as "holiday/surplus" money to cover extra items and expenditure. Although the downsizing has been put on hold, kid support projects have not, and although I have not paid out much on this yet, promises are being made. The ISA capital is earmarked as the 'care home fund'

I also have a reserve pot, that was earmarked car replacement (I drive around in an old banger that will die sometime). I am in the process of spending this on solar panels instead (my utility bill is already scary). In this case I am looking to accumulate a cash reserve in the ISA as a replacement for the car/emergency fund.

Much of this is very theoretical at this stage, and has not been tested by any real squeeze on expenditure vs income.

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Re: Reserve for One-Off Expenditure

#522782

Postby Dod101 » August 16th, 2022, 9:36 am

Well having lived off my investments for more than 25 years (the last 15 or so I have also received a State Pension) I ought to be able to help the OP. My investments are in three pots but the biggest by far is held in a couple of ISAs, a smallish amount in a SIPP and a few directly held certificated shares.

The ISAs provide most of my day to day expenses. My SIPP income is just accumulated within it and some years withdrawn in March. My State Pension is my travel fund and I accumulate it in a savings account.

I am also fortunate to have about three year's expenditure held in index linked National Savings certs. I draw on this for a new car every five years or so.

As for things like getting the exterior of my house redecorated (about a five yearly expense), that just comes out of my monthly income as does other maintenance work. If I had really serious expenditure I guess I would raid my SIPP and/or my travel fund but I have never needed to.

So I just get on with life without worrying very much. I am on my own nowadays but even when not, I could always juggle things so that funds were available when needed, so the direct answer is that I do not have specific reserves for one off expenditure.

Dod

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Re: Reserve for One-Off Expenditure

#522786

Postby xxd09 » August 16th, 2022, 9:46 am

Aged 76-retd 18 years
Keep 2 years living expenses in cash
If have to buy an expensive item use living expenses account but I top up on my yearly withdrawal-obviously taking more that year to return to the status quo
Seems to have worked over my retirement so far
Keep your savings invested as long as possible and keep it simple
xxd09

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Re: Reserve for One-Off Expenditure

#522806

Postby TahiPanasDua » August 16th, 2022, 10:46 am

Great topic, I can't wait to hear what others are doing.

Three immediate and obvious thoughts are:
1. The future is, for the most part, unknowable.
2. We all have differing abilities to set aside cash.
3. Our personalities can tolerate risk at vastly different rates.
There can't be a universal "right" way to provide for the future.

Our approach so far has several weaknesses, not the least of which is having relatively large sums in bank accounts earning almost no interest while deflating like the clappers.

We live almost exclusively on natural dividends. We keep two bank accounts, the first holds incoming cash, the holding account, and it pays a monthly "salary" to the second, the spending account. We pay nearly all our normal expenses from the spending account, including all fees, insurance, car and household maintenance, repairs etc. The monthly amount is fortunately generous enough to cover occasional biggish sums.

The holding account is primarily aimed at covering any shortfalls caused by down years in the stock market. However, we have never had to do so since retiring over 20 years ago. We are lucky enough to be able to live on about half of our current "salary" if needed.

The holding account currently has about 3.5 years normal expenditure which is too much. To reduce that to about 1 years expenditure, we are currently drip-feeding monthly into a selection of mainly income-style ITs.

Bigger one-off items, such as new cars, come from the holding account. We intend to pay for any such items by selling shares if necessary to top up the 1 year holding amount. One obvious downside is that sales could coincide with market drops. Luckily, this has not happened over said 20+ years. Indeed, as luck would have it, the reverse is true. We disposed of our entire Hong Kong legacy portfolio late last year and used part of that to upgrade our property. The market subsequently plummeted while I dithered about where to invest the excess. No skill involved, just luck.

Others will certainly recommend better alternatives but personality comes into it. I can't be bothered with complex rebalancing acts and have no interest in gold, bonds, etc. So far, we can comfortably afford that luxury. Those early retirees, for example, living on a tight-ish SWR, or aficionados of investment complexity, will be unable to emulate our casual, nay dissolute, ways.

Good luck!

TP2.

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Re: Reserve for One-Off Expenditure

#522811

Postby tjh290633 » August 16th, 2022, 11:14 am

I am maybe a little different from others. I have a full State pension, including SERP dating form 1998, an occupational pension paid from the same time and an annuity (Index-linked to 5%) from the last occupational pension scheme and an FSAVC. These more than cover my normal living expenses, and I save regularly into a savings account, originally set up as a new car fund many years ago. As that money builds up it goes into a cash ISA, from which I draw as required for items like car replacement, building repairs, etc. Aside from this I have a share ISA, commented on in viewtopic.php?p=341678#p341678 and elsewhere. I usually draw on the income from this for cruises and family celebrations. The balance of the income is reinvested.

So really I have two sources of funds for one-off expenditure, the cash ISA and the share ISA. Of late I have drawn on the cash ISA more, because of the minimal rate of interest, compared with the 4.65% that I get from the share ISA at the moment.

I should add that I also pay out of pension income into bare trusts for my 4 grandchildren, which is a minor sop to reducing IHT liability. I view major expenditure as being subsidised by 40% by the removal of IHT liability on that amount.

The amount of reserve for any one indivdual will obviously depend on their circumstances. My guess would be about 2 years normal expenditure, but regularly topping it up will be desirale.

TJH

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Re: Reserve for One-Off Expenditure

#522920

Postby Itsallaguess » August 16th, 2022, 6:20 pm

stevie1912 wrote:
So some of this one-off expenditure may be short term and some long term. The expenditure is unknown on timing and amount.

I am really keen to understand whether or how others allow for this. Do you have a separate reserve or did you just target a lower SWR so that you could accommodate one-offs as they arose? How many years of regular expected expenditure do you hold in a reserve? Do you run as a separate pot or do you have a nominal amount of an overall pot allocated to one-offs?

When you spend or gift, do you aim to bring your reserve back up to the original level - do you top up from investment returns or if you spend is less than your regular withdrawal amount?


Are you able to incorporate any future additional funding into your planning in this area?

I only ask because many people might have future access to some level of works pension which might incorporate a level of lump-sum access at the same time, and then there's potentially some state pension to look forward to at some stage too, and I wonder, if such future funds were to become available, whether you're able to factor in some of those additional funds as a means of back-filling any potential earlier draw-down for this type of lumpy expenditure?

I might imagine a situation where a phased draw-down of this type of 'expenditure-fund' might be carried out with a bit more confidence if there were opportunities to re-fund to a meaningful level using these types of future 'confident' income-streams, which might also help to allow a smaller pot to be planned for at the same time perhaps?

Cheers,

Itsallaguess

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Re: Reserve for One-Off Expenditure

#522950

Postby Darka » August 16th, 2022, 7:51 pm

My wife and I retired last October and this is what we did:

We needed a new bathroom; so before we resigned we saved up enough for that and then bought the bathroom on a 1 year interest free loan, the money to repay that loan is now sitting in Income Bonds paying us interest until the loan needs repaying next July.

In addition to that some external repairs/decorating depleted most of our One-Off expenditure fund (our Spending Reserve).

We are now putting aside £300 per month with a view to continue to do that over the mid-term to rebuild the Spending Reserve.

We also need a new Kitchen, the funds for which will come from my SIPP in two years time as part of the 25% tax free sum of which I only intend to take a small amount.

We don't have a lot of expensive gadgets/appliances so could replace any single item within a month or so, we do have additional spare income each month should we need to replace anything more urgently.

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Re: Reserve for One-Off Expenditure

#523098

Postby SoBo65 » August 17th, 2022, 12:44 pm

I am planning on there basis of a 10% reserve fund with monthly addition in lieu of private medical insurance and an amount for other contingencies included in annual budgeted expenditure. This is effectively a repurposed holding in Fundsmith held directly on their own platform. Unless you are fortunate to be in an ex employer group PMI scheme, I don't see the point of individual underwritten PMI as the premiums escalate massively with age.

stevie1912
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Re: Reserve for One-Off Expenditure

#523137

Postby stevie1912 » August 17th, 2022, 2:20 pm

Thanks for your very useful replies...

JohnB wrote:Too many people have the mantra of 3 years in cash, whatever, which is a lot of money going backwards.


I agree John, and given that some of the one-offs will be long term, I was going to hold 50% cash and 50% world tracker to back the reserve.

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Re: Reserve for One-Off Expenditure

#523143

Postby stevie1912 » August 17th, 2022, 2:33 pm

There seems to be some commonality about maintaining a Spending Reserve / Holding Account / Living Expenses account that has more than 1 years' worth of expenditure in it to cover one-offs. Or some earmarked cash and investments for certain large spend.

And also to replenish and to build back up over time.

Ranging from 2 to 3.5 years.

I may go for a higher amount to start with and as my kids get more financially independent allow to reduce in the future.

I personally like the idea of a separate earmarked pot so that I know what is allocated to one-offs. It would be for very lumpy infrequent expenses rather than regular home maintenance etc which I will cover from my yearly spend.

No far off being able to put these ideas into practice.

Really appreciate the input.

stevie1912
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Re: Reserve for One-Off Expenditure

#523144

Postby stevie1912 » August 17th, 2022, 2:36 pm

xxd09 wrote:keep it simple
xxd09


Definitely. I always fall into the trap of over-thinking, but am now determined to make things as easy as possible. Have been busy consolidating investments and unwinding spreadbets that I used instead of dealing accounts. It was all too complicated but much simpler now. Thank you for reminding me.

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Re: Reserve for One-Off Expenditure

#523148

Postby kempiejon » August 17th, 2022, 2:45 pm

stevie1912 wrote:There seems to be some commonality about maintaining a Spending Reserve / Holding Account / Living Expenses account that has more than 1 years' worth of expenditure in it to cover one-offs. Or some earmarked cash and investments for certain large spend.

And also to replenish and to build back up over time.

Ranging from 2 to 3.5 years.

I may go for a higher amount to start with and as my kids get more financially independent allow to reduce in the future.

I personally like the idea of a separate earmarked pot so that I know what is allocated to one-offs. It would be for very lumpy infrequent expenses rather than regular home maintenance etc which I will cover from my yearly spend.

No far off being able to put these ideas into practice.

Really appreciate the input.


I'm still working though my investment returns are enough for planned expenditure but I'm hanging on for a year or so to earn more DB pension and get another year of National Insurance.
When I do walk away from full-time permanent employment I'm aiming to have a 3 years of expenses as cash to draw on for interuptions to the investment income flow or lumpy expenditure and income. The plan being to rebuild when I can.
These day with an income if a big expense comes along I can spend savings and then replenish then as I earn them. Why would it be different to that; if your non working income is sufficient can't the same apply?
I expect to have similar access to finance and credit when no longer fulltime employed and can make use of that like I might today for a car or large ticket item. My credit cards seem to monthly encourage me to use my credit limit to take interest free transfers.

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Re: Reserve for One-Off Expenditure

#523155

Postby stevie1912 » August 17th, 2022, 3:07 pm

kempiejon wrote:When I do walk away from full-time permanent employment I'm aiming to have a 3 years of expenses as cash to draw on for interuptions to the investment income flow or lumpy expenditure and income. The plan being to rebuild when I can.
These day with an income if a big expense comes along I can spend savings and then replenish then as I earn them. Why would it be different to that; if your non working income is sufficient can't the same apply?
I expect to have similar access to finance and credit when no longer fulltime employed and can make use of that like I might today for a car or large ticket item. My credit cards seem to monthly encourage me to use my credit limit to take interest free transfers.


I am reluctant to withdraw large amounts from my main pot in the early years in order to mitigate sequence of return risk, so a separate reserve for one-offs and perhaps to top up lower early withdrawls if the markets fall, makes sense for me.

With no DB provision, I would not want to add leverage to take out credit, but I could see the benefit of this if a large proportion of someone's income was guaranteed.

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Re: Reserve for One-Off Expenditure

#523157

Postby Dod101 » August 17th, 2022, 3:16 pm

stevie1912 wrote:
kempiejon wrote:When I do walk away from full-time permanent employment I'm aiming to have a 3 years of expenses as cash to draw on for interuptions to the investment income flow or lumpy expenditure and income. The plan being to rebuild when I can.
These day with an income if a big expense comes along I can spend savings and then replenish then as I earn them. Why would it be different to that; if your non working income is sufficient can't the same apply?
I expect to have similar access to finance and credit when no longer fulltime employed and can make use of that like I might today for a car or large ticket item. My credit cards seem to monthly encourage me to use my credit limit to take interest free transfers.


I am reluctant to withdraw large amounts from my main pot in the early years in order to mitigate sequence of return risk, so a separate reserve for one-offs and perhaps to top up lower early withdrawls if the markets fall, makes sense for me.

With no DB provision, I would not want to add leverage to take out credit, but I could see the benefit of this if a large proportion of someone's income was guaranteed.


I agree with what you say, particularly about not borrowing. I have not done that since I retired. If I do not have the money to hand I do not spend.

Dod

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Re: Reserve for One-Off Expenditure

#523549

Postby Hariseldon58 » August 18th, 2022, 5:59 pm

Interesting that we all have different approaches, we reinvest all income. Most of the portfolio is in ISAs and SIPPs and thus we spend mostly from a general investment account . This is now dwindling but we have avoided drawing from the ISAs over the last 15 years making full contributions for both of us each year. (Plus the £3,600 gross SIPP contributions)

When we started I would have predicted the general account would have been exhausted within 8 or 9 years but it’s still going !

The annual expenditure is typically around 2 % or 2 ½ % of the portfolio value, it started at 4%…

Portfolio growth has been good, it seems illogical to worry about exactly where the money comes from, it’s all fungible. It really does not matter whether we sell some shares or spend some cash savings, the entire years expenditure is no more than the market moves in a volatile week.

Our approach of simply not caring where it comes from or worrying about it would be very uncomfortable for many.

It’s equally valid to create a monthly income pot or have a cash reserve, or have a portfolio that has a stream of dividends coming in.

Our portfolio at present includes a large chunk of intermediate and long TIPs, they would probably last about 12 years at present spending levels. Knowing that component in the portfolio is solid means you need not worry about the day to day movements.

Interesting that many will not borrow. New electric car due shortly and chose to purchase on PCP, in effect I invest the cost of the car in the portfolio and hope to achieve more than the 5.9% interest rate cost. It’s clearly unimportant but I feel more comfortable not spending the lump sum but spreading the cost over multiple years !

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Re: Reserve for One-Off Expenditure

#523577

Postby Eboli » August 18th, 2022, 7:24 pm

I comment only because I appear to have a totally different approach to this.

My retirement investments comprise a basket of investment trusts (11 to be exact). 1 of these I treat as pseudo cash (PNL - Personal Assets). As the value of the other 10 fluctuate I ignore it until a pre-set collar is reached when I either switch money from PNL into the basket of 10 or switch out of the basket and into PNL. I keep a minimum of 5% in PNL. At present about 28% is in PNL and substantial transfers were made into PNL in 2020 which has since diminished. This, is what I would treat as my "cash" reserve.

In addition to this I keep cash of £20K which may vary from being simply in my current account or in some immediately accessible account. If this cash figure gets to £15K I top it up by cashing in £10K of PNL and withdrawing it (from an ISA or SIPP depending upon the tax position of the year involved). Normally my income from state pensions and widower's pensions is more than sufficient for my regular expenditure. The increase in the cost of diesel and energy may change that this winter and I may need to re-think. At present, the major reason why I might need to move pseudo-cash to cash is if I buy a new car or travel more than usual. (Incidentally, both reason are likely to diminish over the next decade, should I survive it).

I have never felt the need to 'envelope' cash for types of expenditure in the way suggested here by some. This is not quite for the reason Dod's has suggested (if I don't have it I don't spend it) but rather because I have adjusted my mindset away from 'must save'. Indeed, the most difficult thing to change when you retire is, perhaps surprisingly, the mindset that got you to retire early. It is OK, really, to spend it and go negative on current account. I have never regretted it.

Eb

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Re: Reserve for One-Off Expenditure

#523597

Postby stevie1912 » August 18th, 2022, 8:37 pm

Thank you for sharing different experiences. It appears that approach is highly dependent on circumstances.

I expect my one-offs to be relatively high due to many kids who are still dependent. So a meaningful reserve would give some optionality for me to help them if needed.

If my regular withdrawal rate was very low, or if majority of regular spend was covered by guaranteed pensions, or if I wasn’t wanting to potentially help the kids, then perhaps I would be more able to cover one-offs as they arose from an overall pot.

Just starting out in retirement and having no guaranteed income until state pension in 16 years time, if all my funds were in one pot, then I would be reluctant to spend on one-offs in the early years. To Eb’s point, I would find it hard to change mindset and spend it.

I realise I am just playing with labelling of pots, but psychologically I am more likely to spend or gift if a separate pot is set up at the start. Hopefully in time my regular withdrawal rate reduces and it becomes easier and simpler not to have a separate pot.

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Re: Reserve for One-Off Expenditure

#523903

Postby Itsallaguess » August 20th, 2022, 7:12 am

stevie1912 wrote:
Just starting out in retirement and having no guaranteed income until state pension in 16 years time, if all my funds were in one pot, then I would be reluctant to spend on one-offs in the early years. To Eb’s point, I would find it hard to change mindset and spend it.

I realise I am just playing with labelling of pots, but psychologically I am more likely to spend or gift if a separate pot is set up at the start.

Hopefully in time my regular withdrawal rate reduces and it becomes easier and simpler not to have a separate pot.


I think the above touches on a couple of important aspects which are often lost in some of these conversations, which is that quite often the potential 'personal benefits' of working things in different ways in this area is much more to do with 'psychological benefits' as they are to do with 'financial benefits', and I think it's very important to recognise that where there might be a broad consensus that it might make no real difference from a purely *financial* aspect as to which method someone might use to navigate through these particular issues, it then does come down to perhaps making sure that a potential chosen path at least delivers the best relevant *psychological benefits* that might suit one particular investor over another...

You also touch on another important point where you acknowledge that a particular method of dealing with these situations that suits you best *now* might well change in the future as you become more accustomed to living with things on a longer ongoing basis, and where you'll then possibly be quite happy to take a more relaxed approach to this issue than the one that might suit you more at this particular point in time, and I think taking both of these aspects into account and appreciating that not only is there some flexibility in the types of approach you can take now, but also that there's likely to be some flexibility in what type of approach you might want to take going forward over what will hopefully be many years of retirement, puts you in a good position of open-mindedness around these issues that's likely to pay ongoing benefits from here on in...

Cheers,

Itsallaguess


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