[USER]

When planning your post FI / retirement expenses if you plan to retire early (such as mid 40s), what kind of contingency/unknown do you add into your expenses as a % or $?

Obviously, no one can really know what their expenses will look like for 50 years (meaning the actual drivers of these expenses), how their hobbies, interests will evolve post FI, and how these expenses will change over the course of your lifetime.

There’s also unknowns, such as higher than expected inflation, deciding to buy a vacation house 10 years after retirement that you didn’t plan on, moving to a new area with a different cost of living, picking up a new hobby due to extra time, healthcare expenses, etc, Or even things that lower expenses, like reduced travel spend in 70s and beyond (versus 40s and 50s).

For example, if you wanted the same lifestyle/expenses during retirement that you do know, and your expenses add up to $x, what % do you plan for contingency when using this to determine FI number and models?

This can also be items such as SS or pensions that technically aren’t counted, and therefore “extra”. But if you’re planning to retire in mid 40’s, those are so far away, not sure how much these would include.

[Olivia]

Not sure if this is a popular opinion but when look at such a long time horizon, I think the only way to ensure success is to be flexible.

You can build a buffer but, ultimately, you might need to adjust your spending as you go.

[Farre]

I use 30-40% extra in my number. When I’m young and somewhat healthy, it’s fun money.

When I’m older, it’s home-care/extra elderly expense money (not in US) or something I can chop out of my budget in a bad year.

I do count an annuity and an eventual pension, but they are not factored into my simulations until I have access to them.

[Kelly]

It’s hard to answer that generically, but we’re FIREd and I can tell you that the cost of our health insurance has increased 18% to 24% EVERY YEAR!!

[Eric]

When planning for early retirement, especially with a horizon of several decades, it’s wise to build in contingencies for the uncertainties you mentioned.

Typically, I would recommend adding a contingency factor of 10-20% to your projected expenses, depending on your comfort level and the degree of uncertainty you feel about future costs.

This helps account for potential unknowns like inflation, unexpected healthcare expenses, changes in lifestyle, or even large one-time expenses like buying a vacation home or relocating.

If your annual expenses are $x, adding 10-20% gives you a cushion for unforeseen circumstances.

For instance, if your projected expenses are $50,000 per year, adding a 15% contingency would raise that number to $57,500.

This gives you some flexibility to adapt to life’s changes without compromising your financial security.

Additionally, when considering things like Social Security or pensions, it’s often helpful to not count on them as part of your “core” funding plan, especially if they’re far off and not guaranteed in terms of timing or amount.

You could treat them as a bonus or buffer that helps offset inflation or future needs but not rely on them to meet your day-to-day living expenses during early retirement.

Healthcare is a critical area to consider, particularly if you’re retiring before age 65 and not yet eligible for Medicare.

Healthcare expenses can vary greatly, so it’s essential to research and include realistic estimates for premiums, out-of-pocket costs, and potential long-term care needs.

Planning for healthcare at age 40 could involve building in higher contingency funds for this category, possibly 5-10% of your overall expenses.

Lastly, while it’s hard to predict what your lifestyle will look like in 30, 40, or 50 years, a good rule of thumb is to assume some changes.

As you mentioned, you may spend more on travel in your 40s and 50s and less in your 70s, or pick up new hobbies that increase costs.

Balancing this by erring on the side of conservatism with a healthy buffer can give you peace of mind without overextending your savings projections.

Ultimately, flexibility is key.

While you can’t plan for everything, building a cushion and regularly reassessing your spending assumptions as life changes will help you adjust without derailing your retirement plans.

[Author]

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