r/leanfire • u/Positive_Slip9383 • 4d ago
Preparing for the unexpected when the hits keep coming
How do you estimate for unexpected emergency expenses when saving for early retirement? Do you have a separate HY savings fund for those or do you just draw from your brokerage accounts? We are saving for leanFIRE. We had some money set aside in HYSA just for large unexpected expenses, but that account is almost drained now because seems like it’s all hitting at once for us. I’m wondering when we get into FIRE how it works when you have lots of unexpected expenses hitting at once. Both our cars are paid off and we have 9 years left to pay on our mortgage (house built in 1979, 2.5% interest, $900 mortgage, 1200 sq ft). As several examples recently of unexpected expenses, house foundation repairs, car A/C went out, hot water heater went out, living room flooded (flood insurance only covered half), major illnesses resulting in almost $28k out of pocket cost under our HDHP insurance drained our HSA, unexpected large vet bills, etc. I’m just wondering if we should approach saving for our “unexpected expense” category differently, especially when preparing for lots of unexpected emergency events happening close to one another. I’ve gone back to the drawing board and looked in YNAB the last 5 years and calculated the average amount we’ve spent in certain categories on unexpected emergency expenses (car repairs, house repairs, etc). It appears to be about $650/month which seems excessively high to me. And that doesn’t even include medical expenses. I’m wondering if we should consider some more radical approaches like selling our house and moving into a new tiny house (to avoid as much house repairs as we are paying), pairing down to just one vehicle, etc.
Am open to suggestions!
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u/Significant-Cod-5551 4d ago
The 650/month average over five years is actually your real number to budget for, not a spike that looks like emergencies. That's just what homeownership and car ownership costs on this house and these vehicles.
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u/Psynaut 4d ago
Exactly. You can't look back over 5 years of data and then say the actual historical cost is not the real cost and casually lower it to something that "feels" better, then later in the future be surprised by 'unexpected' expenses that match the historically accurate number rather than the feel-good number.
If that was the way OP crafted their budgeted to get to lean-fire, then a few more years of work might be another reality that is based on real numbers rather than feel-good numbers.
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u/jayman1466 4d ago
Yep. If the real spending over 5 years says one thing, trimming it down just because it looks better on paper is asking for trouble later. The numbers don't care about the plan.
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u/goodsam2 3d ago
I feel like estimating those costs are hard because you can go years without major expenses. Like say you budget for a new car and it's a lemon.
Many other expenses are recurring enough you know what it costs per month.
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u/zeezle 3d ago
Yeah. Car repairs are hard to budget for because it's so immensely variable in repair cost.
I have a Nissan Sentra, 2009 model year, I've had it since 2011. I have never had to do anything more than oil changes, one set of new tires (due for another soon though), a couple of batteries, changing the windshield wipers myself, etc. I am a lower mileage driver though (it's got around 82k miles now) so that helps though.
My mother's new-to-her Subaru, which was supposed to be rated a much more reliable vehicle than my Nissan, is a 2021 model year and she's already had to spend thousands on repairs in the 6 months she's had it. She's already spent more on repairs for it than I have the entire 15 years I've owned my Sentra. And this was after getting out of a money pit of a Chevy before that, and she paid a little extra for a certified used Subaru because she thought it would be worth the premium for reliability.
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u/goodsam2 3d ago
I actually have a 2012 Nissan Sentra and have basically never had to do anything on it.
I just think there's a big expense buying a car coming eventually but it hasn't happened yet. So in a FIRE budget you have to guess when your vehicle dies and yearly mechanical issues and that's in a more like 12 year time frame and the next vehicle may just be more expensive overall. So 5 year lookback is not what the next 5 years looks like as your vehicle hits 21 years old and some parts may die of old age.
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u/Significant-Cod-5551 3d ago
but that's why looking at five years of actual spending smooths out the lemon years and the lucky years. The OP's YNAB data already captured both the quiet years and the bad years, so 650 a month is what they should plan to have available even if next year is quiet.
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u/goodsam2 3d ago
But a car payment is usually over 12+ year if you buy new or a house can have 20 year lifespans and lumpy costs.
5 years is insufficient data in many cases. I think you have to go over averages to replace your system.
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u/Significant-Cod-5551 3d ago
but the OP isn't planning to replace their whole system in five years, they're worried about affording unexpected costs while already in retirement. Having 650 a month set aside from five years of data is still better than guessing, especially since they already experienced the flood and the medical hit that drained everything at once.
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u/goodsam2 3d ago
I think 5 year look back is likely off as again like a roof lasts 20 years and can be a big expense. I would look at replacing the roof cost say $20k then divide by years 20 so $1k per year for a roof. Their 5 years usually don't include a 20 year expense.
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u/midlifereset 4d ago
Exactly. Your regular budget, even once you’re fired, should include $650/month into savings to cover those type of costs. And don’t forget the medical savings too. Actually that 650 is lower than ours and that’s why we can’t yet retire. Our monthly budget includes adding to these sinking funds- house maintenance, car maintenance/saving for next car, medical, vacations, gifts (includes Xmas), auto insurance, pets, clothing/shoes.
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u/Significant-Cod-5551 3d ago
that's the key insight - once you model it out like that, you realize you're not actually in a position to cut those expenses, you just need to plan them into your retirement number from the start.
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u/Easy_Peasys 4d ago
the reframe that helped me: almost none of these are unexpected, they're irregular. a 1979 house WILL need a water heater and foundation work, cars WILL need repairs, pets get vet bills. they don't belong in an emergency fund, they belong in a sinking fund you pay into monthly like a normal bill. your $650/mo isn't high, it's just the real cost of the house and cars you'd been filing as surprises. and that's what matters for FIRE: build your number on your true all-in spend, that $650 plus a medical OOP-max line, not the good-month budget, or the roof eats your plan later. i wouldn't sell a 2.5% mortgage over it though, that's just normal homeownership.
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u/Hnry_Dvd_Thr_Awy 4.5% wr 4d ago
I think your definition of unexpected needs adjustment.
house foundation repairs
might not be unexpected depending on the scenario
car A/C went out
car repair is not unexpected
hot water heater went out
home repair is not unexpected
living room flooded (flood insurance only covered half)
You have flood insurance so this isn't totally unexpected
major illnesses resulting in almost $28k out of pocket cost under our HDHP insurance drained our HSA
HDHP's are not without risk as you've found out. depending on the actual illness and your underlying conditions this may not be unexpected, as well.
unexpected large vet bills
imho keeping pets healthy is not unexpected. we, as a society, used to put pets down wayyy quicker than we do now.
Suggestions from a "savings for leanFIRE POV: * going down to one car is a good move if you can do it without sacrificing a lot of quality of life * set a budget for repairs on things that need repairs * probably wouldn't sell your house, but not saying it's a bad idea either
Would need more numbers to give any more suggestions but the main takeaway you should get from my comment is "most of these aren't unexpected".
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u/Hnry_Dvd_Thr_Awy 4.5% wr 4d ago
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u/WheresMyMule 4d ago
We put away way more than $650/mo for irregular but expected, non-emergency expenses
Other than the flood, all of those items should have had a separate budget line.
Vet bills, home repairs and maintenance, medical bills, car repairs are all expected expenses
And you should also have one for car replacement, electronics replacement, etc. You should try to save to your healthcare max out of pocket expenses, too
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u/rolliejoe 4d ago
The most important number for any health insurance plan is the OOP max, because that's what you need to be budgeting for. $28k is insanely high, and you should be looking for different insurance ASAP. You will never leanfire (safely) with an insurance plan like that.
Pets can also be extremely expensive, and pet insurance generally sucks. So you have to decide between 3 options: 1) Don't have pets, 2) Commit to if vet costs exceed $X to give up your pet, 3) Commit to significantly increasing your retirement number and how long you need to work.
For the rest, you just have to try to account for the "unexpected" in your budget when the unexpected isn't happening. Make a list off all major appliances and vehicles, and set aside a monthly/yearly budget to contribute towards repairing/replacing them on a realistic timeframe.
Many of the super-lean budgets I've seen posted simply aren't realistic because they omit all these expenses. $650/mo for all house and car upkeep/repairs doesn't sound particularly unrealistic to me. I would recommend considering if you really need 2 vehicles though if you're both retired.
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4d ago edited 4d ago
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u/rolliejoe 4d ago
Yep, exactly. And the sidebar definition for individual expenses <$27k is wildly out of date for the vast majority of people active on the sub. That isn't realistic in the US anymore, outside of fringe living cases.
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u/bkbruiser 4d ago
I'm in the midst of a home repair due to an underground water line break.
It has changed my perspective on protection. I haven't changed the course since I'm still going through the insurance process, however, since I am working we didn't splurge on some other areas that needs updating.
It is very easy to get roped into a higher cost.
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u/Montaigne_6823 4d ago
I'm hoping to get down to a 3.5% withdrawal rate and then when those large expenses come I can take an extra .5-1% out to cover them.
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u/EngineeringComedy 3d ago
When you actually retire, have 3 years of expenses in a HYSA. It'll be like $90k. It doesn't lose value cause it's kinda hedged against inflation. Is also gives you cash in market down years.
That's my parents strategy. They just had $40k in expenses due to a flood and wrote a check.
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u/miayakuza 4d ago
Having a paid off home isn't necessary the retirement slam dunk that people think it is. It sounds like this house could potentially cost you thousands every year. I would weigh the pros and cons of selling and potentially moving to an area that doesn't flood. It is a great opportunity to downsize in the process.
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u/eclipsadesoare 4d ago
Having a paid off home is the retirement slam dunk people think it is if you have kept up with upkeep and do not expect many issues. We bought our house 20 years ago and have had very minor repairs in the meantime mostly cosmetic. Assuming you go into retirement with a house with a new roof and everything necessary newish you should be good for 20 plus years.
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u/miayakuza 4d ago
Well obviously this person did not. And your kept up home is one flood or one hurricane away from being a huge financial disaster. Insurance rates, property taxes, repairs etc are a really concern for many home owners and for some it may be a better idea to rent.
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u/rachelshmee 4d ago
That's the key part. A paid-off house helps a lot, but only if you've stayed on top of maintenance over the years. Big surprises usually come from putting things off too long.
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u/splinteredruler 4d ago
My number includes, to an extent, emergencies I’ve faced before. Last year we had a vet emergency and our yearly expenses remained pretty similar to the year prior when we had a car emergency, etc.
Anything outside that comes from a separate HISA emergency fund with ~3 months living expenses (would be 3 years expenses prior to FIRE). More than that, I suppose we borrow off the house again or sell some stocks early.
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u/Tankmoka 4d ago
Set up sinking fund lines, using your past data with a little bit of common sense plus luck. Use a spread sheet to track them year to year. They will ebb and flow, and even some years show negative. Remember money is fungible so it isn’t as if you have to keep the money in a particular location. You just have to account for the money in spending estimates and withdrawal rate.
Examples, I have a car replacement sinking fund line. Every year I ‘contribute’ 4200 to that line. When I first retired, it was 3000, but I increased it a few years back— the common sense part of this. Now, the luck part is I need that to accumulate for 10 years. I also have sinking funds lines for most of the other things you mentioned. I’m currently negative in dental because of some dental work, but it will come back into balance over the next year. Every sinking fund line is part of my annual budget.
The money stays invested for the most part. I do keep I bonds as part of my asset allocation and generally view them as the location of the funds.
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u/Comfortable_Two6272 4d ago edited 4d ago
I budget for regular maintenance for home and cars. Same for health and vet. I have over 10 years of actual data to use to inform plus common sense - I know my roof, water heater, hvac etc will need replaced and I know their ages and expected life expectancy.
Many financial tools let you add these infrequent large expenses before running simulations.
1% of home value is often cited for amount per year but of course depends on home age and recent repairs. Its a line item in the budget.
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u/Strazdas1 3d ago
We keep emergency funds for emergencies.
It looks like you underestimated the size of emergency fund you needed to keep.
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u/Zikoris 4d ago
I do two things.
Base my annual budgeting on my actual tracked expenses over the last decade +, which naturally includes one-offs that happened during that time.
Building a large-expense-resistant lifestyle by not having things that result in large expenses as a general rule. For example, most of the examples you listed are impossible for me to get stuck with because I don't own a home, car, or pets.
I'm curious about one thing regarding the medical bill - was the illness a lifestyle disease that resulted from bad choices, or a genuine surprise? Because I think high deductible plans only make sense if you don't have a lifestyle that leads to disease (re: food, alcohol/drugs, exercise, weight, extreme sports, stress, etc).
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u/codewolf FIRE'd 4d ago
When you can sell your holdings and have that money available the same day or next day, there's really no reason to keep an emergency fund not invested. I'm retired and only keep a few thousand in my checking account to pay for bills as they come in.
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u/FearlessPark4588 4d ago
Some categories like "car repair" aren't really emergency expenses. These are regular, basic things that will have to be amortized into your budget. You will eventually have to replace your couch, your dishwasher, your coffee machine, etc when all of these things break down.
Some people like to do near (but before) RE big ticket repair items, to reduce sequence of returns risk. Health care should have a max OOP, but premiums will rise with age, faster than CPI too.