Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How to Create a Living Expense Floor for Early Retirement
Transcript
- Lucas: Luna, I was digging into the 2025 J.P. Morgan Guide to Retirement last week, and there's a concept in there that I think is under-discussed in the early retirement community. It's something they call the 'living expense floor.' Luna: I've heard the term thrown around, but I don't think I've ever seen a clean definition. What's the basic idea? Lucas: It's pretty simple. The living expense floor is the minimum amount of money you need to spend each year to cover your absolute essentials — the stuff you cannot cut. Housing, utilities, groceries, healthcare, transportation, minimum insurance payments. J.P. Morgan's data shows that for most retirees, this floor is somewhere between 50 and 70 percent of their total pre-retirement spending. Luna: So it's not your whole budget. It's the non-negotiable baseline. And the idea is that if you can cover that floor with safe, predictable income sources — like Social Security, a pension, or a TIPS ladder — you can take more risk with the rest of your portfolio? Lucas: Exactly. And this is crucial for early retirees, because we don't have Social Security or Medicare for the first decade or two. Our floor is entirely self-funded. But once you calculate your floor, you can build a withdrawal strategy that guarantees those essentials no matter what the market does. That's the psychological anchor. Luna: I love that — 'psychological anchor.' Because a lot of the early retirement stress comes from not knowing whether you'll have enough to eat and keep the lights on if stocks drop 30 percent. Lucas: Right. And the floor approach addresses that head-on. I had a listener, a guy named Mark, who retired at 42 with a $1.2 million portfolio. He calculated his floor at $36,000 a year — that was his rent, food, insurance, car payment. Everything else — travel, eating out, new gadgets — was discretionary. In 2022, when the S&P 500 dropped about 19 percent, he told me he barely flinched. He knew his floor was covered by two years of cash and a small bond ladder. Luna: So the floor gave him permission to ignore the noise. That's the opposite of what most retirees do — they panic-sell or cut spending across the board. Lucas: Right. And Mark's story is not unique. J.P. Morgan's research shows that retirees who set a floor actually end up spending more over time, because they're not afraid to spend the discretionary money when the market is up. They have a rule: discretionary spending gets cut in down years, but the floor never changes. Luna: But how do you actually calculate your floor? Is it just listing your bills? Lucas: It's more nuanced than that. You want to include things like periodic expenses — car repairs, appliance replacements, dental work — that you know will happen but not every year. J.P. Morgan recommends taking your last three years of actual spending and categorizing every line item as either 'essential' or 'optional.' Then average the essential items and add a 10 percent buffer. That's your floor. Luna: So you're not just guessing. You're looking at real data. And the buffer accounts for the fact that essentials can creep up — like property taxes or insurance premiums. Lucas: Exactly. And one thing that surprised me: J.P. Morgan found that the floor actually decreases in later retirement. People in their 70s and 80s tend to spend less on transportation and housing — they downsize, they stop driving as much. So your floor at 45 might be $50,000, but by 75 it could be $35,000 in today's dollars. Luna: That's helpful to know. But for early retirees, the floor is highest in the first decade, because you're still young and active and you have to self-fund healthcare. Lucas: Yeah, and that's where the trade-off comes in. If your floor is very high — say, $80,000 a year — you need a much bigger portfolio or a part-time job to cover it safely. But if you can keep your floor lean, you have more flexibility. That's why many early retirees choose to live in lower-cost areas or pay off their mortgage before quitting. Luna: So the floor is not just a number, it's a design choice. You can actively lower your floor by making strategic life decisions. Lucas: Exactly. And I think that's the most empowering part. Once you know your floor, you can stress-test it. Say you have $800,000 and a $40,000 floor. A 5 percent withdrawal rate on that floor alone is pretty risky. But if you have two years of cash reserves and a Social Security bridge that kicks in at 62, suddenly the math works. Luna: I want to push back a little, though. Isn't there a danger that someone sets their floor too low — like, they cut everything to the bone — and then they're miserable because they can't afford to do anything? Lucas: That's a real risk. The floor is not supposed to be a deprivation number. It should cover a comfortable, if modest, life. J.P. Morgan actually suggests including one 'non-negotiable joy' in your floor — like a gym membership or a streaming service — because if you cut everything you enjoy, you won't stick with it. Luna: That's a good rule. So the floor is the minimum to be happy, not the minimum to survive. Lucas: Right. And that's the distinction that makes the floor concept so useful. It's not a budget — budgets feel restrictive. A floor feels like a safety net. You know that no matter what happens in the market, you'll still be able to live your baseline life. Everything above that is gravy. Luna: I think that's why the host of this show, you and I, we talk about these tools — because they actually change how people feel about their money. And we're able to do this because of listeners who support us. Lucas: Yeah. It's a small group, but it makes a big difference. If you've gotten value from these episodes and want to keep them ad-free and listener-supported, you can chip in at buy me a coffee dot com slash fexingo. No pressure, just an honest option. Luna: And we mean it — it's what lets us spend the time digging into research like that J.P. Morgan report instead of chasing sponsors. Lucas: Absolutely. So back to the floor — one practical exercise I'd recommend for anyone listening is to pull up your last year of credit card and bank statements and categorize every single expense as essential or optional. Then total the essentials. That's your starting floor number. Luna: And then compare it to your current withdrawal rate. If your floor consumes more than 4 percent of your portfolio, you either need to lower the floor or increase your savings. Lucas: Right. And remember, the floor changes. Every year, you should revisit it. Maybe your healthcare costs went up, or you paid off your car. Adjust accordingly. The key is to keep that psychological anchor solid. Luna: I think this is one of those ideas that seems obvious in hindsight but is rarely put into practice. Thanks for bringing it up. Lucas: My pleasure. Next time, we'll talk about how to actually build a portfolio that funds the floor separately from the discretionary spending — what some people call a 'bucket strategy.' But for now, if you know your floor, you're already ahead of most retirees.