Preservation Mode

Matt Trogdon

I RECENTLY LEFT MY job without having another lined up. Upon quitting, I noticed an immediate mindset shift: I went from thinking about how to grow my money to, instead, thinking about how to preserve it.

As a trained financial planner, I know that many workers will face a similar mental transition as they begin to wind down their careers. But I was surprised at how quickly it happened to me. After all, I’m only age 39, I’m fortunate to have investments and an emergency fund, and I plan to return to work soon.

Here are four questions I’m considering while I’m between jobs. You may find them helpful if you’re considering a career change, a gap year or early retirement.

1. How much money do I really need each month to support myself?

It’s natural to get used to a certain amount of income when you have a stable job—and I’ve enjoyed a steady salary for as long as I’ve been in the workforce. But now that I’m in preservation mode and considering my next steps, I’m wondering how much I actually need to support my lifestyle.

As I see it, there are two ways to answer this question. First, I can approach the question from the perspective of my previous salary. If I assume I spent every dollar of my previous salary except for my documented savings, I can get at that number pretty easily. I just take my old salary and subtract my 401(k) contributions.

This gives me the amount I need to earn to sustain my lifestyle in a new job. For example, take someone who makes $50,000 a year, saves 10% in a 401(k) and socks away another $50 a month in an emergency fund. That person wouldn’t need to replace $50,000 to keep up the same lifestyle, but just $44,400.

The second way to answer the “how much do I need” question is from an expense perspective. Here I would tally up my fixed costs (mortgage, utility bills and so on) and variable costs (entertainment, travel). Then I would gross those numbers up for taxes. If my pre-tax fixed expenses are $1,500 a month, and my variable expenses are another $1,000, I know I need $18,000 a year to cover the former, and $12,000 to cover the latter.

If I’m going to pull that money from a portfolio, I’d need to figure in federal and state income taxes. If those came to 15%, I’d have to pull some $35,294 out of my portfolio to have $30,000 to spend. If I’m going to earn that money through employment, I’ll also need to account for not just income taxes, but also 7.65% in Social Security and Medicare deductions. That means I’d need to earn $38,785 to net me $30,000.

2. To hold me over, can I restructure my portfolio to provide income?

My entire investing career has been oriented toward growth. But I now face an income shortage. Even after I find new work, there’s no guarantee I’ll make the same amount that I did previously. I’m considering whether it makes sense to divert some of my portfolio into income-producing assets. This is a question that many pre-retirees face, so it’s interesting for me to see it up close.

It doesn’t help that interest rates are so low at the moment. My online savings account pays 0.5% a year, which won’t get me very far. Certificates of deposit aren’t offering much more. There are always bonds and dividend stocks to consider.

My friend Ashby Daniels advocates a dividend stock strategy in his easy-to-read book, Creating a Retirement Income Plan Simplified. Investing more in stocks—even dividend-paying stocks—would move me further out on the risk spectrum, and there’s a chance of getting burned. But the idea of scooping up dividends to provide income intrigues me nonetheless.

3. If I sell assets in my portfolio for living expenses, which assets should I sell first?

I have enough savings to hold me over for a while, and this break from work should be short-lived. But you can never be sure what the future holds. What if I enjoy this newfound independence and decide I want to extend it? What if I decide to build my own business? What if I take a lower-paying job?

In all of those scenarios, my cash savings could eventually run out, forcing me to tap into my investment portfolio. Again, this is a question that many retirees face. Do I know which assets to sell and the order in which to sell them? Do I know the tax implications of selling if I need to? From a tax perspective, I’m well diversified across taxable, Roth and traditional retirement accounts. Should I sell taxable investments first? Or consider tapping my Roth contributions?

4. What part-time and “gig” work is available?

I’m only a few weeks into my “funemployment,” and I’m already starting to get antsy. But I’m enjoying the ability to wake up naturally, enjoy a slow cup of coffee in the morning, and take the dog for a walk without having to worry about getting back to my desk.

Rather than return to fulltime work, could I cobble together enough part-time jobs to keep me afloat for a while? If I have an accurate idea of how much income I need each month, I’ll have a starting point as I weigh that possibility.

Matt Trogdon is a financial advisor in Washington, DC, with a special interest in helping Gen X and Gen Y families. He also serves as a workshop instructor for the Babson College Financial Literacy Project. Matt’s previous article was What It Really Costs. Follow him on Twitter @Matt_Trogdon.

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