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I HAVE A RITUAL ON New Year’s Day—and it has nothing to do with making resolutions or watching college bowl games on TV.
Every Jan. 1, I pull up my handy financial planning spreadsheet on my laptop and input year-end numbers for my investment portfolio based on where the various funds closed out the year. I created the spreadsheet 20 years ago when I was in my early 40s, had just gone through a financially devastating divorce, and retirement seemed like nothing more than a pipe dream.
At the time, I was working long hours in the all-consuming world of corporate communications and investor relations. I had a magic number for what I thought I’d need to step out of the frying pan no later than age 63. I knew how much I would have to contribute and earn each year to get there. It was just a matter of continuing to chip away, putting the plan on autopilot, and checking in once or twice a year to see how I was doing.
The spreadsheet is pretty basic, reflecting my relatively simple portfolio and investment approach. There are three tabs. The first tab looks backward, capturing the year-end value for each of my investment accounts—IRAs, individual stock holdings, money market accounts and so on—as well as the estimated market value of my house, net of mortgage debt. These values then add up to capture a snapshot of my net worth and how it’s grown over the years.
The second tab looks forward, projecting the expected growth of my investments in the years ahead using average market returns for a well-diversified portfolio.
The third tab contains a working budget for my golden years, based on a conservative spending level of $75,000 per year. The budget itemizes general categories of expenses—housing, utilities, medical, travel and such—as well as sources of income to cover those expenses. The income sources include a conservative 3.5% annual draw on my investable assets (not including real estate), Social Security income (starting at age 66), a small pension that I’m getting from a former employer, and any income I expect from my consulting business.
For most of the past 20 years—and particularly during the bull market that began after the 2008-09 market crash—updating this spreadsheet every New Year’s Day has been a happy exercise. With the market delivering close to an average 10% annual return during this period, I’ve consistently been pleasantly surprised to find that I outperformed my projected account values.
By year-end 2020, two years earlier than projected, I had surpassed my magic number. The following year, at age 61, I handed in my notice and made the big leap out of the corporate world.
It was about this time that I began doing something else with this little spreadsheet of mine. With the market and my investments doing better than my original projections, I began dreaming. I built in scenarios where I could use the surplus funds to splurge on fancy vacations, luxury items for my house—and perhaps even buy a condo in Myrtle Beach, South Carolina, or another warm-weather location for snow-birding during the cold winter months.
Then came 2022 and the worst market for stocks since 2008. Like a lot of other people, I’ve avoided looking at my investment accounts over the past year for fear of just how bad the carnage would be. I couldn’t even hold out hope that the bond side of my portfolio, which represents about 40% of my investments, had held up as bonds typically do during stock market swoons. Everything would be down double-digits.
But avoidance is not a strategy and so, on this past New Year’s Day, I logged into my accounts and took a look. As expected, it was ugly. I had lost all the market gains in my portfolio for the past two years. So much for dreaming. Forget the fancy vacations, the luxury items for the house, the condo in Myrtle Beach.
But then I reminded myself of why I’d created the spreadsheet in the first place. My goal had never been about getting rich or living an extravagant lifestyle. It was about gaining my financial freedom. As much as I enjoyed my career as a corporate communicator, I had a burning desire to go out on my own as an author and storyteller. To do that, I would need to sacrifice income for independence.
I’m doing that now and loving it. Every day, I get to wake up and do what I love—write and tell stories—with no one telling me how to spend my precious time.
My plan worked. I’m living the dream. It’s a simple dream I’m living, but it’s my dream, made on my own terms and no one else’s.
As long as I don’t change my income or expense assumptions, I should be able to continue to live this dream for as long as I’m healthy. As for the market, there’s no telling what it’ll do. If the bear market continues, I may have to adjust my income assumptions, increase my consulting work or perhaps take Social Security early.
That’s the way it works with plans. We make assumptions for an uncertain future and adjust along the way.
Who knows? Maybe a new bull market will begin in 2023, my portfolio will roar back and I’ll be able to dream again of that condo in Myrtle Beach. In the meantime, I’m enjoying my independence.
James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, “The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life’s Purpose,” was published in 2022 by Blydyn Square Books. Jim blogs at PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.
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Our spreadsheet sounds very similar, and it is intended as a reality check.
I’m with you when it comes to retirement. It’s all about freedom and doing what you love. We could probably write a good guide for retirement.
James, we’ve all been humbled (no pun intended) by the declines in our net worth in 2022, especially retirees who depend on their portfolios for income. I’ve taken two lessons from my experience with last year’s market decline:
1. It’s important in retirement to have a cash cushion large enough to sustain you during a bear market without having to sell investments to raise cash.
2. Looking forward, the expected returns of stocks and bonds are much brighter today than they were at the height of the bull market in 2021.
I suspect that, if you stay the course, odds are good that you’ll be able to, once again, dream of that condo in Myrtle Beach in the years ahead.
Financial independence and freedom are priceless. Congrats.
Your comment about independence reminded me of the parable cited by J L Collins about the Monk and the Minister. Financial independence may be the best part of getting older.
https://jlcollinsnh.com/2011/06/02/the-monk-and-the-minister/
I have to ask one of my favorite questions. What does the $75,000 in basic retirement expenses represent as a percentage of your pre retirement income?
Also, like everyone else my portfolio is down significantly from a year ago, but dividends and interest payments seem unaffected. You said you assumed a 3.5% withdraw rate. Have you looked at how far that is off from what int and dividends are creating regardless of the change in value of the investments?
My municipal bond fund interest has increased by about 5% since last March 1st.
Good point about the interest and dividends. To be honest, I haven’t looked at how my dividends were impacted, if at all, within my retirement account at Vanguard. But in a separate taxable account that I hold for individual dividend-paying stocks, that dividend stream has been largely unaffected by the downturn–with the exception of AT&T, which reduced its dividend after doing the Warner Bros-Discovery spinoff. But that dividend stream isn’t very significant.
Spreadsheets are great tools! Thanks, James, for sharing your approach.
Recognizing goals and committing them to a spreadsheet is the important part for me. I started a savings spreadsheet 30+ years ago, based on my (then) current salary and projecting that amount forward to a desired retirement age with assumed rates of inflation. In retrospect, income replacement was a modest goal as I did not anticipate promotions and my salary was low. My plan for annual investment growth was to stay 2% ahead of inflation and to save enough for 35 years of retirement. Unlike you, I would update the spreadsheet only every couple of years to know that I was still on track.
About ten years pre-retirement, I started estimating retirement expenses and future investment withdrawals, making back-of-the-envelope type calculations to become familiar with goals and needs. Three years before retirement, I incorporated these into a spreadsheet — with multiple tabs to consider all the “what if’s?”. Now retired, I update this spreadsheet regularly and it has become a useful budgeting tool.
You’re not the only one guilty of a little dreaming until last January’s wake up call. Thank you for sharing your thoughts and hopes.