LAST YEAR WAS OUR first full year living solely off our portfolio, with no paycheck coming in.
How did it go? It was a vast improvement from 2022, when we not only retired, but also got hit with high inflation, tumbling bond prices and a sharp stock market decline. We were looking at sequence-of-return risk—that perfect storm of rising living costs and a shrinking portfolio that can derail those early in retirement—and I can recall feeling a bit panicked.
Fortunately, we had prepared for this. We had two to three years’ worth of living expenses in cash investments and short-term bonds. With savings yields at levels not seen in more than a decade, our cash was pulling its weight and was available to us for spending, so we weren’t forced to liquidate depressed stock and bond positions.
What a difference a year makes. Share prices bottomed out in late 2022 and then started a recovery, which for now still seems to be rumbling along. What were the lessons from 2023, our first full calendar year without a paycheck?
Spending. I learned to trust our financial plan. Thanks to our robust cash reserve, we were able to resist the urge to hunker down and cut back on spending, even though our total net worth took a beating in 2022 and was still recovering throughout 2023.
In fact, we hit a highwater mark for spending in 2023, including a bathroom remodeling, landscaping our front yard, two trips to Europe and several shorter trips within the U.S. This level of spending was new to us. I’m pleased we were able to overcome our natural frugality and just do it.
Travel. We usually prefer to make our own way when we travel, exploring destinations on our terms, rather than being locked into someone else’s schedule and itinerary. But last year, we tried our first group trips, and came away with mixed feelings.
We also tried our hand at longer trips. Going somewhere for a month and staying in one place was fine. Hitting the road for three or four weeks—but changing location multiple times—was not. It made me wonder: How much travel can we enjoy before we start feeling like we’d rather be at home?
Finances. We’re still figuring out when to replenish our cash reserves and what to hold. With Treasury bonds paying 4% or better at varying maturities, I’m intrigued by the idea of a bond ladder as a hedge against a decline in interest rates. But what’s the right amount to put in the ladder, and how many rungs should I fund?
My wife, who is younger, will have an Affordable Care Act (ACA) health insurance policy for the next eight years. Meanwhile, I turn age 65 this year and become eligible for Medicare. We need to be mindful of our taxable income and its effect on our insurance premiums.
As our taxable income rises, my wife will see a reduction in her ACA premium tax credit. If our income is really high, I could even get hit with the Medicare premium surcharge known as IRMAA. Selling investments to fund a bond ladder would not only increase our state and federal capital gains taxes, but could also potentially ratchet up our health insurance costs.
On the other hand, a bond ladder would lower our portfolio’s risk and lock in a healthy return for a fixed period of time. Should we build a ladder that gets us through the eight years between now and when my wife is eligible for Medicare, despite the implication for our tax bill and insurance premiums? It’s questions like that which make this life stage so challenging.
Tom Short’s career as a management consultant spanned nearly 40 years, and included more than 200 client engagements in a variety of industries and several countries. Tom is also a startup mentor, helping new founders pursue their dreams. He and his wife live in California and have been married for 25 years. They enjoy travel, skiing, gardening and volunteering in their community.
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I’ve had some similar thoughts about traveling. I enjoy travel planning, and we both like doing our own thing. However, we have done a couple of cruises now, one river cruise and one ocean cruise. And I will say that it can be awfully nice to have someone else do most of the heavy lifting for a trip. Just less mentally stressful. At the same time, we came away from our most recent cruise, a Venice-to-Athens ocean cruise on Viking, with mixed feelings. Some of the day trips were just too long—too much time on buses. You had to be up and out early and then they didn’t stop for lunch until 2 p.m. or so. By the time they took us back to the ship, sometimes close to 6 p.m., we were exhausted. We did a post-cruise extension in Athens and horrified the Viking people by opting out of the day trips and doing our own thing. We were just done by that point.
I’ve also had similar feelings about length of trips. We did a three-week trip to New Zealand and Australia in late 2015 that involved nine flights and ten different accommodations. I planned this trip myself, and it was a GREAT trip. But after two weeks, I hit a wall. I was exhausted and so homesick that a message from a family member would almost put me in tears. Same with the Venice-to-Athens trip—great trip but too long and too many stops. I wonder if I’d feel differently if we parked in one spot for three weeks or longer. We spent two weeks at our timeshare in Maui last May, and I never got tired of being there and could have stayed longer.
Tom, thanks for sharing your financial thinking in this article—very interesting.
Following up:
In the weeks since I wrote this I did decide to go ahead and liquidate some equity positions and have already set up a hybrid bond/MYGA ladder. The first three rungs are US Treasury Bonds I bought from Vanguard, staggered at 6 month intervals starting around 15 months from now. The next three rungs are MYGAs spaced 12 months apart, running through 2029.
Although we did incur some LT cap gains from raising the cash to fund this, I was able to offset some of the gains by booking a loss through selling a bad bet I made on a tech IPO. We also downgraded our level of ACA healthcare coverage from a Silver ACA plan to a Bronze one which helped offset the increased premium from the increased MAGI.
It feels good to be taking advantage of the high interest rates and locking in a known source of cash flow for the next five years that will cover 70% of our projected annual spending.
Don’t worry about paying IRMAA and NII. If you can get your income way up there and keep it high, go for it. You can always save half of it if you’re worried about the future.
I agree, why people worry about keeping income low to avoid higher premiums amazes me. I often think would they do that while working as many employers use salary based premiums.
I have no problem with paying higher premiums for higher current income but Roth conversion “income” should be excluded from the IRMAA MAGI calculation since the conversion is on past, perhaps long in the past, income. Yes, pay income tax on the conversion. No, it should not affect your IRMAA MAGI.
Thanks for sharing your lessons learned, Tom. You seem well along to overcoming the challenges ahead.
Optimizing one’s finances to minimize taxes should be a given. Most of this site’s readers likely do that. But strategizing to avoid Medicare surcharges, as I often read in posts to this site, seems to me like not seeing the forest for the trees and potentially missing out on investment opportunities.
The first tier of IRMAA surcharges in 2024 amounts to $839 more in Medicare premiums annually over the standard premium. The highest tier (modified adjusted gross income of more than $500,000) amounts to an additional $5032 annually over the standard premium. At the highest tier, the cost of Medicare with a low deductible Medigap and Part D policy is around $10,000 per year in my state. Even that is a relative bargain for health insurance.
For married filing jointly the first tier of IRMAA surcharges in 2024 amounts to $1,678 more in Medicare premiums annually over the standard premium since both spouses pay the IRMAA surcharge.
Great perspective, Jo Bo. I guess I can let go of any concerns about IRMAA then. The ACA and SSA taxes are a more immediate issue for us to navigate in order to minimize the bite taxes take out of our annual spending.
Any thoughts on smoothing it all out by purchasing an immediate annuity with a portion of assets to fund basic expenses?
Having a guaranteed check show up in the bank each month has a soothing affect.
We’ve looked at SPIAs. While I agree having the guaranteed check show up each month would be great, we have over 30 years to plan for based on our current mortality estimates so the amount of our portfolio we’d need to convert to make a meaningful difference in cash flow would seriously compromise its ability to grow over that long of a period.
Our current plan is to look at a SPIA when I turn 80.
I went through a similar “bridge funding” issue last year, did a quick spreadsheet between a treasury bond ladder and a SPIA. They were remarkably close in the IRR and for total return SPIA was a tad bit better. Of course with the treasury bond ladder, you don’t have to pay state taxes. So I ended going with a “period certain” SPIA. I priced these (both the BL & SPIA) using the tools from Schwab & Fidelity and ended going with one of them. Having this show up on my dashboard was important to me and both of these companies do the vetting out of the insurance companies and this helps!
Congratulations on feeling better about your plans. Since you mention incurring capital gains to fund your bond ladder, you must be planning to create the ladder in a taxable account. You might consider doing so in a 401k or IRA instead. You’d incur no capital gains to create it, and wouldn’t have the taxable income from the bonds. I know you intend to spend that income, but you can still do so by selling small tranches in your taxable account and offsetting in the tax deferred account.
https://humbledollar.com/money-guide/municipals-vs-taxable-bonds-in-a-retirement-account/
Thanks for the article – I’ll read that one again.
Yes, that is certainly a valid strategy. The primary purpose of the bond ladder is to be a cash reserve, not a capital appreciation play. We need to decumulate from our portfolio as we don’t have much passive income.
So as a reserve it serves as a cash source regardless of whether the market is up or down. During a bear market, we spend it as ready cash. During a bull, we spend it and replenish our reserves when they hit the replenishment level.
By keeping it in taxable, I don’t have to pay income tax on the principle investment amount, only the interest (and then only Fed tax, not state).