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Our Freshman Year

Tom Short

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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