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Rookie Year

David Powell

FANS OF PROFESSIONAL sports know the excitement and agony of watching each year’s fresh crop of rookies. These young players have to relearn a game they thought they knew.

The fact is, the strategies, tactics, intensity and winning habits of big league sports teams are tougher than those of college and minor league teams. That can leave rookies wondering what hit them when they move up to the big leagues.

That’s how I felt in December 2022, when I retired after decades of working and saving.

Season’s start. For me, full-time work ended abruptly. Deciding not to seek another position came later, the result of a months-long wallow. I realized one day that I didn’t know what I was waiting for and I “don’t wanna be a richer man,” to quote David Bowie.

Time with family and friends had become precious. What’s more, I’d fallen in love with choosing how to spend my time. I couldn’t appreciate the joy and lightness this freedom brings until many months away from full-time work. Lower blood pressure has been a bonus.

Better defense. As a first step in our rookie retirement year, my wife and I reviewed expenses and cut some low-hanging fruit. Streaming services we modestly used? Gone. A remote storage unit for our seasonal things? Replaced with storage racks over our garage doors and a paring down of seasonal holiday treasures. These cuts and more felt so good that it’s now a January tradition.

Housing can be a big expense, but we finished off our mortgage years ago. When work ended, we had already decided to retire in place, staying in our home of 20-plus years in the Pacific Northwest. This area isn’t cheap, but it could be much worse. We’re still healthy, our kids aren’t far away, and we saw no reason to spend money on a move until later in life. By the spring, we’d finished a major year-long home renovation that was underway when my job was cut. From here, housing costs should offer few surprises.

New game. When I had a steady paycheck and was working long hours, I never took the time to create a detailed retirement-income plan. When my job went away, I felt we had likely saved enough to meet our goal for retirement income: 100% of my final net salary and bonus. That 100% excludes the retirement savings we used to sock away, but adds in higher health care costs.

Still, I hadn’t figured out how to turn those savings into steady early retirement income, while we waited to start Social Security. I felt stupid for skipping this step until retirement was suddenly upon us. Rookie mistake.

Over the next eight years, I have a chunky mix of investments outside our main portfolio that mature at different times: retirement stock grants vest quarterly until late 2026; annual deferred compensation investments pay out from 2026 through 2030; and an eight-year bond ladder covers 2024 to 2031. Series I savings bonds can be tapped for gaps, if needed.

Eventually, we’ll use some dividends and interest from our retirement portfolio, while it hopefully keeps growing. To cover the rough spots, and sleep well through tough times, I’m increasing our cash holdings from 18 to 30 months of expenses.

Like many HumbleDollar readers, I shifted our cash savings from our bank to a federal money market fund, so our cash would work harder while short-term rates are high. To simplify our cash flow, I finally set up a monthly automated transfer from our money market fund, so our checking account always holds two to three months of living expenses. It took this rookie six months before he felt comfortable enough with every aspect of our plan to automate that monthly transfer.

Don’t beat yourself. Without a steady paycheck coming in, our time horizon had changed overnight. I now wanted a bit more certainty, plus bigger financial margins to cover surprises, until we claim Social Security. That drove two more changes.

First, when yields on nominal and inflation-indexed five-to-10-year Treasury notes approached their recent highs in October, and with inflation heading down, I decided to shift part of our retirement bond portfolio from Treasury index funds to direct Treasury bond holdings. I also stretched our average bond duration, which had been short heading into 2022. Holding these new Treasurys to maturity gives us what Bill Bernstein calls “investing equanimity,” and does so with satisfying yields and low expenses. Our portfolio’s short-term Treasury holdings are still held in a Vanguard Group index fund.

Second, when my ex-employer’s stock price rose to new highs, I limited potential “losses” in future stock grant vests by buying put options for 2023 and 2024. Put options rise in value when a stock’s price drops below the contract’s strike price.

Playing the long game. Our final tactics were around longevity. In this first year of our retirement, I reviewed my assumptions for our portfolio’s expected return and dividend yield, as well as our planned withdrawal rates, which are set at 3% or less. I want a plan that’s conservative enough to carry us through the next 40 years, while still leaving some money for the kids.

To lower our early retirement risk, I trimmed our portfolio’s stock target to 67% and boosted Treasurys to 33%. With that allocation, and plenty of cash savings, I should be able to view market downturns as a buying opportunity. After we start Social Security benefits, I’ll let our stock allocation grow. Once I hit age 75, we’ll use a simple retirement-income system: We’ll supplement a modest income annuity and Social Security with required minimum distributions from my rollover IRA, plus dividends and interest from our taxable-account savings.

As I wrap up my rookie year, I can see why so many retirement veterans say “the first year is the hardest.” I’d love to hear how other readers are playing their retirement-income game.

David Powell spent nearly four decades as a software engineer and engineering general manager at Apple, Microsoft, NIH and Silicon Graphics until he retired in 2023. He can be reached on Threads at @AmpedToGo. Check out David’s earlier articles.

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