FREE NEWSLETTER
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.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Congrats on finishing the rookie year successfully. 100% income replacement as a goal might make sense for those who do not track their expenses and need an approximation. To me it does not make sense. I save a good portion of my income and I need not have to regenerate it again to save back. This is tax inefficient. Also, I might have new expenses in retirement like increased spending on travel /vacation/medical insurance and reduced expenses in areas like commuting expenses, formal clothing etc. Ideally, I would like to understand my current expenses and model the expenses in retirement (estimates that need to reviewed and updated every year.
Regarding income portion, I am planning on using dividend focused ETFs (SCHD, VIG etc.) to fund majority of the expenses and also use cash and ibonds as a buffer. Using qualified dividends allows you to pay less or even no tax on the income. I know they are not guaranteed but these ETFs have high quality companies and I think it is a manageable risk. I also have cash/ibonds as a buffer .
Thanks for the insightful article. I also planned on our retirement income to be 100% of my working income. I was lucky enough to have retired with a pension that would have accomplished that 100% goal. But with my wife and I being in Wade Pfau’s “Safety First” camp and annuity payouts having increased over what my pension’s monthly income would be, I took the pension as a lump sum and put most of that money into a combination of 3 annuities, one SPIA and two fixed indexed annuities. All 3 of those annuities have no ongoing fees. I know I “may” have done better by putting money in the stock market, but I did not want the hassle or uncertainty. I now know exactly what our income will be so budgeting ahead for fun things is easy. No financial advisor or tax accountant fees are needed. I just did my own taxes in less than an hour using Turbo Tax.
Question: With annuity payout rates having increased, is it not mathematically superior to use an annuity for base income rather than using bonds? Bonds or Income Annuities: Which Are Best For Retirement Income? – Retirement Daily on TheStreet: Finance and Retirement Advice, Analysis, and More
Nice, jealous of all these HD readers with pensions! 🙂
Bonds and annuities each have a place in my own plan. I think of them more from the perspective of their respective strengths than differences in rate of return. If you dig under the covers of the portfolio held by companies issuing annuities, you’ll see a lot of corporate bonds and some commercial real estate holdings, plus equities. Together, those make the annuity path (for me) a bit riskier than my bond path which is based purely on Treasurys.
For “safety first”, I used an eight-year Treasury ladder as a sort of period-certain annuity to “cross the chasm” to my Social Security benefit. I hold short-term and intermediate-term Treasurys in our retirement portfolio (mostly in my IRA) for low-risk income and diversification. And I bought a deferred income annuity to top up our Social Security benefits to a level of income that’s tighter but livable when we have to hunker down through the next big market drop. I want to leave some sort of legacy to our kids from our retirement portfolio but annuities work against that so I won’t be annuitizing the whole portfolio at this point. Down the road, if I show signs of failing, my wife can revisit that decision with her new financial planner.
David, great article. I’m going to have to take some notes on your investment strategies.
I retired a little earlier than you, April 2022. I was going to wait until October, which was my full social security retirement date, but I was tired of all the crazy corporate covid rules and job efficiently programs which didn’t do anything except reduce efficiency and increase stress levels. The kicker was when they turned on a feature in my vehicle monitoring dongle that, in addition to speed, kept track of how the brakes and accelerator were used and reported it to my manager.
I did wait until October to start social security. I wasn’t sure if I could, but God worked it out great when I found out I had a small city government pension from a previous job, that I didn’t realize could have started taking when I turned 60, and I could get 16 years of back payments.
As you said, the nicest thing being retired is the total lack of any kind of stress. My biggest concern however is trying to make up for the exercise I used to get while working.
I wasn’t anywhere as sophisticated as you in my retirement investing, but my house is paid off, I have no debits and, after thinking things over, took a pension instead of a lump sum. My pension and social security equal what my take home pay was and are not correlated to the stock market. I have few retirement accounts with about 350k to make up for inflation.
I could have retired earlier at 62, some of my fellow workers thought I should have, but I said what fun is it to retire and then be poor? I’m glad I waited.
It’s really fun being retired and having the same take home pay I had while I was working.
Love this, Tim. Matching take-home pay with a pension and Social Security takes a lot of worry and complexity out of retired life. Having that third leg of additional savings gives you margin for life’s curve balls, or house maintenance, etc.
Replacing work exercise was a concern for me too. I should probably start some kind of strength training. But for now I’m walking+hiking 3-4 miles a day and will get back on my bike for trail rides when the weather improves.
I’ve tried to learn as much as I can about retirement but am still working. My plan is to retire in about 5 years. Your article in my opinion shows that you have good plans that you continue to tweak. For what it’s worth, you seem to be killing it.
Very timely. I retired in December with some pretty good indicators (New Retirement planner, input from 2 CFPs/Vanguard) that I was “In the ballpark”, but it’s still jarring to move from saving your pennies to spending them. Currently triangulating on the big picture plan.
Currently reading Steve Vernon’s book with the attention grabbing title “Don’t go broke in retirement”, clued in by Adam Grossman here (thanks Adam) via Mike piper. Good stuff. Understandable.
You touched on all the “feels” of our new life since April 30.
Clever move on buying the puts, hopefully you won’t need them!
I feel no call to return to work, but I need to become focused on building some more structure besides reading and walking and purging household belongings and office paperwork. And I have double the challenge with my spouse only reading and walking, plus his consulting…
We want to stick to our plan to travel, but feel the need to be able to quickly get home for my aging parents. Thus no desolate Greek Island or Alaskan adventures for now…but looking forward to some time in the Carolinas soon!
North Carolina in the spring is gorgeous, but make sure that trip is before summer (i.e. no later than May).
My move to a CCRC has provided lots of structure, I guess, my problem is that there is so much to do if I choose.
The Carolinas are wonderful, best wishes for a happy, unforgettable trip.
Structure and new purpose are still evolving for us too. The big renovation forced a near “death cleaning” of belongings. It gave purpose and structure for a while but that’s done.
We also love travel so that’s part of our new life, plus better self-care, family, and some volunteering. But there’s room for more, TBD.
David,
Good luck with your plan to ‘age in place’.
I can speak from recent experience that downsizing – and our kids wanting very little of our “stuff” – is incredibly stressful.
I suppose it will be easier on you when your kids have to do all that.
I hear you. We’ve been through that process now for two parents and two uncles. It’s a ton of work and taught us a lot. We culled a lot of stuff through this most recent renovation. A future downsize is always an option based on health or finances but I’d rather kick the bucket here if I can.
At long last another person who sees the value of 100% income replacement upon retirement. 👍😎👍😎👍😎
Sounds like a good comprehensive plan, a bit too complicated for me, but your income stream is what’s important.
Don’t be too sure housing costs wont offer surprises though. That’s what thought with our condo – that was about $15,000 ago.
Ha! Picking an income target wasn’t easy. Stock was a big part of our annual income but most of it went to retirement savings or big house projects etc. We’re still saving in retirement for those big surprises we can’t imagine but that always show up.
Having a pension would’ve made this easier, but those are rare in my industry. Dad and my father-in-law worked for the phone company and each had one.
Are you stirring the pot Mr. Quinn? I can predict what will happen next! 😀
I, too, believe in 100% income replacement in planning for retirement. Unlike David, I did not exclude retirement savings from that amount. I considered the extra amount as going towards inflation and unknown future expenses, such as health care.
We live on a fixed pension and SS. Combined they exceed my working base pay – not total compensation. The pension spending value has taken a hit the last sixteen years, but we will use dividends, and tax free interest to offset the inflation when necessary.
Not sure we would be as well off if we started with 70-80% replacement. Cutting back has not been necessary so far.
Hey David,
One of the tools we used to minimize expenses when we retired was to obtain an ACA (Obamacare) policy. We were able to keep our MAGI (modified adjusted gross income) below 40 K. We were able to accomplish this as we had paid off our mortgage and have a simple lifestyle (other than trips). We mostly utilized our IRA funds and then taxable assets to top off any income above 40K.
As a result over four years we obtained 48K in subsidy premiums, plus were paid rebates of premiums of about 4K.
Only in our “rookie season” did we pay premiums ($16/month) until I learned the “rules of the game”. Our only major medical expense was an ER visit which cost 5K because we had the bronze plan, but that expense was paid via our HSA.
Prior to retirement the most important issue above everything else is SORR
Yes. I’m aiming to manage sequencing risk with a solid bond portfolio, low draw rates, and “air bag” savings plus an annuity outside our retirement portfolio.
Thanks for this article, David. As I am in my rookie year, I found it quite interesting. You have some income sources not available to me, such as deferred compensation and stock options. I have a pension that currently covers our core expenses, so our income strategy is much simpler than yours. We’re working on our defense and future Social Security payments should help with the long game.
David, I’ve always enjoyed your articles, and learn from them. I’m still working my way toward my rookie year, if things go as planned, and trying to keep from “hitting an all time low.” I appreciate the thoughts from the other side. I hope you have an all-star retirement.