How I Stayed Retired for 10 Years after Retiring in 1999

[audreyh1]

(In case any one is wondering - this was assigned homework from my "10 year anniversary" thread)

part I - Introduction

Some folks have expressed amazement that we survived 10 years from 1999 without crushing losses to our investments or having to go back to work. We are not surprised, and I guess the main reason is that being conservative people we would never have stopped working at such young ages (39 and DH 44) if we didn't believe we had more than ample resources to get us through some tough times and more than enough padding in our estimated expenses to pay for a lot of fun travels and a few toys, etc.

Nevertheless, looking at the past 10 years, from 8/9/99 the day I retired, our net worth has gained 22% from the initial value. At the peak in Oct of 2007, we were up 55% from where we started. Boy were we felling good! But then you all know what happened next. At the bottom of the market in March (actually, the numbers I have are for end of Feb) we had lost 6.4% from our starting value. That was a bit shocking at first, but then I realized that we had already enjoyed almost 10 years of fun retirement living, got to do a lot of fun things, and bought a motorhome. Looked at that way, I felt like maybe we were OK after all.

Neither my husband nor I had seriously thought or planned for early retirement although I certainly had fantasized about all the cool things I would do if I were "independently wealthy". But when the company I had worked for for 14 years finally went public in 1995, all of a sudden all that "funny paper money (stock certificates)" we owned was real. I realized that maybe in a few years I really wouldn't have to work anymore if I didn't care to - what an intriguing idea! At that point I started seriously considering what I felt would be enough money on which to retire. A couple of years later I had some pretty concrete goals, and we started seriously to "work the plan" AND keep our fingers crossed!

To reach FI, we took the ultimate risk - kept all our eggs in one basket. We were young enough to take such a risk, AND given that our initial investment in buying our stock options was not that high with respect to our savings I never felt that we were imprudent in placing this bet. In fact, I was very cognizant of the fact that we were lucky to have this opportunity and it was probably the only one coming our way!

So, we achieve FI, have enough where we can really stop working if we want to. What next - figuring out how to invest and live during retirement.

 

[audreyh1]

Part 2 - Developing and Implementing the Investment plan

Part 2 - Developing and Implementing the Investment plan

My initial goal was to divest enough company stock to create a retirement "nest egg" - a well-diversified, conservative "core" retirement portfolio that could support a 4% withdrawal rate based on my estimated retirement living expenses, with plenty of padding built in. But then I also hoped, over the first 10 years, to not have to draw from it much, but instead whenever possible draw from the remaining company stock we owned. However, if for some reason the "riskier" company stock shrank drastically or disappeared altogether, we could switch to regular withdrawals from the retirement portfolio and be fine. Over 1999 and 2000, I sold enough of the company stock to fund our retirement portfolio, and by late 2000 it plus our IRAs comprised about 60% of our investments, and we still held about 35% in company stock. It looks like the retirement fund plus IRAs supported about a 3.9% initial withdrawal rate. Of course if you counted the company stock as well we really had a much smaller initial withdrawal rate - more like 2.67%, which is extremely conservative.

During 1999, I also sold other investments and assets that we had accumulated over the years (not counting our IRAs) - a bunch of tech stocks we had bought on speculation in 1997, and some land that DH had owned for way too long. These goodies were converted to our "travel fund" - a healthy cash stash that we planned to use for the initial 2 to 3 years of retirement so that we could go wild with all our travel fantasies without worrying what our retirement portfolios was doing in the near term. It also amounted to more padding (and subsequent lowering of our "true" withdrawal rate). This initial "cash stash" worked so well psychologically that it became a permanent feature of my investment plan - i.e. it became our "short-term" cash account to hold 1 to 3 years worth of after tax living expenses separate from our portfolio.

 

[audreyh1]

Part 3 - Investor - Know Thyself!

Part 3 - Investor - Know Thyself!

I'd done all sorts of ad-hoc investing during the 80s and 90s and learned a lot about myself and how I reacted to different investing situations - good and bad.

Looking at the equity markets in 1999, I was very nervous. Things seemed way out of whack. However, I also knew that waiting for a better entry point might not work. Experiments in the past with "waiting for a dip" had had miserable results. A reasonable approach seemed to be dollar-cost-averaging. I had read advice to DCA in over a one year period. That seemed kind of short to me looking at past market cycles, so I picked 2 years instead.

I also deliberately picked an investment plan that matched my personality and our lifestyle. In terms of our lifestyle, I wanted something that required minimal maintenance and monitoring so that we could go off and have fun without worrying about how our investments were doing. I picked a diversified portfolio of mutual funds. I also knew that every time I tried to "time" investments, I was never happy with the anxiety of "pulling the trigger" and most of the time my execution was poor. So I wanted to not have to try to anticipate the future. I studied asset allocation with rebalancing, and that appealed to me in that it enforced a "sell high, buy low" discipline and was totally based on what your investments had done in the past - no guessing about what they might do going forward. I also decided to use a "deviation from target allocation" trigger so that I would rebalance the retirement fund more based on divergence than on a calendar schedule. The intention was to not rebalance very often (wait 2 years even), but that if divergences occurred rapidly between asset classes, I might want to rebalance sooner.

Owning a large chunk in equities made me nervous, but I wanted enough in equities to protect from inflation over several decades and I had a 50 year time horizon. So I picked 60% as the initial equity allocation, 30% bonds, and 10% cash. Equities were allocated across international, large, medium, small caps and REITs. I also picked a balanced fund as my "benchmark" as a test to see if I was really getting any benefit from managing my own asset allocation and rebalancing. 10% of my portfolio went into this benchmark fund to keep me "honest".

I learned most of the nuts and bolts of asset allocation and rebalancing from Frank Armstrong's web postings. He had very practical examples and they helped me lay out what seemed to be a reasonable allocation. He also had great advice about how to handle withdrawals under various market conditions - namely to withdraw only from bonds+cash during down equity years, and to keep at least 7 years expenses in bonds+cash in your allocation so that you could wait out a long bear market and allow equities to recover before needing to draw from them. I set 10 years bonds+cash as my minimum.

So basically - a simple investment system that required little thinking on my part and little monitoring. I had a spreadsheet that calculated the rebalancing and I didn't need to check it more than once a quarter, although I would update it at least once a month, and sometimes weekly. But I didn't have to!

 

[audreyh1]

Part 4: Surviving the decade since 1999

Part 4: Surviving the decade since 1999

During the first bear market - 2000 to 2002, I was averaging into the market during that time. As a consequence, I was averaging in to a declining market (sweet!) I didn't experience any loss to the portfolio until 2002. Still that was a nerve-wracking time. The bear market lasted way longer than any bear markets from the past several decades and things were looking bleak. I stretched out my averaging period to 2.5 years. I well remember Oct of 2002, when I did my "last" DCA. It was hard, but I did it! And 2003 was a sweet reward for having finished my DCA in late 2002, all losses recovered and by the end of 2004, it looks like we had a 5-year after-tax ROI of 28% on the retirement portfolio, or an average annual return 2000-2004 of 5.1% per year.

As it turned out the company stock went on a roller coaster up and down during the 2000s, but every 2 or three years it would approach the top of its cycle, and I was able to divest enough to replenish the short-term living funds for another 2-3 years. Occasionally I was able to add more to the retirement fund. So most years we drew on the retirement fund only to pay taxes, and one year we withdrew some to help buy our motorhome.

It also turned out that the estimate of annual expenses I had used as a base for decision making had been extremely conservative. Even in our most expensive year we were 8% under our expected (padded) budget. And over the past 9 calendar years we have averaged 17.5% under the initial budget.

There have been no inflation adjustments made to our budget over the past 10 years. In fact, our costs have gradually gone down since retirement. Certainly some fixed costs have risen - food, fuel, insurance, etc. But other discretionary costs have gone down and more than compensated for any rises in fixed costs. I think we also learned to "streamline" as we went on and get the "most bang for the buck".

Note that none of these annual expenses include the cost of buying the motorhome in 2005. We took a good chunk of the cost of the motorhome out of the retirement fund, thus reducing our potential annual draw by 4% of the motorhome cost. That seemed like a reasonable way to treat such a purchase. The proceeds from selling our house in 2005 were put into a separate balanced fund to remain invested until we were ready to buy another house maybe in 10 years.

By 2003, 2004 I was beating my balanced fund benchmark (WEBAX) but I noticed many other balanced funds were beating me. In fact I was seriously questioning whether I should just transfer everything to a balanced fund and not bother with rebalancing. I switched to DODBX as my benchmark. Then by 2006, I started beating DODBX (maybe that should have been a warning - or at least an indication that the domination of large cap value was coming to an end). My more broadly diversified asset allocation blew away DODBX in 2007 and 2008. As a consequence, I guess I'm going keep doing my own AA. Do I have a new benchmark? Yes - OAKBX. The house fund is invested in it, and some of my retirement fund.

Things were going great! By the end of 2007 the retirement portfolio had an 8-year 2000-2007 after-tax ROI of 50%. (The ROI calculation excludes any additions to the fund over that time period). We were feeling pretty good! The withdrawal rate we needed from the portfolio had dropped to 2.8% from the initial 3.9% based on our initial estimated expenses. And on top of that we seemed to be spending less and less each year. We were feeling "flush".

Then 2008 happened. Very lucky for me I was able to once more replenish our short-term funds from company stock and so we had 2.5 years of living expenses covered before everything fell apart in late 2008. This was the year that my "rebalance triggers' started firing madly. I rebalanced in July just in time to see everything really fall apart, then again in October. By Jan 2009, things were way out of whack again, so I grit my teeth and rebalanced again. After this I hit my "min years expenses in cash+bonds" limit so that when things went down again in March, I was was out of ammo. Things have recovered quickly and in early August I reached my rebalance criteria on the upside, and was able to sell some equities and replenish my cash+bonds.

I have made some refinements from the past 10 years experience. I found rebalancing so frequently very disconcerting, so I widened my criteria so that I won't rebalance so often, although chances are we won't see that kind of volatility again for a very long time. I am keeping my 1-3 years living expenses cash account, it really helped me stay sane especially over the past year. Company stock is a much smaller % of our net worth at this time as we drew down on that over the past decade. Total net worth is now up 24% from where we started, and only down 20% from the peak in late 2007. Funny, how we can feel good about "only 20% down".

 

[audreyh1]

Part 5 - Conclusion

Conclusions

I've been highly complimented and lauded as a "great investor" because I stayed retired the past 10 years without having to go back to work. But I think y'all are giving me too much credit. Yes, I made some reasonably good investment decisions, but I think survival also had more do with starting with plenty and overestimating our expenses.

So, you may conclude that if you really do have more than enough money to retire very young, you probably will survive a 10 years like we just had. I think that is a very reasonable conclusion as long as you don't do anything really STUPID like spend well beyond your means or take extreme risks with your nest egg. That's what I think - my main "trick" was that I didn't do anything really stupid.

But I did develop an investment plan/system that worked for me because I was able to stick to it for the last 10 years without too much angst and it did get me through some tough times. So I trust it, and I'm sticking to it! I like not having to make guesses about the future.

In conclusion:

1. We were lucky - equity in a company turned into enough net worth to retire very early.
2. We started with 1.8X what we really needed to retire, based on our actual expenses and our total long-term investments.
3. Dollar-cost-averaging in over the initial 2000's definitely helped.
4. The remaining company stock we owned held in there well enough for us to draw from that most years rather than from retirement portfolio.
5. We didn't do anything really STUPID - like go crazy with spending or make super risky bets with our core "nest egg" retirement portfolio.
6. In spite of living off investments during a horrible decade, our net worth did manage to grow 22% over the 10 year period.

I'm figuring these conclusions may be a bit disappointing to folks here who didn't get the windfall we did. OK - you can take back any "credit" you might have given me except for point number 5 which I am, in fact, very proud of.

best

Audrey

 

[Rich_by_the_Bay]

Thanks for posting, Audrey, and congratulations on navigating the minefield so adeptly. As is often the case, a bit of luck plus lots of good decisions and a refined sense of yourself saved the day.

Here's to the next 10 years and beyond. Cheers!

 

[W2R]

Audrey, that was fascinating! Thanks so much for taking the time to write up what retiring in 1999 was like. I am so impressed, and still encouraged by all that you said.

 

[Leonidas]

Excellent post, I felt like applauding.

Loved conclusions 1, 2 and 5. If I ever wrote out my own conclusions there would be similar notations.

I'm curious about the consistent use of the phrase "1-3 years living expenses". Do you mean the amount you have in cash equivalents fluctuates, or that you have enough for 1 year of normal spending and up to 3 years if you cut back on expenses?

 

[audreyh1]

Excellent post, I felt like applauding.

Loved conclusions 1, 2 and 5. If I ever wrote out my own conclusions there would be similar notations.

I'm curious about the consistent use of the phrase "1-3 years living expenses". Do you mean the amount you have in cash equivalents fluctuates, or that you have enough for 1 year of normal spending and up to 3 years if you cut back on expenses?

Yes, the amount I hold in my short-term cash account fluctuates. I don't let it get down below 1 years living expenses before I replenish it, and I don't replenish it above 3 years expenses either - any excess stays in the longer term investments.

I hope that is clear.

Note that I also hold cash in my retirement portfolio. But there cash is playing a role in the allocation/rebalancing.

Audrey

 

[Notmuchlonger]

Way to go! Looks like its working for you two. Thanks for the information.

 

[caninelover]

Wow. Audrey, first of all, congratulations. Second of all, thank you so much for taking the time to write up such a thoughtful and reflective post about your experiences and conclusions. I will probably read this one a few times and file it away somewhere. You've given me a few things to think about. I like your conclusion # 2, but it also seems like you have real discipline with investing...you didn't abandon your strategies when the markets went sour.

Really valuable lessons in your example, thanks again for sharing it!

 

[audreyh1]

Wow. Audrey, first of all, congratulations. Second of all, thank you so much for taking the time to write up such a thoughtful and reflective post about your experiences and conclusions. I will probably read this one a few times and file it away somewhere. You've given me a few things to think about. I like your conclusion # 2, but it also seems like you have real discipline with investing...you didn't abandon your strategies when the markets went sour.

Really valuable lessons in your example, thanks again for sharing it!

You're (all) welcome!

Yes, I was able to maintain discipline with my investing. But I think that is because I put in a lot of effort into matching my system to my personality. I've admired other successful investors with good schemes and good discipline but have known that I would personally never be able to execute their system.

Most of my investing strategies have been picked based on psychology rather than purely financial considerations.

Audrey

 

[caninelover]

Most of my investing strategies have been picked based on psychology rather than purely financial considerations.

Audrey

More to think about... thanks

 

[DblDoc]

Great post Audrey. I think conclusion #5 is key. You were able to stick to your plan which was rational and reasonably thought out and you were able to avoid the emotional decisions so many investors make in the heat of the moment which turn out frequently to be bad decisions.

The narrative also gives one the feel of how it isn't completely mechanical. You made tweaks here and there and adjusted to the circumstances, but the general plan remained in place.

Thanks for taking the time to post this.

DD

 

[tryan]

Thanx for sharing! Great read.

To reach FI, we took the ultimate risk - kept all our eggs in one basket.

This was key .... saving and diversifing - pennies - will get you to FIRE by 60. To hit FIRE in your 30's or 40's you need RISK.

 

[Midpack]

Thanks for taking the time to post this, a very good read.

 

[Moemg]

Great post . It was really interesting to see how you did it .

 

[LOL!]

I wish to add my thanks as well! Thanks!

 

[ksr]

Yes, thank you for taking the time to write this up and share your experiences. Your story is inspiring and proves that careful planning and a level head really pay off.

 

[Alan]

Thanks for posting Audrey and for summarizing with the 5 key points as you see them. Not many financial planners will add the luck factor into retirement planning but it can be such a factor which is why, like you, you have to have to enough slack and be prepared to respond to bad luck.

 

[molly]

Audrey-

Thank you so much for taking the time to put together this wonderful 10 year investing summary. I have been following your comments for a long time and have been on the lookout for this promised post.

We are 62.5 and recently “nudged out” . My DH planned on 65, but life had other plans. We have saved but haven’t been quite as “lucky”. However, we are in pretty okay shape. “Living off the portfolio” was better to read about than actually being confronted with the reality. After years of the dependable paycheck and benefits….it feels like jumping over the cliff – even with a $42k pension backstop, paid house, our kids through college with no loans, and today $.9 mil in retirement savings. Our philosophy is similar to yours and Otar’s. However, it is much more comforting as we embark on this new phase of our life to read of your personal experience.

I especially agree with your “cash hordes” to help keep the powder dry and as ammunition for future opportunities. Every dollar has a job AND……………that is the “JOB” of cash. “Luck” is indeed the unknown factor in even the best of plans.

I much prefer the wisdom of those who have “walked the walk” as opposed to those who “talk the talk” or “wrote the book – but haven’t walked the walk”.

Congratulations and may your success continue. I look forward to more of your posts.

Again, my appreciation for your time that you share with us.

 

[TromboneAl]

Nicely written and organized.

 

[Dawg52]

How I stayed retired over my first 2 rocky years.......

 

[Bestwifeever]

I didn't realize you were such a child when you RE'd, Audrey--if you'd waited ten more years to retire you'd still be retiring early!

 

[steve88]

thanks for sharing