For early retirees, what are your safety nets?

[bradaz2488]

Onl

Only spend 50% of the starting portfolio at 95? You have a huge safety net.

I know... Like I said if we could spend our last penny on our death bed I would plan for that. With a +40 year plan I was really nervous about running out of money. I assume a 7.5% yearly increase in HC cost. If I assume 10% I actually run out of money at age 94 (DW 91).. It is amazing how small increment add up over 40+ years. I will loosen the purse strings down the road when HC costs are more stable/predictable and when we get 7-10 years out from SS FRA... I hope to give myself big annual raises down the road ....

 

[USGrant1962]

Mine are:

1. Flexibility on expenses
2. Paid off primary residence and vacation home (consider these my LTC insurance)
3. Conservative assumptions in my FIRECalc modeling such as:

1. Life expectancy of 95
2. SS has 25% haircut (I'm actually at 99% in FIRECalc with no SS)
3. Neglect part time work or consulting
4. I believe I am using higher tax rates than reality, so my gross spending in FIRECalc is higher than I'll really need
5. Greater than 100% success in FIRECalc

4. A likely inheritance
5. Flexibility on claiming SS - earlier if portfolio is down to relieve withdrawal pressure (see Item 1 above)
6. Move to a (slightly) lower COL area (planned for a few years from now)

 

[Jaded salami]

Not sure what you mean by safety nets. My ER plan consists of two parts: the first part are the years between when I ERed 9 years ago at age 45 and age ~60 which is about 5 years from now. I am using only the monthly and quarterly dividends from the after-tax accounts for now, but if I have to tap into principal that is okay.


Once I turn ~60, my reinforcements (an equivalent to your "safety nets?") begin to arrive. They are (a) unfettered access to my rollover IRA, (b) my frozen company pension, and (c) Social Security.


Just get me to age ~60 intact and then my financial picture only gets better.

I was planning to write something profound, but other than retiring 3.5 years ago at age 52, scrabbler1's plan exactly mirrors my own.

I also second everyone who says get a handle on your actual expenses, I had tracked expenses in detail for about 5 years before I was confident I had a good idea what my burn rate was.

 

[flyingaway]

Not sure what you mean by safety nets. My ER plan consists of two parts: the first part are the years between when I ERed 9 years ago at age 45 and age ~60 which is about 5 years from now. I am using only the monthly and quarterly dividends from the after-tax accounts for now, but if I have to tap into principal that is okay.


Once I turn ~60, my reinforcements (an equivalent to your "safety nets?") begin to arrive. They are (a) unfettered access to my rollover IRA, (b) my frozen company pension, and (c) Social Security.


Just get me to age ~60 intact and then my financial picture only gets better.

If I read your post correctly, you only spend the dividends in taxable account, not touch the principal before 60. In theory, you could do this forever, no need for any reinforcements.

 

[daylatedollarshort]

Our options are - reduce discretionary spending, downsize, lower cost of living area in U.S., move to some place like Spain or Portugal, ramp up hobby income, get part-time jobs, buy some land and move to an off grid solar cabin.

We use a matching strategy and once SS kicks in our withdrawal rate will be around ~.5%, so we have a fair bit of buffer in our plan and limited sequence of returns risk for our current housing and lifestyle.

 

[traineeinvestor]

No pension, social security etc. Also what the banks label an "annuity" out here where we live is a value destroying sick joke. On the plus side, high quality health care (with or without insurance) is much more affordable than in the US.

We tracked expenses for several years and :

1. assumed an arbitrary 20% increase in expenses
2. made no allowance for DD1 and DD2 eventually becoming independent (they are still only 14 and 12, so some way to go there)
3. ignored any income from part time jobs (DW found a job she loved and decided to go back to work full time)
4. with a potential FIRE period of 50 years, we should put most of our savings into risk assets (real estate and equities), ride out market fluctuations and live off the available cash flows
5. ignored the potential for a modest inheritance
6. ignored the possibility of either (i) moving from our current home to a smaller property to increase rental income or (ii) taking out a reverse mortgage later in life

I suppose you could say that our safety net was saving more than we really needed.

Quite frankly, I stayed in the workforce for longer than number crunching suggested was necessary but I would rather spend a couple years earning a high income in my forties than run the risk of scrambling around looking for a job in my seventies (when I would probably be considered unskilled and may or may not have health issues).

 

[Major Tom]

I don't have much ability to reduce expenses, as I am already living at a fairly minimal level, though perfectly happy and not feeling pinched at all. My "safety nets" as it were, are -

1) A WR marginally over 2% of the current portfolio,
2) SS coming online in 8 years, at the earliest. SS wasn't included in my original calculations, so it's all extra money for me.

That's about it, really. Like others here, I do not consider the 4% figure a rule - rather, a rough guideline based on past results.

 

[brucethebroker]

How much extra monthly cash flow would make you feel more comfortable?
$500? $700? $1000? $1500?

Do you have a hobby? If so, make it into a PT job: something to do you enjoy and bring in cash. Like to golf? Find a way to make golf pay (work at pro shop, maintain greens, visit thrifts, buy used clubs and resell). Do you collect books? Sell them on Amazon. Collect antiques? Put them on ebay. Repair bikes in your garage. Tutor middle schoolers at the local library (about $25 an hour in our area). Advantages:

1. You most likely don't need to earn anywhere near your current income to smooth things out.
2. You will earn additional SS "quarters" to increase eventual payments. Read up on how zero earning years reduce your payments-even small earnings make a difference.
3. Your spouse will thank you for being out of the house on a regular basis.
4. If self employed, you will pick up valuable tax deductions that allow, among other things, the ability to write off "business" travel (fly to AZ or FL in the winter to shop for inventory-it's legal!), and your car, and health insurance for yourself and spouse.

This is nothing to scoff at ("Walmart Greeter"). Millions of retirees do it and it can be very rewarding. You might only have to work PT until you collect SS (at a higher payout).

The time to experiment with PT work is now, before you need it, while still making the big bucks. Good luck.

 

[braumeister]

Not knowing what #1 "Cruise Ship Giglio" meant I Googled it. The answer from Google is all related to the Costa Concordia Ship disaster. I must admit to extreme befuddlement. #'s 2-4 I can relate to.

I'm sure he just fat-fingered the word gigolo.

 

[DrRoy]

I can add that we are doing fine on 2% WR. That is our safety net.

 

[scrabbler1]

If I read your post correctly, you only spend the dividends in taxable account, not touch the principal before 60. In theory, you could do this forever, no need for any reinforcements.

Nearly true, but not quite. First, the dividends do not grow with inflation, while my expenses do. Second, the built-in surplus I have has been shrinking because some of the dividends themselves have been shrinking. Third, due to some health issues, my overall expenses beyond inflation have risen slightly in the last few years. And fourth, if I have any one-time large expenses which exceed my built-in surplus, they will come out of principal.

Taken together, in a few years these 4 things will probably erode my remaining built-in surplus and force me to use some principal before the reinforcement begin to arrive. I have lots of principal including some "slush funds" set aside just for this purpose.

Any one of my reinforcements will probably be enough to offset these gradual, negative pressures on my financial picture. And those reinforcements do not include a possible inheritance down the line, nor do they include a likely reduction in my medical expenses from switching from an ACA health plan to Medicare.

 

[cyber888]

Back up plan when savings run out to $0.00 and you only have $1200-$1300 in Social Security .... move to a cheap Asian country like the Philippines or Thailand and still live fine.

 

[GravitySucks]

Not knowing what #1 "Cruise Ship Giglio" meant I Googled it. The answer from Google is all related to the Costa Concordia Ship disaster. I must admit to extreme befuddlement. #'s 2-4 I can relate to.

Typo.
Gigolo
https://youtu.be/F4q8_2q44CQ

Life Goes on Without Me.

 

[nun]

4. Moved to a place with minimal healthcare costs.

Luckily I only pay $100/month for health insurance and other out of pocket costs are low. When I hit Medicare age my costs will rise as I'll have to pay PartB and a comprehensive Medicare extension plan......that combo is currently $200/month. I might then consider moving to the UK for the NHS, but who knows what it will be like post BREXIT.

 

[flyingaway]

Back up plan when savings run out to $0.00 and you only have $1200-$1300 in Social Security .... move to a cheap Asian country like the Philippines or Thailand and still live fine.

How could you do that in your 70s or 80s?

 

[dunkelblau]

I guess my approach is to keep distinct silos for 3% annual withdrawal. For a prolonged risk-off scenario I keep 33x current annual expenses (excluding income taxes) in FDIC-insured deposits. Exposure here is inflation in case CD rates never catch up to inflation. For this issue I keep 33x current expenses in common stocks which hopefully hold up better but could get wiped out by a lawsuit. So for that exposure I have 33x current expenses in my 401K and IRA which hopefully offers some protection. Mostly in international stock funds which may help if the US dollar crashes.

If none of these work then Plan B is expense reduction, which would be difficult for me because I think I'm at the minimum right now. But if the need arose, leaving California would be an option. Plan C would be returning to work as a part time contractor if they'll have me and tutoring math or science if not. My current expenses are less than what my projected Social Security benefit will be so the gap I expect to be relatively small. So hopefully covered by just a few hours a week.

Pensions, children, and inheritance ain't gonna happen for me.

 

[rodi]

I guess my approach is to keep distinct silos for 3% annual withdrawal. For a prolonged risk-off scenario I keep 33x current annual expenses (excluding income taxes) in FDIC-insured deposits. Exposure here is inflation in case CD rates never catch up to inflation. For this issue I keep 33x current expenses in common stocks which hopefully hold up better but could get wiped out by a lawsuit. So for that exposure I have 33x current expenses in my 401K and IRA which hopefully offers some protection. Mostly in international stock funds which may help if the US dollar crashes.

If none of these work then Plan B is expense reduction, which would be difficult for me because I think I'm at the minimum right now. But if the need arose, leaving California would be an option. Plan C would be returning to work as a part time contractor if they'll have me and tutoring math or science if not. My current expenses are less than what my projected Social Security benefit will be so the gap I expect to be relatively small. So hopefully covered by just a few hours a week.

Pensions, children, and inheritance ain't gonna happen for me.

Did I read that right? You have 99x your expenses? Wow. Belt, suspenders, and super glue. Lol.

 

[Hyper]

We came from nothing so know what it's like. Blessed by the Lord and never want to go back, we could cut way back if need be. Honestly we don't spend much now. Our activities aren't expensive but we would definitely have to move to another state.

 

[Markola]

The most broke period I ever lived through was in grad school. I didn't own a car, shared a house, read books and talked about lofty matters with other smart, broke people, like my future wife, whom I met then. I could see the checking account dwindling to nearly nothing each week and there was no savings account. It was awesome. Today in our early 50s we have seven figures saved, no debt and good jobs and SS is there someday, so Plan B is knowing DW and I can muddle through whatever, should we have to again, and it will be alright.

 

[Danmar]

Nearly true, but not quite. First, the dividends do not grow with inflation, while my expenses do. Second, the built-in surplus I have has been shrinking because some of the dividends themselves have been shrinking.

Surprised your divs are not increasing or even shrinking. My divs are now growing by about 7% per year and have doubled since retirement n 2006. This has kept my cash flow (divs plus pension) growing ahead of inflation.

 

[flyingaway]

The most broke period I ever lived through was in grad school. I didn't own a car, shared a house, read books and talked about lofty matters with other smart, broke people, like my future wife, whom I met then. I could see the checking account dwindling to nearly nothing each week and there was no savings account. It was awesome. Today in our early 50s we have seven figures saved, no debt and good jobs and SS is there someday, so Plan B is knowing DW and I can muddle through whatever, should we have to again, and it will be alright.

Similar comments may have different meaning dependent upon your status, i.e., retired or not.

 

[mrfeh]

My first safety net is realizing that 4% is not a rule at all, but a finding in a study that historically has worked over a 30 year period. It may or may not work in the future, over longer periods. So I had no plans to ER at 4%.

+1 Even if you put all your faith in 4%, it does not apply to early retirees.

To answer the OP's question - we keep 3 years of expenses in short-term investments to help protect against sequence of returns risk.

 

[jollystomper]

Though not quite retired, my safety net is similar to what others have mentioned. We have a "luxury" budget that I have used for forecasting planned expenses, and an "austerity budget" for the absolute basics. My pension will cover the austerity budget, and when SS kicks in that would give us some additional breathing room.

In addition, we have enough in cash to cover the gap between pension and our "luxury" budget, or to supplement our "austerity" budget, to not be forced to sell equities before we are eligible for SS.

 

[scrabbler1]

Surprised your divs are not increasing or even shrinking. My divs are now growing by about 7% per year and have doubled since retirement n 2006. This has kept my cash flow (divs p,us pension) growing ahead of inflation.

Most of my dividends are from bond funds, not stock funds. As a percentage of my big bond fund's NAV, the monthly dividends per share has fallen by more than 1/3 since 2009. I have increased that bond fund's share count by about 50% (through rebalancing, reinvested cap gin distributions, and some external purchases), so my monthly dividends have been pretty stable.

My quarterly stock fund dividends have increased somewhat, but they represent maybe 15% of my portfolio.

 

[Danmar]

Most of my dividends are from bond funds, not stock funds. As a percentage of my big bond fund's NAV, the monthly dividends per share has fallen by more than 1/3 since 2009. I have increased that bond fund's share count by about 50% (through rebalancing, reinvested cap gin distributions, and some external purchases), so my monthly dividends have been pretty stable.

My quarterly stock fund dividends have increased somewhat, but they represent maybe 15% of my portfolio.

I understand. So the distributions from your bond funds are characterized as divs. These would be interest or cap gains in Canada.