A lot of planning in life seems like figuring out how to reach the next island. You aim for the right college, then the right job, then a series of jobs, marriage, buying a house, kids 1, 2, 3 if you have any, moving to a new city, pretirement – all are major island destinations in Life’s Archipelago. At each stop, one climbs onto a new shore of experience and maturity, surveys the landscape and settles in for a spell. Pretty soon, all prior change is digested and another island of achievement and growth beckons on the horizon.
During the career phase of life the journey is sustained largely by a salary or two in the household. It is rare for a person to enter pretirement and be able to instantly command an equivalent income to the salary that got them there. Instead, they usually have to assess the islands of assets shimmering out in their future, which they’ve created during their career, and begin swimming to the shore of one, consuming what they need there, then swimming to the next one.
These “Asset Islands” have a lot of variety and include retirement accounts at work, IRAs and Roth IRAs, taxable brokerage accounts, home equity, rental property, work in pretirement, a new business, annuities, pensions and Social Security.
I’ve explained how my wife and I hacked our retirement accounts at work earlier than most people do to start our pretirement by using the little-known Rule of 55 . She is presently dialing work down and enjoying a kind of self-determined sabbatical while she explores when and how to dial paid work back up again. Vanguard Personal Advisor Services built our financial plan specifically with such periodic sabbaticals in mind on the way toward reaching the final island in the chain, a place we might call No-Work-Atoll (sorry if that’s a groaner).
When she finds her next job she will probably earn less money than in her last role as a busy manager. That’s possible for us to absorb, because anticipating much lower salaries in the future is also built into our plan, as is the number of years we think we’ll work at them. The plan’s DNA is, obviously, what we perceive will be greater happiness due to having more time for travel and individual pursuits. Money is one of the means.
We know how we want the next 3 years or so to go. Beyond that, it’s progressively hazy. We also know that Stuff Happens. If a few years from now we want to dial work and compensation up or down, based on what we think will make us most happy at that time, we can adjust the plan to project what the consequences to our stash will be. If we decide we’ll obtain maximum happiness from working until we drop, which would be a surprise, we can rebuild our plan that way instead.
Though I’m working full-time, as I have for decades, she has swum to the first island, which is her Thrift Savings Account (TSP), and is shaking herself dry in the shade of a coconut tree, rejuvenating for an undetermined period with a nice fresh mango. I have not decided when I’ll swim to my 403b Island, (the 401k for the non-profit sector) so my first goal is to reach the calendar year in which I turn 55. At that point, I’ll have the option to leave and start consuming 403b Island if I want to. After that, our Vanguard plan calls for generally spending down our taxable assets first, the rest of our 403bs and TSP, then our large IRAs and lastly our Roths.
A major destination on our swims is to reach age 70, we hope, at which time we’ll step onto Maximum Social Security Isle, the Big Island we’ll never leave. That’s a major, annuitized land mass in our future budget, projected to pay about 2/3 of our needs per year. Rather than taking Social Security at 62 as most people choose or need to do, our plan will have allowed us to wait for as long as possible, which is to age 70, giving our Social Security “annuities” time to grow as bountiful as can be.
It would take the savings equivalent of a couple of million dollars to generate two thirds of our income needs per year sustainably like maximum Social Security will. Yes, I know the news media, looking for doom and gloom to stimulate and scare us, tries to make us believe Social Security will disappear. Many FIRE enthusiast assume zero Social Security. However, there are several ways to save this system that millions of voters depend on, and even the worse case, informed scenarios envision only 25% cuts to payments, which our plan can accommodate.
If you haven’t done it, it is comforting and worthwhile to go to the Social Security website and compare how much more you will receive each year if you do not take the payments at 62 but wait until you are 70. It’s the equivalent of an investment that grows at 8% per year for those 8 years. Multiply that largest-possible annual amount by 25 and consider that annuity value in the millions of dollars an additional component of your future portfolio. It’s pretty compelling to think this way!
Even after reaching Maximum Social Security Isle and setting up a permanent camp, we can enjoy the benefits of day trips to other places of non-work, most prominently our Roth IRAs, which are sizeable now, are invested aggressively in 100% stock index funds, and still have 15 and 17 years, respectively to percolate and compound for my wife and me before our plan calls for starting to bring them online if we want or need to. The nice thing about Roths versus Traditional IRAs is that we don’t ever have to pay any taxes when we tap them, nor are we forced to start spending them at age 70.5 to begin paying back deferred taxes through Required Minimum Distributions. As noted before, our plan’s idea is to have paid down the Traditional IRAs and 403bs so that Required Minimum Distributions aren’t much of a hit.
We might still have our low-interest mortgage until I’m age 79. Or, we might sell before then and move to, well, an island somewhere. Either way, this residence contains home equity that is building up every year, which is another asset island we can draw from, sooner or later. Even if we stay in this house until we swim no more, we have the option of a reverse mortgage to keep the party going. Or hire a property manager to rent it out. Again, that’s so far out into the future that we don’t think about it much.
As I said, our plan has us working some or a lot, as we choose, for many years to come. If we really, really wanted to stop working right now, we probably could, but it would require some fairly major adjustments that we aren’t feeling motivated to make. We could move to a lower cost of living area or even a different country as many, many American expatriates do quite comfortably, never to see a staff meeting again.
Maybe my wife and I will continue to find new islands of full-time work that will inspire us to swim to them. On the other hand, maybe we won’t, in which case we’re prepared with a plan to be able to thrive on some of the asset islands we’ve built up. Either way, the swim will be an adventure we intend to be ready for.