Confidence to Pretire: Know Your Levers

“Will I run out of money?” is the most prominent question people start their pretirement planning with. After pondering it for several years myself, and as a member of a married couple, I think it is a flawed question. A much better and more liberating one is, “What are the many ways we can adapt our lives so that we always have more than enough?”

Having a plan for pretirement is comforting and exciting but it can also feel constraining.  Our Vanguard Personal Advisor Services plan is adaptable but it can also feel like driving on a freeway to reach an appointment in another city with someone important who is expecting you:  Will traffic slow me down?  Do I have enough gas?  Will I take the wrong exit and get lost?

I find that using retirement calculators, though handy, is similarly stressful.  Each one seems to be different and none are able to incorporate all of the many variables in a person or family’s life.  It’s not possible.  Retirement calculators and professional financial plans have their place in the toolkit but should be kept in perspective.  The biggest tool we have is the flexibility to adapt.

What is different about your life from ten years ago, major changes that you didn’t expect to happen?  Are you living in a new city?  Did you have more kids or no kids unexpectedly?  Are you divorced?  Married to someone you didn’t know ten years ago?  Managing an illness you didn’t expect?  In a new career?  Back in graduate school?  The point is, life is not fully predictable, which makes financial plans and retirement calculators of limited utility.

One adapts to change.  “Embracing Change” is one of those workplace cliches but it is a mandatory mind and skill set.  I’ve known people who hunker down and ignore change as a coping strategy but they often end up worse off.  Rather than hunkering down and ignoring change, it is usually more successful to keep one’s antennae in the air, making small adjustments as change is warranted rather than waiting to be forced to make really big changes that have been ignored.

Happily, as in any other sector of life, we can anticipate and embrace change by adapting our pretirement plans.  Those documents and calculators can give the impression that we only have a binary choice:  Work until we don’t have to work at all anymore or quit sooner and watch all the money run out. The problem is plans and calculators cannot encompass the nearly infinite variety of options a person has across the next 30-plus years of pretirement and retirement in a changing world.  

After years of reading enjoyable financial blogs and books, listening to podcasts and playing with partially-helpful calculators, I’ve mentally broken through to viewing pretirement as an adventure, not a calculation. Adaptation is its key rather than a huge portfolio. I am no longer as concerned about running out of money as I was when I started this journey of self-education and preparation.  Rather than the simplistic and limiting “Will I run out of money?” output, the question has evolved for me to “What levers can I pull and when that will give me the income I need to foster maximum self-determination and happiness in my life?”

Levers To Pull in Pretirement

What are some of the tools at our disposal to ensure that we don’t just sit in our chairs until suddenly, in total surprise, the portfolio fails and all the money runs out?  Here is a very partial list:

  1. Part-time work of some kind, either self-employed or working enjoyably for someone else, or maybe both at the same time.
  2. Run our house as a vacation rental.
  1. Rent out our house long-term and live somewhere else.  That would be a break-even proposition right now, given our mortgage, so there’s little value in doing it.  Someday, the economics might make more sense.
  1. Downsize our house.  Lots of people live in smaller and less-expensive condos and apartments than the house we live in.  This 103 year-old house has two sets of stairs and a big yard that we might tire of working on someday.  If we sell and downsize, buying or renting a less-expensive place to maintain, clean and operate, several points are added to the confidence level.
  1. Refinance the house.  This doesn’t make sense now but we might like to leverage our equity in the future.  I don’t love the idea of reverse mortgages but it’s another viable way for older people to finance retirement.
  2. Sell the house and buy a duplex, living in half.  Such a move could help neutralize one’s mortgage.
  3. Co-housing is a mostly-European concept but is also practiced in America.  It’s a way to share expenses and create a community of human relationships, both of which are important for a comfortable and happy life.  I plan to explore this topic more in future posts, just because it sounds interesting.
  4. Move to the country or a smaller town.  We find lots of ways to spend money enjoying our city.  If we had to, we could move to a cheaper area.  Lots of people do, which changes their economic picture.
  5. Move to a different country.  We have friends who live much of the year in Latin America and I had an uncle who hit hard times and moved to Costa Rica, where he could afford to get on with his life.  There are lots of expats living adventurous lives in less expensive countries.
  6. Simply reach age 70 before we take Social Security.  Taking Social Security at age 62, as most people do because they choose to or have to, provides a subsistence level benefit.  Waiting until 70 allows the payment to increase by 8% for each year one holds off.  This additional 8 years of compounding makes waiting until 70 a whole other proposition and can allow an above-average income in retirement all by itself.  For someone who has not saved, simply figuring out ways to literally buy time until age 70 could be the way to go for their retirement.
  7. Buy adequate insurance.  We have lots of it:  car insurance, home insurance, long term care insurance, term life insurance, liability insurance, even smart phone insurance.  Nothing can solve all financial problems and protect us from losing all of our assets in any eventuality but we can dramatically reduce the odds of and damage from such an event.
  8. Avoid debt.  Eliminating all debt beyond a low interest mortgage in pretirement gives a person flexibility to pull many other levers elsewhere.
  9. Allow for financial upsides.  So much of financial planning is anticipating and managing risks that are downsides.  What if good stuff happens, too?  The financial markets might perform better than expected.  None of the experts ever predicted the creation of Facebook, Amazon, Apple, Netflix or Google or, for that matter, any other company in the S&P 500. Other transformational companies will surely appear. Also, is your city growing?  If so, your house might go way up in value.  You might get an inheritance you didn’t expect.  Who knows?  I once worked with a woman who kept some stock in a small company she helped found decades before.  One day, she announced her retirement, completely unplanned, because her former partners had sold the business for big bucks.  We wanted to throw her a retirement party but she said, “Thanks but nah, I’m good. Bye-bye.”  The point is, optimism is no more expensive than pessimism.
  • The “Will I Run Out of Money?” retirement planning mindset is too fear-based and suffocating.  However, once you inventory all of the levers you have to pull that could prevent you from ever running out of money, you might very well find that spending your last dollar actually becomes much less likely to occur than making some of the many moves at your disposal to keep going. Maybe you’ll have less money after full-time work, as will we, perhaps, but having lots of money isn’t what makes us happy. Freedom and more time for greater fulfillment are better rewards.
  • What are some of your own levers?

    Literally no one is going to sit in their chair in pretirement, look at their financial plan and say to themselves, “This says I will run completely out of money in five years.  Gee, I guess I’m doomed to having the lights go off.”  No, you’ll get up out of your chair when you start to feel concerned and will pull some of your levers to adapt.

    The inevitable changes in life and our adaptations to them imply adventure to me.  I see my inventory of levers as forms of power to manage my life.  I also like the thought of employing them to benefit our own lives a lot more than the usual American work-full-time-until-you-can’t model that serves many others’ economic interests.  I figure, perhaps the best thing I can do for others whom I love is to first try to be happy and engaged with maximizing my own one life.

     

     

     

     

     

     

     

     

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    The Pretirement Swim Through the Asset Isles

    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.

     

    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.