One of my biggest concerns about early retirement was
running out of money. What if there was another massive correction in the stock
market? What if my rental properties went vacant for an extended period of
time? What if Financial Samurai died? What if I accrued unexpected medical
expenses? What if I underestimated how much I needed to be happy? Such
worrisome thoughts can paralyze even the best of us.
Whether you decide to retire in your 60s or in your 30s, I’m
here to say the fear of running out of money in retirement is overblown.
Journalists and government officials, most of whom have never retired, have
fear mongered the general population long enough! Through firsthand experience,
let me explain why your retirement life will probably be just fine.
1) You will need less than you think: I’ve been out of the
workforce since early 2012, and my biggest surprise has been how much less I
need to live a comfortable retirement life. Like any good retiree, we plan for
multiple scenarios over an extended period of time before making a decision. I
spoke with at least two dozen retirees about retirement spending and they all
said they are spending much less than they anticipated. For myself, on average
I’m spending 30% less than projected.
It costs nothing to play tennis at a public park. There are
plenty of cheaper food alternatives once you no longer have to work in an
expensive downturn area. You can read all the latest magazines at your local
library, surf the web, and enrich your mind with classic literature for free.
In fact if you look, you’ll find a plethora of free activities.
2) You don’t need to save for retirement once you are
retired: What many retirees “forget” is that once they reach retirement, they
no longer need to save for retirement. It’s not so much forgetting, but being
so accustomed to saving that you just can’t stop! If you’ve spent a lifetime
maxing out your 401k, you’ve suddenly got $18,000 a year more in gross
disposable income.
For the life of me, I cannot stop trying to save at least 50%
of my after-tax income, while also contributing as much as possible to my Solo
401k even though I’m supposed to live it up more in retirement. I tried blowing
money on mid-life crisis cars this year, but both my low-ball offers were
rejected. I tried spending more while I was in Europe for three weeks, but
couldn’t stomach paying more than $250/night after taxes and fees for a hotel.
I still can’t convince my dad to get cable. Old habits die hard!
3) You will adapt to different income levels: For the first
two years after I left my job, my annual income decreased by 70% – 80%. Yet
looking back, there were minimal lifestyle changes. I still lived in the same
house that I had been living in for seven years prior. Refinancing my mortgage
before leaving helped. I still stayed in the same house in Hawaii for the past
30 years every time I visited my parents. I also drove the same paid off car
named Moose for a couple years until I bought a snazzier car in late 2014.
Yes, I had to cut back on eating prime rib for a couple
years. But I replaced $50 dry-aged steaks with $2.5 In N’ Out cheeseburgers.
Yum! $12 toro sashimi was replaced with regular old $4 salmon sashimi. Still
quite tasty.
Just like the lifestyle of a one "percenter" is not much
different from the lifestyle of a middle income person, as long as you have the
basics covered, the lifestyle of a lower income person isn’t much different
from a middle income person either. The lower income person has a harder time
saving for retirement, which ironically gels well with a retiree who doesn’t
need to save for retirement.
As long as I have food, shelter, clothing, dental floss,
companionship, and internet access, I’m 85% of the way there. For most of you,
it’s going to be the same thing. The joy of doing anything you want, whenever
you want more than makes up for a lower income.
4) You will be in a lower income tax bracket: The great
thing about making less money is that you’ll be in a lower income tax bracket.
Therefore, you’ll have a relatively higher amount of disposable income for each
dollar earned. It felt wonderful going from a 39.6%, 35%, or 33% marginal
income tax bracket (depending on my deductions and bonus) to a more reasonable
25% tax rate for a couple years. Just imagine killing yourself at work for 70
hours a week to give over 50% of some of your income to a fiscally
irresponsible government. No thank you.
The double benefit of no longer having to work and paying
less taxes made me much happier. Paying less taxes will make you much happier
too.
5) You will find many ways to make money: If you retire with
only part of your living expenses covered, logically you’ll need to come up
with a solution to cover the “income gap” required by your desired lifestyle.
Throughout our entire careers, we are always asking for more. Thus, in
retirement it’s often hard to accept less. But once we learn to control our
egos, a bevy of new income earning opportunities materialize.
Since retiring, I’ve done consulting with four financial
technology companies at an hourly rate 60% – 80% less than what I used to earn
at my full-time job. Initially, it felt odd making so much less. But I soon got
over it because the experience was fun and I was learning something new. I even
let some people who had no idea what they were doing, tell me what to do! The
experience was insightful because it allowed me to write the post, How To Get A
Job You Do Not Deserve.
Then, I really squashed my ego and spent time driving for
Uber for $25 – $35 net an hour. One time I picked up an ex-client at his place
in Pacific Heights. Perfect. I wanted to see if making a living driving was
possible. It’s hard, but doable. The experience was good and driving added
about $5,000 more gravy to my plate in 2015. From there, I wrote some articles
about my experience and added another $5,000 through driver referral income. I
still pick up passengers when going long distances to make gas money.
If you don’t have a car, not to worry. Recently, I hired
some “Taskers” from TaskRabbit to help transport some furniture from a buddy’s
place to my house this past weekend. After paying a 35% (!) commission to
TaskRabbit, the Taskers still made $54 an hour. Further, they had a couple
other “tasks” lined up that day. And if you aren’t strong enough to be a mover,
you can do a hundred other tasks that don’t require muscle, like cat sitting.
If you’re allergic to all animals, don’t worry. You can
always sign up to be a greeter at Walmart or flip burgers at McDonald’s while
also eating free food. You’re not too proud to work a minimum wage job are you?
If you are willing to swallow your pride and make much less
than you once did, you’ll have no problem making up the income gap between your
covered expenses and your desired lifestyle.
6) You have more to offer than you think: When I left
finance, I thought I‘d be done for good because I didn’t think I had any
transferable skills like a software engineer or electrician. When you’re used
to doing one thing for a large portion of your life, you begin to doubt your
versatility. Every colleague I spoke to felt the same way, which is why so few
ever leave.
Having transferable skills is overrated. All you really need
is to be: 1) likable, 2) trustworthy, and 3) consistent. To make life easier,
build a high EQ. Anything technical can be learned on the job. Think about how
much you remember from high school and college. Not much! The CEOs earning $25
million a year aren’t coding or rewiring your house. All they’re doing is
managing people, building business relationships, and making decisions.
Given you’re close to or already retired, what you’ve got
more than most is experience. Experience cannot be taught or bought. Acquiring
it takes time. Your experience is extremely valuable. I never anticipated
companies approaching me for online marketing consulting work. But at least
eight firms have done so because over the last seven years with little
budgeted, I’ve organically built my own platform into something significant.
For any startup that wants to build its brand online, this is valuable
experience.
7) Your existing assets have upside: You might have a
business that invites couples into your home to learn how to cook. Why not
expand and shoot videos of the cooking sessions to sell online?
You might have rental property that hasn’t been spruced up
in a while. Perhaps if you did some minor remodeling, you could get a much
higher rent.
Your investments might not be properly allocated based on
the current state of the economy. Perhaps instead of having 50% of your assets
in a Treasury bond yielding 1.5% in a bull market, you could double your money
by allocating more to blue chip dividend stocks that pay more than a 2% yield
and provide stronger capital appreciation. Or perhaps instead of having 100% of
your net worth in public equities, you should be more diversified in order to
not get pummeled during the next downturn.
It’s rare that all of our assets are fully optimized. Only
car manufacturers are able to trick us into changing the oil every 3,000 –
5,000 miles. The reality is, if you didn’t change the oil and spark plugs for
10,000 miles, your car would probably still work just fine!
If necessary, we can probably all do some fine-tuning to
make our existing assets generate more income. It’s just a matter of taking the
time and expending the energy to make it happen. Don’t let a steady paycheck
make you comfortably numb!
8) You can always tap your pre-tax retirement accounts
early: If you so happen to retire before the age of 59.5, you can follow Rule
72(t) and withdraw money from your pre-tax retirement accounts penalty free
provided that the holder take at least five “substantially equal periodic
payments” (SEPPs).
According to the IRS, the maximum you can borrow from your
pre-tax retirement account such as a 401k is (1) the greater of $10,000 or 50%
of your vested account balance, or (2) $50,000, whichever is less. For example,
if a participant has an account balance of $40,000, the maximum amount that he
or she can borrow from the account is $20,000.
Finally, you could simply pay a 10% early withdrawal penalty
if you were absolutely desperate. Luckily, if you incur unreimbursed medical
expenses that are greater than 10% of your adjusted gross income in that year,
you are able to pay for them out of an IRA without incurring a penalty.
9) You can create your own destiny: Let’s say nobody at
McDonald’s is willing to hire you. Why not be your own boss? Startup costs are
extremely low nowadays. All you’ve got to do is throw up a site for less than 5
bucks a month and you’re literally in business.
After retiring, I wanted to take Financial Samurai more
seriously. So I committed to writing at least three posts a week by spending
2-4 hours each morning before tennis. I didn’t know exactly how I was going to
build the business, but I knew that if I kept on writing, opportunities would
arise. After a full year of sticking to my plan and publishing my freedom book,
the traffic on this site grew as did its income.
My story is a classic case of “do what you love to do, and
the money will follow.” To maximize profits, I should spend more time
optimizing this site. But why bother when this site’s income is already a
bonus? I’m having too much fun to go back to a stressful work mindset.
The key is to just start your own site/business endeavor.
You don’t need to have all the variables pre-mapped because as you tinker, your
variables will change. Overanalyzing a situation will make you do nothing.
YOU’RE STRONGER THAN YOU THINK: If you’ve been able to
entertain legitimately the idea of retiring early, then you probably also have
the intelligence, courage, and game plan to adapt to any unexpected changes
that happen after retirement.
Change is scary. But the fear in your head is almost always
greater than the reality. Just make sure you have something you enjoy doing
once you pull the "ripchord". You might have so much time you won’t know what to
do with yourself!
Sam Dogen of the Financial Samurai.
