It’s December and I decided to do a post on what it’s like to live on a nest egg. My situation is I’m fully retired no side gigs age 67 (next month). I should have enough money to pay for my retirement and my wife’s to age 100 with no interest beyond inflation on my investments. I do budget, but I budget in reverse. I budgeted a yearly amount that is 20% more than I live on, so in case I need more money there is an automatic built in excess cushion in my budget. If I don’t spend up to that excess it just counts as a bias against any SORR risk I might incur. In other words if I budget 10k/mo and i spend about 8k/mo so my SWR (and SORR risk) varies downward from safe to safer not vis versa. So I’m always running “to budget” and not “over budget”. It means I never have to sweat it when my wife or kids “need” something. My answer is essentially always yes.
I started winding down my risk profile 3 years ago to a lower risk. It is recommended in early retirement up through 5 years into retirement (10 total years peri-retirement) that risk be cut to a 50/50 allocation. I’m a little over that around 56/44 but close enough. In the past 3 years I added 5% return/yr to my portfolio, 4.3%/yr in the past 2 years, and -5.8% in the past year. Part of my risk “wind down” was to take some post tax brokerage stock and turn it into cash (risk free asset in the short term) to live on while I Roth convert at maximum efficiency, so my actual risk based portfolio is closed to SORR since I’m not withdrawing from it right now but withdrawing from the cash pile. I actually sold at the market high but that was parsimonious and not by design except I decided it was a good time.
This means I don’t need to sell anything or do anything to my portfolio to live for the next 4-5 years. I have enough cash to pay my bills and taxes and live my life. A recession can come or go it won’t matter to my cash flow. As I spend down my cash my AA will once again automatically rise, until RMD when I will take SS and RMD a small remaining bond based TIRA of about 600K which will keep my income in the 12% tax bracket for a long time. So I accomplish SORR protection in early retirement and portfolio preservation by risk reduction in early retirement. When I RMD and take SS, I will then feel free to bring my portfolio risk back up because I will be 5 years in, age 71 and tax streamlined from the Roth conversion. I will convert a little over 1M to the Roth at a net tax bill of 15 cents on the dollar. The Roth will grow as a retirement self insurance account for my wife and myself in case of extraordinary expense like cancer care or assisted living or for a legacy for my kids. My analysis was 5 years of cash is probably excessive but if there is a recession it will prove fortuitous since I sold at market peak. Having never retired before I wanted my bases covered and had only my estimates of what to expect.
Thus far this plan has unfolded perfectly. Certainly a 6% drop this year is unwelcome since I’m as greedy as the next guy, but not at all critical to my or my wife’s well being. This week I further de-risked my portfolio jettisoning some alternatives and real estate and turning that into bonds and low beta to reduce my AA a little closer to 50/50. Those assets were not performing and especially real estate carries a higher risk than the US market so provides a kind of negative diversity in a down market. If the market keeps going down, I will start to sell global and emerging markets since they likewise carry more relative risk than the US market. So my risk management strategy is to sell high risk and turn it into low risk, but stay invested. I also bought some gold miners with some of that money since gold and gold miners tend to be zero to negatively correlated to stocks in a crash. Gold equivalents are cheap to buy now, so I buy low, to sell high when the market is in the tank. I’m still fully invested but my portfolio has somewhat less risk this week than last week and I’m more defended against the bad, which I find desirable in these conditions. I don’t need a home run, base hits will do just fine. What I especially don’t need is to strike out. I’m learning that risk management is the key to portfolio longevity in retirement. I see some posts about “standing tall” and “taking your beating like a man” when it comes to portfolio management. Selling out is stupid but de-risking at least to me makes sense since I’m not replacing my lost dough and poor risk decisions with hard work anymore. I’m done with work. I’m retired.
- Have a retirement plan. Deflation is nothing like accumulation.
- Understand your risk and how to vary the risk and the benefit/consequence of that
- Understand the cash flow as time goes on. SS RMD and when they kick in etc makes a big difference in the plan
- Have a budget and spend under budget
- Have a big enough pile to start
- Plan for your life till death and then for your wife till her death it makes a difference
- Understand your taxes including the difference between married jointly and single, the government is coming for them.
- There are no easy magic formulas or narrative for actual retirement. You get to be the author.
- Retirement self insurance is quite useful since you both are going to die of “something”, and that “something” may prove expensive or even 2x expensive. Dying is a known unknown but planning, even moderate planning gives some control.
- Living real life is not living a narrative. Happiness and peace depends upon living in reality.