This article was first posted January 1, 2015.
November 2014 marked the twentieth anniversary of that glorious day back in 1994 when I quit my job as an Engineering Supervisor with a Fortune 500 chemical company and decided to live off my savings. Like most people, I was willing to do what I had to to earn a living. But once I'd accumulated enough invested capital to safely meet my living expenses, I really didn't have much of a reason to show up for work in the morning. So at age 38, I quit.
How much do you need to retire? -- the 4% rule
When I quit working in 1994, I'd amassed savings equal to about 25 times my annual spending -- in other words a 4% withdrawal rate. I deemed that safe based on the fact that university and charitable foundation endowments typically spend around 5% of assets per year, so using a 4% withdrawal was conservative. I didn't come across William P. Bengen's "safe withdrawal rate" study until 1997 after I'd been retired for 2 or 3 years. Bengen's work seemed on the mark and a similar study by three Trinity University (San Antonio TX) researchers confirmed Bengen's results. I even took the Trinity Study a step further and used their methodology and Robert Shiller's 1871-2002 database of interest rates and stock market returns to do my own study covering that much longer period -- the 4% withdrawal still survived.
3% is the new 4% rule? -- only if you're letting a financial adviser skim the other 1%
Dr. Wade Pfau, a "professor of retirement income" at the American College for Financial Services created a bit of stir with his January 2013 research report "Low Bond Yields and Safe Portfolio Withdrawal Rates". Pfau and his co-authors argued that today's low interest rate environment calls the 4% rule into question -- better trim that to 3% if you want your money to survive 30 years.
Regrettably, few noticed that Pfau's robust 10,000-run Monte Carlo simulation assumed a 1% skim rate for a financial adviser and the mutual fund managers he or she recommends. That was far more detrimental to portfolio survivability than the low interest rates. It's possible to put together a diversified portfolio at a low-cost provider like Vanguard for annual expenses of 10 basis points (0.10%). The best 401k plans like the Federal Gov't Employees Thrift Savings Plan operate with less than 3 basis points in annual expenses (0.03%). Losing a full 1.00% (or more) to an investment adviser is nothing short of financial rape.
If you avoid the drag of a financial adviser's fee and high cost mutual funds, your retirement stash will grow that much quicker. Over the past 20 years my retirement portfolio has grown enough so that my annual living expenses today only amount to about a 1% withdrawal. In effect, I'm now living comfortably on the annual fee many people lose to a financial adviser.
Maintain your asset allocation through thick and thin.
The last 20 years have given investors a real roller coaster ride. The bull market of the 1990's brought the Technology Bust of the Year 2000. The housing bubble of the new century's first decade was followed by the 2008 economic collapse in the waning days of the Bush Administration. The stock market is now routinely hitting new highs again while home prices and middle-class wages lag in much of the country. Despite all that, if you remained invested and maintained a reasonable asset allocation, you did just fine. (The chart below shows the 1994-2013 performance for several retiree portfolios under the burden of a 4% withdrawal. The 2014 inflation-adjusted annual withdrawal of $6,225 amounts to just 1.13% of the $548,612 year end balance for the best performer, the Harry Dent Portfolio.)
I spent the first 10 to 12 years of my retirement taking long road trips for several months out of the year from my base in Houston. (I've now visited all 50 states more than once and most of the Canadian provinces, too.) As a result of all that "research", I decided I really liked the Pacific Northwest (basically the area from Juneau, Alaska south through British Columbia, Canada and down to Portland, Oregon and west of the Cascade Mountains.)
By 2006, I decided to rent a small apartment in Southwest Washington near Portland and spend a greater part of the year in the area. I soon learned that despite Texas's reputation as an inexpensive place to live, many items like food, health insurance, and property taxes were cheaper in WA State. In short order, I established residency and started spending the requisite 6 months out of the year in WA State. By 2012, the real estate bust afforded me an opportunity to buy a recently remodeled condo in the neighborhood for six times its annual rent. In Houston, where you could rent a comfortable apartment with a pool and tennis court for $500-$600/month, there was little reason to accept the burdens and hassles of owning a home..
Obamacare wrecking the country? -- it's a windfall for most early retirees.
As anyone who's purchased a health insurance policy on the individual market knows, health insurance is a lot more expensive if you're not getting the "bulk discount" of a large employer's plan.
After my COBRA benefits expired, the first individual health insurance policy I purchased cost $1,900/year for a policy with a $100 annual deductible and $1,000 maximum annual out-of-pocket cost. By 2013, I was paying $8,800/year for a policy with a $2,500 annual deductible and $10,000 maximum annual out-of-pocket cost. A more than 400% premium increase for a policy with less comprehensive benefits. (During the same period, the CPI increased by about 50%.)
As Retire Early noted in the November 2014 update "Why I'm Not Worried About Obamacare Premium Increases" even retirees with millions of dollars in investments should be able to manage their income to qualify for a significant refundable tax credit. My annual health insurance premium dropped from $8,800/year to $2,400/year for a policy with more comprehesive benefits (e.g., Obamacare threw in a free colonoscopy -- a $2,800 out-of-pocket cost under my pre-Obamacare plan.)
If you're getting your Obamacare information from Fox News or another right-wing resource, you owe it to yourself to make a visit to the Health Exchange website. You're likely leaving thousands of dollars on the table in reduced premiums and tax credits.
Reducing spending during stock market declines? -- not when travel bargains abound
Conventional wisdom advises retirees to reduce spending during stock market declines to improve portfolio survivability. That may make sense if your annual budget contains a lot of fluff like expensive travel or a new car every 2 or 3 years. But if you've retired closer to the bone, it's a lot harder to reduce ongoing expenses like like health insurance premiums or property taxes if there's no "fluff" to cut elsewhere.
When the economy crashed (along with the stock market) in 2008 during George W. Bush's last year in office, I noticed airline fares and cruises started to get really cheap. I started traveling extensively as a result to take advantage of the bargains (2 or 3 two to three-week cruises a year.) I've now seen all seven continents (even Antarctica.)
By the end of 2013, I'd seen everything I wanted to see that was accessible by cruise ship and was looking for something new to do. I noticed that it was fairly inexpensive to rent a small plane in the Portland area (e.g., $80/hr for a two-seat Cessna 150 to $285/hour for a six-seat, twin-engine Cessna 310 -- fuel included!) I started taking flying lessons over the Summer and got a Private Pilot's license. (I'm now working on an Instrument Rating so that I'm not grounded for the bulk of Portland's 7 to 8 month long rainy season.) The Pacific Northwest is one of the most scenic areas of the world to fly a small plane.
Any regrets? -- yeah, I wish I retired earlier.
I can honestly say I haven't been bored for one minute in the last 20 years. The ultimate luxury is not having anything you have to do, or anyone you have to report to. Essentially, I'm able to do whatever interests me at the moment, 100% of the time.
It's also astonishing how quickly time passes when you're retired. The past 20 years just flew by in comparison to how slowly time passed while I was sitting in an office during my working years. I'm profoundly grateful that I was able to amass the financial resources required to retire early. And while there's been ups and downs, the stock market has cooperated in providing more than adequate investment returns over the long run.
I'm looking forward to the next 20 years.
Resources for more information
Career Advice for Budding Early Retirees.
Vanguard's fees are costing me a new car? (2013) You'll have to save a lot more for retirement if a financial advisor and the mutual fund managers he recommends are taking a lot of your wealth in excessive fees.
The Federal Thrift Savings Plan: A Model for the Private Sector? (2008) Lobbying arm of the mutual fund industry complains that it's not fair to compare their products to the low costs of the TSP.
ExxonMobil Savings Plan Brochure (PDF) -- Fund expense ratios and 401k mgmt fee on page 17 of document. Annual fees ranges from 2 basis points for the bond fund to 6 basis points for the international equity fund.
USA Today -- Are fees draining your 401(k) retirement savings? (Aug 25, 2009) Article notes that some small company 401(k) plans can have annual fees & expenses as high as 4.8% of assets.