Retirement Interview 26

Here’s our latest interview with a retiree as we seek to learn from those who have actually taken the retirement plunge.

If you’d like to be considered for an interview, drop me a note and we can chat about specifics.

This interview was conducted in July.

My questions are in bold italics and his responses follow in black.

Let’s get started…

GENERAL OVERVIEW

How old are you (and spouse if applicable, plus how long you’ve been married)?

My wife and I are both 62.

We’ve been married for 32 years.

Do you have kids/family (if so, how old are they)?

We have two daughters, ages 26 and 23.

What area of the country do you live in (and urban or rural)?

We live in the suburbs of a major city in the Northeastern U.S.

RETIREMENT OVERVIEW

How do you define retirement?

In a word, freedom.

To me it means you have the means, ability, and opportunity to do what you want.

Financial independence is a necessary but not sufficient condition. Equally important is embracing the mindset that you are free to choose the path that you want, as opposed to a path you think is prescribed by societal norms or expected by people who are influential in your life.

If your path happens to include paid work that is fine, so long as you are doing it because you want to, not because you feel you must. Alternatively, if pursuing self-enlightenment via a Tibetan spiritual retreat is on your bucket list then go for it, even if your in-laws think you’ve lost your mind. It is quite possible they never liked you very much anyway.

How long have you been retired?

That is a bit of a tricky question. I left my job about 6 years ago, so that is when most people would say I retired.

However, after leaving my job I spent the next 1.5 years doing consulting and other things that I felt pressure to do but wasn’t fired up about.

About 4.5 years ago is when I finally started living in accordance with my definition above.

Is your spouse also retired?

My wife chose to leave the workforce about 20 years ago to raise our daughters full-time.

I suppose you could say that once our daughters reached adulthood, then my wife de facto retired. She had no interest in returning to the workforce.

What was your career and income before retirement?

Before retiring, I had a 35-year career in IT. For the final 10 years or so of my career, I was a C-level technology executive in a global financial services firm.

In my C-level position, most of my compensation was performance-based so it varied from year-to-year. A typical year late in my tenure would look like this:

  • $400K salary
  • $300K bonus
  • $500K equity award
  • $250K of deferred executive retirement compensation

The equity award was subject to a vesting schedule that spanned +/- 5 years, and the deferred executive retirement compensation was internally accrued by the company and paid as a lump sum when I left.

Beyond this compensation, my retirement benefits included a 401K savings plan and a defined benefit pension.

In addition to this earned income, our investment portfolio generated anywhere between $300K – $500K per year of passive income during the 5 years or so immediately preceding my retirement. The fluctuation was primarily due to yearly variability in realized capital gains and losses.

Why did you retire?

My retirement was voluntary. The pay was great, but my C-level job came with brutal hours, grueling travel, and lots of stress. After holding the job for about 10 years, I was burned out. I knew I wanted to do something different, albeit I had little clue what that would be.

In the short term I wanted to take some time off to decompress, spend time with my family, and consider my future. At the time I left my job, it wasn’t clear to me whether I was truly retiring or merely resigning to recharge my batteries and then take another job.

I formally reported to the CEO, but I also had an informal reporting relationship to the Board of Directors. When I informed the CEO and senior Board members that I wanted to leave, my sense is that they were shocked but not surprised. They were shocked because I was only 56, well-compensated and effective in my role. I don’t believe they considered me to be a serious flight risk. Moreover, in their experience it was almost incomprehensible for someone in the prime of their career to walk out the door without having something else lined up. As a result, they were somewhat stunned when I gave notice.

On the other hand, they knew I was not in favor of some changes in business direction that the company was pursuing. I was quite vocal with the other members of the senior executive team and the Board in my opposition, so it was no secret that I was not a happy camper. For that reason, they likely were not completely surprised. From my perspective, burnout had been gradually building for several years given the grind of the job, but the strain of disagreements over company direction was the straw that broke the camel’s back. I wanted out.

As an at-will employee, I could have left immediately. Had I walked out the door quickly and unexpectedly, however, it could have created significant disarray inside the company and been quite damaging to the both the company’s reputation and mine. None of these outcomes were my intention.

Instead, I engaged in several months of secret negotiations with the CEO and the head of the Board’s compensation committee on the terms of my exit. In theory, my exit should have been straightforward because a succession plan was already in place that looked good on paper. But if things that looked good on paper always worked, the Cowboys would have won another Super Bowl by now. When confronted with the reality of having to implement the succession plan, the CEO and Board got cold feet.

In the end I agreed to stay on for another 9 months to give the company plenty of time to devise and implement plan B. We agreed in the interest of optics to call my exit a “retirement” rather than a “resignation”, and I agreed not to voice my concerns about the business direction beyond a very limited internal audience. Also, I agreed to be available after my exit to help wind up some transition activities.

In exchange, for my final 9 months I was assured of receiving my normal salary and bonus, and in addition I would get to keep some of the equity awards that would vest only after my departure. Specifically, I would be allowed to retain portions of equity awards that would vest within the first two years of my departure (worth about $500K), provided that I adhered to the terms of my non-compete agreement which spanned that same time frame.

Once these secret negotiations were complete, the company went public with my retirement announcement. I was a bit worried if I could effectively conduct my job as a lame duck for my final 9 months. Thankfully, my concerns did not materialize. People inside and outside of the company demonstrated true professionalism until the end.

On a personal note, I started out my final 9 months in a bitter mood. My administrative assistants managed my schedule, and I warned them in advance that I had no intention of attending any sort of retirement celebrations, should anyone propose or plan them. They responded that such gatherings were part of company culture and would happen whether I liked it or not, and they strongly implied that I should just get with the program. I really hate it when others are right and I am wrong, but deep down I knew they were right.

So, I managed to put aside my hard feelings for my final 3 months as I travelled around the world for one last series of meetings, dinners, and gatherings with thousands of staff, managers, customers, and vendors. Sure, some people just showed up for the free food and drinks, but I was there for another reason. I knew that my success was because of all these people, and this was my final opportunity to personally thank everyone, tell them how proud I was of everything we accomplished together, and let them know that ultimately the company’s future was bright because of them.

In the spirit of celebration (and revenge), people told lots of hilarious stories at my expense, emboldened by the realization that my ability to mount a retaliatory strike as a short timer was minimal. These meetings allowed me to get positive closure on my time at the company, did wonders for my mental well-being, and encouraged everyone to move forward in a constructive manner.

As I was leaving the company, one set of events surprised me above all others. For context, believe me when I say that in the financial services industry, there is no love lost between company management on one side and regulators and auditors on the other. As such I was in no way prepared for the following.

After my final meeting with regulators, our lead regulator pulled me aside for a private conversation. I thought it was going to be one final thrashing. Instead, he told me that he could not and would not say so publicly, but he thought I had done a great job and was sorry to see me go. His words absolutely floored me. That was the first nice thing any regulator had EVER said to me.

Soon after, the engagement partner for our external auditor confided to me that he would miss me, and even considered me to be a friend. That was after a full day meeting where we argued like cats and dogs over audit findings. It finally dawned on me that while I took our epic battles very personally, some of my fiercest opponents did not. It really was just business to them. This realization came too late to help my attitude and mindset during my business career, but it has helped me to try to frame interpersonal conflict situations in retirement in a healthier manner. It also taught me that it is never too late to learn, which is a good attitude to have in retirement.

In retrospect, I was happy with the way my exit went. Leaving on a bad note would have haunted me in retirement, probably until the day I die. No matter how tempting it was at times, I’m glad I didn’t just immediately walk out the door in a fit of anger. Leaving a job in a manner you are proud of, or at least can live with, is key to starting retirement on the right foot.

PREPARATION FOR RETIREMENT

When did you first start thinking seriously about retirement and when did that turn into a decision to do it?

I would say that serious consideration started a few years before I pulled the trigger, so around age 53 or 54. As my burnout gradually progressed, so did my desire to leave.

My wife knew I was very frustrated at work, but when I finally told her that I wanted to leave she was a bit taken aback. One or both of us had always worked, and it would be a big change financially and personally if neither of us did. She knew the toll that my job was taking on me and was supportive of my intention to retire, but she was understandably concerned about how we would afford it, what we would do for family health insurance, and most importantly she wanted ironclad assurance that I wouldn’t follow her around the house all day like a lost puppy. Once I addressed these concerns, she was on board.

Still, retiring early is something that felt odd, because very few of my friends, family members, or colleagues had done it. At that point in my life I was completely unaware of the FIRE movement. In fact, the only people I knew well who had retired early were both of my older brothers. I decided to talk to them, in a quest to determine if my idea of early retirement was brilliance or folly.

At some point I had a business trip to the city in which one of my older brothers lived, so I set up a dinner with him and his wife. They had no idea what I wanted to talk to them about. Once I shared what I was thinking about and why, their faces lit up. They both immediately said that early retirement was one of the best decisions they had ever made, and they never regretted it for a second.

As a sanity check for financial feasibility, I asked my brother what size nest egg he thought I needed to pull it off. I know it was an unfair question to ask, as my brother did not know the details of our financial goals, our expenses, etc. But my situation was somewhat like his, and I was only looking for a visceral reaction. When he said $3 million to $5 million, that was reassuring. I knew he tended to be conservative, and that my magic number was considerably higher (as I detail in a later question). I drew comfort from his estimate even though it was rough and uninformed.

A few weeks later I called my other retired brother, and his feedback was very similar. Based on their feedback, I gained significant confidence that I was making a good decision, or at least not a crazy one. I figured if my brothers could pull off early retirement, then I could too.

What were the major steps you took from deciding to retire to developing a plan to do so?

To be honest, I didn’t have anything resembling a plan before I retired. I knew that the classic retirement advice was to start planning for retirement at least 3-5 years in advance. According to the experts you should estimate retirement expenses in detail, do detailed planning of retirement income streams, determine what you will do with your time once you are no longer working, put together detailed retirement plans, “test drive” retirement in advance, gradually phase into retirement, etc.

All this made sense, especially to a left-brainer like me. Problem was, there was no way I had time to do any of it. Before retirement I was running 100 mph at work, and whatever spare time I had I wanted to spend with my family. There was no way I could engage in comprehensive retirement planning.

Furthermore, the gradual transition mechanisms that retirement experts propose were not feasible for me. In my C-level job, you were either all in or all out. Scaling back to part-time, gradually phasing out, etc., were non-starters. And there was no way I would have been happy accepting a lesser role, like a part-time advisory position, while I planned my golden years. My departure was destined to be from full throttle to dead stop (I don’t mean that last part literally), with little advanced planning.

With this in mind, I knew I had to take a different approach in deciding and planning my retirement.

As mentioned earlier, before leaving my job I wasn’t sure whether I was truly retiring, or just taking a year or two off. In either case, I knew there was a very good chance that I would never get another position that paid as well as the one I was leaving. My overriding concern was ensuring that before I left my job, we had a big enough nest egg to sustain us throughout retirement in the event I never returned to work.

For years, every time I thought about how much money was enough to retire on, a little voice in the back of my head would say “just a bit more than you have right now”. I thought about how I could make that little voice go away, without doing detailed planning and analysis that was not an option for me.

Ultimately, I decided all I could do was a back-of-the-envelope financial feasibility assessment. The first step in this exercise was to come up with a high-level estimate of retirement expenses. My wife and I had never budgeted or tracked expenses, so I no history of expense data to work with. Instead, the approach I took was to look at a high-level picture of our current cash flow to discern our overall expenses, and then extrapolate those into retirement. A cursory review of our checking account for the most recent year revealed we had spent around $150K on total living expenses, not including income taxes.

We didn’t feel like we were skimping on our current lifestyle, so I felt a range of $120K to $180K, not including income taxes, was a decent proxy for our retirement living expenses. I figured this was a broad enough range to cover the puts and takes in our retirement spending, without having to dig into the details of what they would be.

I also did a rough calculation of what our tax liabilities would be on investment income and retirement account withdrawals. This indicated that between $80K – $120K would be likely be sufficient to cover our tax exposure during most years of retirement.

The next step was to determine what size nest egg would be sufficient to support this level of spending in retirement. I took a very simplified approach to arrive at my magic number of $10M. My rationale was that even with a conservative investment strategy, a $10M portfolio would have little trouble supporting a withdrawal rate of 2% to 3% (i.e., $200K – $300K) per year, with inflation adjustments.

As added buffer, I knew that my wife and I were both eligible for future payments from defined benefit pension plans, and from social security. We planned to draw starting these payments about 5-10 years into retirement. These would add another +/- $120K per year of income.

I knew that my back-of-the-envelope financial feasibility assessment was hopelessly oversimplified. I also knew that the resulting $10M magic number was overkill. Seriously, what kind of idiot thinks he needs $10M just to get by in retirement? However, overkill is what rendered a more comprehensive and detailed analysis of expenses and income moot. Given so much slack in the estimate, even if our expenses proved to be much higher or our withdrawal rate had to be lowered, I knew we would be fine.

There were a few other reasons I wanted an oversized nest egg. Despite employing extensive financial risk management measures, I was worried that a black swan event could potentially threaten a significant chunk of our assets. Maybe we would be the victim of a cyber theft, a lawsuit, a financial scam, uninsured medical costs, or even an extreme bear market triggered by a global pandemic (OK, clearly this last one is far-fetched). I wanted our retirement to be in good shape even if a black swan event resulted in a loss of +/- 50% of our portfolio.

In addition, we were keen to continue investing in our daughters and to leave a substantial legacy to family members and charities. Thus, we preferred not to consume our whole nest egg on our retirement. Bottom line, overkill was necessary to convince myself that we could not only safely fund retirement, but we could achieve our other financial goals as well. Overkill was also the key to making that little voice in the back of my head stop saying, “you need just a little bit more” and start saying, “it’s time to get out of Dodge”.

Beyond hitting the $10M magic number, the other key thing I was waiting for before retiring was to reach age 55. That is when I would become eligible for guaranteed health care coverage in retirement under my company’s retiree medical plan. I would have to pay handsomely for it ($30K – $35K per year for full family coverage), but affordability was not a concern. It is premium coverage, and most importantly is was the lowest risk option of assuring family medical coverage until my wife and I are eligible for Medicare.

By the time I turned 55, we had reached our $10M magic number. At this point I was determined to pull the trigger, at a time of my choosing. I ultimately decided to give my notice at 56. The reason I waited was to shepherd some key work projects to completion, and to time my notice after my yearly bonus was paid and another round of equity awards had vested to remove the potential risk of not receiving them once I gave notice.

What did your pre-retirement financials look like?

Here is what our financial picture looked like as I was leaving my job, including the investments I made with my immediate exit package payments. Our net worth at the time was approximately $15.2M, with the following components…

$13.0M investment portfolio, consisting of:

  • $1.5M cash in various bank accounts
  • $2.1M in various traditional 401K and IRA accounts – $1.8M was invested in in stable value funds, and $0.3M in stock mutual funds
  • $2.8M in bond mutual funds in taxable brokerage accounts
  • $6.1M in stock mutual funds in taxable brokerage accounts
  • $0.5M in alternative investments in taxable brokerage accounts – these were invested in REIT and commodity funds
  • $0.7M in tangible assets – house (no mortgage), cars, personal property
  • $1.5M in defined benefit pensions – this represents the amount required to buy an annuity that would provide the same income stream as our pensions

We have no debt, except for credit cards which we pay off every month.

I didn’t count the projected value of our social security benefits as part of our net worth, as I seldom see that included.

We also had about $0.4M set aside for our daughters in 529 accounts. I am technically the owner, but I don’t count this as part of our net worth because these funds are dedicated for our daughter’s college and graduate school costs, and we plan to let our daughters keep any residual amounts when their educations are done.

I think it is worth mentioning that I am a firm believer in constructing a portfolio with low-cost mutual funds and ETFs, offered by institutions that have demonstrated the highest integrity and fiduciary responsibility. Many of our funds are index funds, and those that are actively managed are low-cost compared to their peers. Picking individual stocks and bonds is not something that I have the knowledge and skill to do well, so I’m happy outsourcing this at a low cost to institutions and managers I trust.

Did you make any specific moves to prepare your finances for retirement?

We retired all long-term debt, which was our mortgage and car loans, but that’s about it.

I made quite a few financial moves once in retirement (as detailed in a later question), but not before.

How did you tell your family and friends of your plans?

My wife and two older brothers were the only people I consulted during the decision process.

Before informing the CEO and Board of my intention to leave, my wife and I told our kids what I was about to do. I assured them we had enough money to pull off retirement, and that we would for sure cover all their college costs as we had always planned. They didn’t have many questions or concerns; their overall reaction was more along the lines of “whatever dad”.

Just before my company went public with news of my retirement, my wife and I informed a broader set of people, such as our parents, siblings, and some friends. Family and friends probably thought I was nuts to leave my job, but they were nice enough not to say so to my face. I’m sure they were wondering how, or even if, we were going to pay for everything in retirement, especially with 2 kids in college. We are very private about our finances, so none of these people had a firm idea of our financial situation.

Of course, the first question everyone asked me was what I planned to do once I left my job. I told them the truth – I wanted to take some time off, spend time with my family, think about what to do next. I knew that many of these people were thinking exactly what I would have been thinking had I been in their shoes: “geez, no wonder he’s retiring early, the poor guy just got canned”. Sometimes these reasons are the truth, not just corporate speak that you are being forced out.

RETIREMENT LIFE

How was the adjustment, especially the first few months after retirement?

The first thing I did upon leaving my job was to take a trip to visit my father. I did not have a lot of chances to visit him during my working years, because I was very busy, and he lived halfway across the country. My mother had already passed away, and my father, who was in his late 90s, had been ill for some time. However, I had not realized how ill he was until I got to his house.

I was able to spend a few days with him, and he passed away just a few hours after I left his house to return home. That was an intense way to start retirement, but I was thankful that I left the company when I did, or I may not have had a chance to see him one last time.

After that, I spent 2 months pretty much full-time finishing up transition work for my old company, per my exit agreement. When I completed this, my work commitments to my old company were done.

Immediately after finishing this transition work, I spent the next 4 months coaching a local high school sports team. The prior coach had unexpectedly quit, and the school was having trouble finding someone who was remotely qualified and could fill in on short notice. I happened to have a background in the sport and was now suddenly available, so the school asked me. I agreed, mainly because my youngest daughter was on the team and in her final year of high school, and I wanted her to have a good experience.

The kids were great, and despite the rookie coach we had a successful season. Nevertheless, it was a tough transition to go from C-level executive to coach of a bunch of teenagers. Usually it is the players who are one-and-done, but this time it was the coach. I was happy to do it for my daughter’s sake, but I quickly learned this was not how I wanted to spend my time in retirement.

Next, I accepted a full-time consulting assignment for six months that started immediately after the season was over. A friend of mine in private equity urgently needed someone to temporarily fill a senior leadership position until he could find a permanent replacement. I did it as a favor to my friend, and to get first-hand exposure into the workings of private equity. For reasons too numerous to mention, this was no fun at all. This was not how I wanted to spend my retirement.

Before I knew it, a year had gone by and I had done almost nothing that I wanted to do. It is hard to say that my first year did not go as planned because I didn’t have a plan, but this was not at all what I had expected.

The second year started out in a similar fashion. For the first half of the year, I was busy with more consulting assignments at the request of friends and former colleagues. These assignments sounded good at the start, but as they un-folded I found them to be a poor match for my skills and interests.

It was at this point that I finally decided enough is enough, and I started saying no to virtually all opportunities for consulting, advising, full-time employment, etc. When you start saying no to everything, friends and colleagues eventually stop asking, headhunters stop contacting you, etc. I didn’t care much, however, because by this point I was about 95% sure I did not want to return to paid work. This is when I considered myself to be truly retired.

For many people, one of the biggest problems to deal with once they stop working is the loss of a broad set of things associated with a job: identity, power, prestige, social interactions, health care and other benefits, steady income, etc. Losing most of these things didn’t bother me much, I guess because my mindset at the time was “been there, done that, time for something new”.

The only thing that really bothered me was the absence of a steady paycheck rolling in every month. Rationally speaking it should not have been a concern. I obviously knew that in retirement there would be no paycheck and I was well-prepared to tap our portfolio for living expenses. However, after 35 years of aggressively saving and investing, it was unsettling mentally to transition from putting money into a portfolio to taking it out.

Three things helped me get past my concerns. First, for broader investment reasons I decided to stop automatically reinvesting all of our dividends and capital gains in our taxable mutual fund accounts. Instead, I had some of them automatically transferred to our checking account. I know this was just mental accounting and was tantamount to drawing from our portfolio, but this approach sort of tricked my mind into thinking we had a steady paycheck coming in.

Second, about 5 years into retirement we started drawing our defined benefit pensions and social security, which really was like getting a paycheck.

Finally, despite drawing from our portfolio, it continued to grow in value during retirement.

What do you do with your time? What does an average day look like?

Once I was truly retired, for the first time in my life I was in full control of my time and I needed to figure out how to spend it. While I didn’t have a plan, I did have a very long to-do list, so I started there.

At the top of my list was the construction of a comprehensive estate plan. During my working years, my wife and I had never got around to establishing wills, trusts, etc. I was quite uneasy about this, because having spent a lifetime building up a nest egg, I wanted to protect it as well as possible. Not just for my wife and I, but also our heirs.

Equally important, I did not want state intestacy laws and some random judge to determine who inherited our nest egg, and under what conditions. I felt a pressing need to address this as my primary mission early in retirement.

I like to be an educated consumer, so before hiring an attorney to craft all the legal documents I undertook extensive research. This included reading estate planning and asset protection material from numerous financial websites and attending some educational seminars. I was also able to obtain several one-on-one education sessions with financial planners and estate planning attorneys free of charge, as a benefit of private client status we held at one of our investment companies.

After about 6 months of part-time study, I felt I knew enough to hire a law firm and engage with them as they crafted the formal documents. This included wills, trusts, powers of attorney, advance medical directives, and living wills – one each for my wife and me. We went with a law firm that specializes in estate planning, based on a referral from our private client institution. This law firm ended up being great, and I’m very glad we went with an estate planning specialist as opposed to using a general family attorney.

After the formal documents were completed, it took me several months to retitle our joint assets and split them among our trusts. To complement the formal documents, I also personally wrote a set of informal estate planning documents, such as an investment policy statement for our trustees, a settlement instructions document for our trustees and executors, a legacy statement for our heirs, and inventories of our financial, tangible, and digital assets.

Finally, I created extensive ppt material that I used to educate all trustees, executors, and heirs about the plan. The entire process took over a year and was a lot of effort, but it was worth it. I am confident our assets are now well-protected, and that they will be distributed to our heirs exactly as we want. In addition, potential estate and capital gains taxes have been minimized, estate settlement has been streamlined and costs have been minimized, and all stakeholders understand the plan and are well-positioned to execute it when the time comes.

Equally important, it feels good to have plans in place for how our estate will be managed and health care decisions will be made in the event my wife and I become incapacitated, as well as to have our end-of-life medical wishes and plans already prescribed. Upon completion, it felt like a great burden had been lifted.

When I got bored with my to-do list, I started thinking more generally about how I wanted to spend my time. I identified some general areas of interest, but within those areas I did not know what specific things I wanted to do. As such, I started engaging in some things on a trial-and-error basis. Some things worked and others didn’t.

Here is an example of something that didn’t work out so well. Personal finance is an area I find very interesting (I know, something must be wrong with me), and public speaking and teaching are both things I have a background in and enjoy. One day, my wife discovered that our local government was looking for volunteers to teach financial education to adults. I thought that might be a good fit for me and decided to give it try. I did not like it.

There were times when literally no one showed up for scheduled classes, despite having signed up. Other times people showed up for class but had no real interest in participating. They were forced to attend as a requirement of assistance programs they were in, but they really did not want to be there.

In addition, it was difficult for me to personally relate to the financial problems of the students. A few were interested in topics that I know something about (e.g., like investing). But most had more immediate and pressing needs, like repairing their credit, reducing credit card debt, or coming up with a few hundred dollars to pay the rent. I felt bad for them and had a desire to help, but I had no relevant knowledge or experience to draw on.

Bottom line, I was spending considerable time but didn’t feel as if I was helping anyone.

For me this whole experience ended up being a bust, and I stopped participating. But that’s OK – when you engage in trial-and-error, you will discover that some things are not right for you. It has not dissuaded me from looking for other volunteer opportunities.

Currently, these are the areas of interest that tend to consume most of my time:

  • Wealth management: I am basically a one-man family office, and I consider managing all aspects of our wealth as a part-time job. I am an ardent do-it-yourselfer (DIY). In addition to genuinely enjoying this work, the DIY approach saves us a lot of money in fee avoidance. Perhaps most importantly, I take a DIY approach because I believe the only person I can fully trust to manage our finances is me. I hire specialists when necessary, but I would never rest easy at night if I outsourced everything to a financial planner or private bank.
  • Exercise: Long ago I used to be a pretty good athlete. During my later working years, I evolved into a couch potato. Once I retired for good, I decided to try to get in shape. I do various aerobic exercises, weightlifting, flexibility and core exercises, and golf, among other things.
  • Leisure activities: I enjoy keeping up with news, sports, and markets. Also, my wife and I enjoy travelling – or at least we did before the pandemic. We average several big trips a year to places like Hawaii or Europe, and a bunch of little trips to closer destinations. We typically travel with family and friends, or we travel to visit family and friends, so it is one of our main ways to socialize. In addition, prior to the pandemic my wife and I liked to eat out a lot, often with family and friends.
  • Home projects: I spend a lot of time on routine house maintenance and yard work, and minor home improvement projects. We could easily afford to outsource these, but I’m too cheap and I enjoy the gratification that comes from being able to immediately see the results of my efforts.
  • Volunteering: I have a desire to give back to the community via volunteer work, but this is an area I still haven’t figured out very well. I occasionally guest lecture in the MBA program of a local university, and I am on the MBA advisory board of another university. These have worked out reasonably well, but beyond that I have nothing active. I keep looking though.

Regarding how I spend an average day, it would be something like this:

  • Each morning starts with a long walk, as demanded by my dog.
  • The morning is usually when I’m at my mental peak, so I tend to spend the rest of my morning on activities that require the most brainpower, such as wealth management.
  • The late morning and early afternoon are usually when I do house maintenance, yardwork, and other home projects. I also use this time to run errands.
  • The late afternoon is usually when I exercise. I do aerobic exercises of some sort almost every day, and rotate weightlifting on some days with flexibility and core exercises on other days. Pre-pandemic this was at a gym; now it is at home. I also work in a little golf when I can.
  • Dinner is an opportunity for my wife and I socialize the with family and friends. Obviously, the pandemic has changed things. My wife and I always eat at home now, a lot of times with our daughters. We’ve also done some virtual dinners with family and friends, and occasionally we’ve had some friends over for socially distanced dinners on our driveway.
  • After dinner, I’ll usually veg out watching a movie or TV show until bedtime. I’m usually tired by this point, so this is not a good time for me to do any activity that requires much thought.

Throughout the day, I correspond frequently with friends and family via e-mail and texts. I also access the internet frequently, and often have the TV on in the background to keep up with current events.

RETIREMENT FINANCES

How has your financial plan performed compared to what you had estimated before retirement?

Our net worth has grown from $15.2M at the start of retirement, to $16.7M now. The increase is attributed entirely to growth in our investment portfolio.
However, the real story is how the composition of our portfolio has evolved during retirement. I have made some dramatic (and some might think controversial) changes to our asset allocations.

At the start of retirement, our allocation between stocks/bonds/cash was roughly 50/40/10, which was well within traditional retirement guidance. Currently, it is approximately 35/15/50. I doubt that you could find a recommendation anywhere in the mainstream literature for such an atypical allocation.

So why did I do this? My rationale is that even if we make relatively small future returns on our investment portfolio, we could easily maintain our lifestyle and leave a substantial legacy. If we suffer big losses, however, meeting these goals would be harder.

Our portfolio lost 50% during the financial crisis of 2007-2009, going from about $8M to $4M. If that should happen to us again, we could weather it. But I really don’t want to go through something like that again, especially with no more earned income rolling in to replenish the nest egg. Furthermore, I believe that both equity and debt markets are substantially overvalued at present, and at risk of a significant decline. I have no idea if or when such a decline would actuality materialize, but I think the potential exists. Accordingly, I have scaled back significantly on both stock and bond allocations and have moved to an extremely high cash position.

The football metaphor would be that there is no need to throw Hail Mary’s in the 4Q when you have a big lead and basically have already won the game. Instead, just stick to the safe ground game and run the clock out. OK, running the clock out is a rather poor choice of words where retirement is concerned, but hopefully you get the point.

I’m sure the fundamental investing police will bestow upon me the dreaded label of “market timer”, but I choose instead to think of myself as a “market pricer”. The 50% cash allocation is dry powder as opposed to a permanent cash hoard, and I will happily deploy it but only when I feel that stock and bond valuations are more reasonable.

I did move about $1M from cash to stocks in March and April 2020, after a pandemic-induced drop of more than 30% in equity markets. I didn’t buy more because even then I felt equities remained overvalued. I know it is quite possible that over the long-term I could do better by sticking to a more traditional asset allocation, with periodic rebalancing. However, I take comfort in studies that show when market valuations are very high, returns over the ensuing 10-year period tend to be modest.

In other words, while I’m sitting in my huge cash fort protecting against potentially devastating market declines, I may not be missing out on generous long-term stock and bond returns. I’ve been a buy-and-hold investor for 35 years and if I get thrown out of the club then so be it, but I do find it easier to sleep at night.

Can you give us some insights into your post-retirement spending and income? How much do you spend annually and on what? And where does the income to pay for your spending come from?

Our spending in retirement is averaging about $300K per year, so at the upper end of my original guesstimate. A high-level breakdown is as follows:

$140K per year on living expenses, which is a bit less than the midpoint I had originally estimated. About 65% of this amount is consumed by health insurance, other insurances, utilities, real estate taxes, auto purchases and maintenance, and home maintenance and improvement. Another 20% is consumed by travel, entertainment, and dining out. The remaining 15% is miscellaneous stuff.

$110K on Federal and state income taxes, which is within the range I had originally estimated. Our income taxes are highly variable year-over-year, with the variability primarily driven by differences in realized capital gains from mutual fund distributions and sales.

$50K on annual gifts to our daughters. Although we had not originally planned on this at the outset of retirement, we decided to give substantial yearly cash gifts to our daughters for estate planning reasons. We do not need this money and would like to get it out of our estate now in case Federal estate tax exemption amounts are decreased in the future. My wife and I limit the gifts to around $25K/year for each daughter to safely stay under Federal annual gift exclusion limits.

A secondary objective of these gifts is to provide our daughters with capital so that they can gain hands-on experience managing and investing their own money. At some point they stand to inherit a lot of money from us, so I’d like them to be as prepared as possible.

How are you handling Social Security, required minimum distributions, tax issues and the like?

As mentioned previously, my wife and I are both eligible for defined benefit pensions from previous employers. The key decisions we had to make were whether to take them as lump sums or monthly payments, and if as monthly payments then when to start them and what type to take (i.e., single life annuity or joint life annuity).

My inclination at the outset was to take all our pensions as monthly payments rather than lump sums. I liked the idea of having income streams diversified from our investments, and for which someone else would bear the investment risks. I also liked the PBGC payment protections and ERISA creditor protections for the pension payments.

Nevertheless, I cranked the numbers to determine whether the lump sums or monthly payments were superior from an actuarial perspective. What I found in all cases was that our companies were low-balling the lump sum offers. By this I mean that if we were to take the lump sums and invest them in immediate annuities, the monthly payment from the annuities would have been much less than the monthly pension payments. This sealed the deal for me, and we opted for the monthly pension payments option.

For tax reasons we decided to start taking the payments about 5 years after I left my job. We could have waited longer in which case our monthly payments would have continued to grow, albeit very slowly. I ran an analysis which revealed that if we continued to wait, breakeven would only occur in our late 90s.

Regarding the type of payment, we opted for the joint and 100% survivor option for each pension, to make sure either of us could count on this stable income stream throughout our lifetimes. Our pension payments total about $6,500 per month and are not adjusted for inflation. There are still some risks with the monthly pension payments (e.g., the possibility of pension-dumping by our companies), but all things considered it is perhaps the safest income streams we have.

Regarding Social Security, here is what we did. Many experts suggest that if you can wait until age 70 to begin payments, you should do so. I’m afraid our decision flew in the face of this conventional wisdom.

In the case of my wife and I, we do not need to spend our Social Security payments, so we planned to invest the full amount. To determine the best claiming age under this “claim and invest” strategy, I put together a detailed spreadsheet that modeled how social security payments invested monthly for both my wife and I would accumulate until age 95 under four claiming scenarios:

  • Both of us claim at 62
  • Both of us claim at FRA
  • Both of us claim at 70
  • My wife claims and 62 and me at 70

For each scenario, I did a sensitivity analysis of how the accumulations would change under various inflation and investment return assumptions. The spreadsheet model included the effects of income taxes and the compounding effect of investment returns and inflation, which other breakeven calculations typically ignore.

Bottom line, I found that if we achieved an average yearly after tax investment return of 5% or more, then the scenario of both of us claiming at age 62 was the clear winner. If we assumed a more modest investment return of 2% after tax, then the scenario of both claiming at age 70 was the winner. Even in this case, however, the both claim at 62 scenario had the higher accumulated balance until around age 85. After seeing the results of this analysis, the both claim at 62 option was looking pretty good to me.

The following thought process, however, is what sealed the deal. It is well known that Social Security is facing long-term financial problems, and that Congress will almost certainly take actions within the next decade to shore it up. Most of the proposed actions seem to focus on increasing Social Security revenues (e.g., increasing the payroll tax, increasing the amount of earned income subject to the payroll tax, etc.). However, benefit reductions (e.g., means-testing) have been proposed as well. Under every means-testing proposal that I’ve seen, the Social Security benefit for my both wife and I would be completely eliminated based on our income level.

From what I can discern, means-testing does not appear to be a leading candidate for Congressional adoption. Nevertheless, there does seem to be a general attitude on the rise in the US that wealthy people should pay more in taxes and receive less in government benefits than they do now. All things considered, I believe there is a decent chance that means-testing or some other benefit reduction scheme could be adopted in the coming years, which would reduce the benefits for my wife and me. Therefore, my wife and I decided to both claim at 62; in other words, we opted to take the money and run. Together we receive about $3,700 per month in Social Security payments. Hopefully the payments will continue throughout our retirement, but if not, at least we will have received as much as possible before they are stopped or reduced.

Regarding 401Ks and IRAs, the current value of our accounts is around $2.5M. All our accounts are traditional IRAs and 401Ks, not Roth’s. We do not plan to tap these accounts until age 72, at which point we will have to start taking RMDs. Throughout retirement we will be in a high marginal tax bracket, so we don’t have much of a tax optimization incentive to start drawing IRA and 401K money before age 72, or to do Roth conversions.

In addition, the strong set of creditor protections that exist for 401K and IRA accounts under various Federal and state laws is another reason that I like the idea of leaving them intact for as long as possible. The recent elimination of stretch provisions in the SECURE Act for inherited IRAs and 401Ks was a bit of a bummer. However, I believe our heirs can still work effectively with the new 10-year withdrawal window, and perhaps they will have tax optimization options that we don’t.

→ Save time. Save paperwork. Save dollars. Esurance ←