We retired early (the first time) in 2014 at age 33. Within two years, we were both back at work. After knowing what went wrong, we made adjustments, and I’m happy to say that we retired again in 2020 and it’s been going much better. Without further ado, here are five things we did wrong (and five we did right) in our first retirement attempt:
Wrong: Had a Financial Advisor review right AFTER retiring
You can fully plan retirement yourself, and I highly recommend it. I wanted a second opinion for such a big decision, however, so a asked a (fee-only) financial advisor for one. We found, however, that while advisors are comfortable telling a 60 or even 50 year old how much they need for retirement, many of them become very nervous and extremely conservative talking to someone 40 or younger. The truth is, though, that a 40 year retirement (age 50 to 90) already needs portfolio growth to keep up with inflation and make up for withdrawals, so studies looking at retirement rates suggest only slightly lower “safe withdrawal rates” for 50 or 60 year retirements. For example, the excellent Early Retirement Now chart estimates 95%+ safety from a withdrawal rate of 4.00% for 30 years, 3.75% for 40 years, and 3.50% for 50 and 60 years from a 75% stock portfolio.
If you talk to a financial advisor, do it before rather than after you stop working. If you get very conservative recommendations, ask what they would suggest if you were age 60 with the same portfolio to estimate how much they’re adjusting things for your age. In addition, keep in mind that an early retirement can be safer for younger retirees in some ways - social security is more like a “bonus” midway through retirement than something you’re depending on in your default plan, and it’s likely easier for you to go back to work if for some reason you need to.
Wrong: Checked our portfolio too often
Fresh from the discouraging financial advisor review, I decided my main job was to make sure our portfolio would last. I went from checking our balances about monthly to basically every day, and getting caught up in the ups and downs caused me a lot of extra stress. It was hard to resist the urge to “do something” when I was transfixed by the daily activity. When I finally went back to checking monthly, I often saw that stock prices went on an adventure mid-month and then ended up about where they started.
You don’t need to make changes based on day-to-day swings, so check your portfolio as infrequently as you can manage. As a retiree, you’ll likely want to rebalance using your withdrawals for spending, so take out enough for several months at a time and don’t worry about what’s happening in the middle.
Wrong: Didn’t know how to fill my time
I noticed this after the two issues above, but it’s the most important problem with our first retirement attempt. We had taken some leaves of absence before quitting altogether, but my activities during the breaks were really pretty work-related, and without work projects to give me ideas to explore, I became bored. In the years afterward I’ve done a better job identifying hobbies I enjoy, and during our last leave I didn’t end up doing anything work-like at all. Since quitting in December, I’ve been constantly busy and much happier.
Posters on the bogleheads forum, a fantastic retirement resource, often say “retire TO something, not FROM something” but I was frustrated at work and hope that it was more pithy phrase than wisdom. If you don’t know how you’ll fill your time in retirement, don’t wait until you quit to find out. It’s hard to find the time, but start on a few hobbies or projects and find something that grabs you before you have nothing else to do. You don’t have to wait until retirement is imminent to do this, either! =)
Wrong: Cut daycare way back for our young kids
When we retired the first time, we had a one- and three-year-old at home, and we cut back from full time daycare to two half days per week, because we were both going to be home all the time. I love my kids and I love spending time with them, but children that young require constant supervision and get bored quickly. Caring for them all day was drastically different than spending a few hours between work and bedtime each day, and I really couldn’t spend much time on hobbies or independent activities even if I wanted to. On our second go-around, our kids are now six and eight, which makes a world of difference. They have school each day, they can play much more independently, and I can do a lot of my favorite activities with them (climbing, hiking, and camping) rather than only when my wife is on duty.
If you’re in the (admittedly exceptionally rare) situation of considering retirement with young kids, I suggest setting aside money to keep up with full time daycare or a solid set of after-school activities for older kids. You’ll enjoy spending more time with them, but I think individual time to pursue your own interests is important to a happy retirement, too.
Wrong: Missed things in our budget
Don’t get me wrong - we had a stable budget we’d lived on for years before retiring, so we had a very good idea what our spending would be. However, we didn’t look carefully at how we’d used our annual bonuses. We saved most of them each year, but we also set aside 10% for each of our “fun accounts” for individual purchases and sometimes used some bonus money to supplement our next car fund for a car purchase or our vacation fund during a higher travel year. We also didn’t set aside increased budget for hobbies, so we felt uncomfortable spending a lot more on them now that we had the free time.
When setting up your retirement budget, live on it for a while, check for any “supplementing” you’re doing to it, and leave some space for extra activities and hobbies. It’s no fun to be retired and feel like you shouldn’t spend more on playing than you did when you were working and barely had time.
Right: Did a retirement “trial run”
Before quitting entirely, we were fortunate enough to take several three month unpaid leaves of absence during the summers to get a feel for it. I wouldn’t trade back those blocks of free time with my family for anything. They were also great chances to try out our budget with retirement-level free time. That said, a three month break wasn’t a perfect simulation - I didn’t get out of the “honeymoon period”, so even though I hadn’t figured out hobbies, I didn’t quite get to feeling bored.
Still, before you quit, try to ask about a leave of absence or try to save up vacation days for the longest break you can manage. It’s a great chance to get a sense for how retirement will feel with an “undo” option still available.
Right: Was comfortable with portfolio ups and downs
I realize that this contradicts “checked our portfolio too often” above, but once I settled back into monthly portfolio checks, I felt fine again. Having checked my portfolio monthly for a long time before quitting work, the monthly variations felt familiar and not out of scale with what I’d seen before.
So, while I would suggest checking your portfolio infrequently in retirement, before you quit make sure you check your portfolio often enough. The ups and downs feel different when you’re not adding any new savings every month, so being used to them before you quit really helps.
Right: Had a plan for cutting our budget
If you have a reasonable withdrawal rate, you likely will see few (if any) years that require you to make spending cuts. However, watching the 2015 flash crash after quitting felt a lot different than declines I lived through while working. The “I’m buying stock on sale” feeling wasn’t there to make up for concern about whether this would derail our retirement plans.
Fortunately, I’d already written down a plan for spending cuts and a threshold - if our spending was more than 4.5% of our current portfolio, we would cut down to the 4.5% cutoff by reducing giving, our vacation fund, and our next car fund. Having a plan that a calm version of myself had written made me feel a lot better during those first declines. Our portfolio never dropped enough to trigger the 4.5% threshold, and I also felt good that I didn’t have to agonize over a plan in real time or stress about whether the cuts would hurt, since I’d already thought them through.
Right: Figured out healthcare before quitting
Before we quit, I took the time to research plans on our state ACA (Affordable Care Act) website and found the current costs, so we knew exactly what to sign up for. I also looked into the premium subsidies and had a good idea what our subsidy would be at different potential income levels and where the sudden cutoffs were.
In addition to these, for our second retirement we made sure to use work healthcare benefits before leaving (LASIK!).
Right: Figured out retired taxes before quitting
Taxes in retirement deserve several dedicated posts, but let me summarize very briefly. We have money in IRAs, Roth IRAs, taxable brokerage accounts, and (a bit) in bank accounts, and so in retirement we have a lot of control over our taxable income and taxes. Our taxable account dividends are unavoidable but tax-efficient. We can get our remaining spending from cash or old Roth contributions for tax-free income, sell taxable stock for capital gains income, or make Roth conversions from our IRAs (for eventual spending) as regular income.
With these choices, you can tune your income to optimize your taxes. In our case, aiming for an income around $102,000 ($62k conversion + $40k dividends) causes a tax bill of under $100 (!) for our family, and is (just) low enough to keep us qualifying for ACA health care subsidies. With the pandemic, 2021 and 2022 have changed our optimal income, but afterward, this is the plan.
I highly recommend estimating your in-retirement taxes with the free Intuit TaxCaster (I prefer the Android app) to quickly estimate taxes and try different situations, and you might consider using tax optimization software like I-ORP to plan out your Roth conversions if you have a lot of IRA savings.
I hope this list helps a few aspiring retirees somewhere to avoid some of the pitfalls I unintentionally explored.