Half Retirement Spurs Market Apathy
Half Retirement Spurs Market Apathy
There is no question that there are some out there that are quaking in their boots right about now. They see the market dropping and are starting to panic. It doesn’t matter that they planned their asset allocation based on long term returns. It doesn’t matter that they have done the math over and over. Especially if this is the first year of retirement, sequence of returns risk is likely turning some stomachs sour. Yet, although I am embarking on my own journey to pull away from the W2, fear is the farthest thing from my mind. I am rather indifferent. I feel as safe as can be. Half retirement spurs market apathy.
And I couldn’t be happier with my decision.
Safe Withdrawal Rate
I have said before that we are kidding ourselves with this idea behind the safe withdrawal rate. We shoot for a number like 4% and then systematically withdraw much less. The reason is fairly simple. We are conservative. We leave “work” and eventually produce other revenue streams through passion projects or consulting gigs left over from our previous W2. Why turn down easy money?
So, in essence, we lower our SWR way below 4%. With all the extra income coming in, many eventually land somewhere around an SWR of 1-2% for the first decade of retirement. The likelihood of success multiplies greatly in this scenario.
Half retirement spurs market apathy for me. If you consider this to be year one of my retirement, than my SWR is 0%. That’s right. My current situation can fund my needs indefinitely. If the market crashes, and this ends up being one of the worst sequence of returns of the last century, I’ll still be covered.
Sequence of Returns
Speaking of sequence of returns, I have no concerns here. Arguably the biggest worry of an early retirement melts away when you are still earning money. No matter how badly the next ten years go, cutting the SWR down 1-2% will mostly guarantee success.
Period.
Not only that, but the dividends can be reinvested so that you are not only surviving the market downturn, but continuing to actively buy new equities while on sale.
And if you are continuing to use the half retirement money to invest in tax deferred vehicles, holy moly, it gets even safer. Not only are you buying in a down market, you are also significantly lowering the current tax burden. Sounds like a win, win, win to me.
Health Insurance and Travel
If sequence of returns is the biggest worry for a new retiree, certainly health care costs come in as a very significant number two. Health insurance is expensive, especially for those who haven’t reached Medicare age yet.
Half retirement spurs market apathy here too. Although I don’t get health insurance through my current gig, I certainly have enough money left over to pay for it on the open market no matter how expensive. The benefit is even greater if you re like my friend Dave and his half retirement still provides an employer subsidized benefit.
Travel hacking? You can if you want. But for those of us still working past financial independence, the buffer of extra money is enough that travel is covered many times over. If I want to spend a little extra, or take a few more weeks, no problem.
It’s the ultimate in FatFIRE.
Final Thoughts
Half retirement spurs market apathy. As I see the Dow continue to drop, my mood doesn’t need to follow it into the gutter. My safe withdrawal rate is close to 0%, and sequence of returns risk can’t touch me. I have health care costs taken care of, and my travel/leisure budget is as fat as ever.
I’m not saying you have to transition into a half retirement like me, but it certainly provides a good deal of safety and comfort.
A portfolio isn’t susceptible to sequence of return until you start withdrawing. When the portfolio is closed is just floats on the economy like a bobber on the waves. When you open it and start extracting from it, is when SORR hits. Taxes need to be paid, AA matters, a severe draw down mean you have to sell low. At 70 the Government RMD’s you and forces you to sell. Life gets complicated. As long as you have a job and the portfolio is closed the income saves your from SORR. Not so much when it’s open. When it’s open is when you are most susceptible and the earlier SORR forces selling low if no other income is present or the government is forcing RMD. Also the tax code is progressive so a 250K/yr RMD is much more expensive than a 100K/yr RMD. To pull out the required 250K costs 17 cents per dollar, 100K 8.7 cents per dollar. RMD happens whether you are still getting an income or not and only boots up the tax bill even worse. Selling low and paying high taxes = bad juju on portfolio longevity. Solution Optimize optimize optimize before you get your clock cleaned.
When you get your SWR down to 2% because you waited so long to start drawing, you can afford to have your clock cleaned, refurbished, and plated in gold.
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