It takes a lot of planning to retire early. However, the financial challenges don’t end as soon as you retire. I managed to save and invest enough by age 33 to retire early, but I’m still learning how to handle my new lifestyle and finances a year into my retirement. Here are the biggest lessons I’ve learned so far.
1. Ignore Your Investments (Sometimes)
Today it’s easier than ever to get real time updates on your entire investment portfolio, and that’s not necessarily a good thing. Between streaming quotes, emailed news alerts, portfolio tracking services at Yahoo Finance and Google, and multiple business channels like Bloomberg and CNBC, there really is information overload in the financial world.
If you find yourself sucking in business news channels constantly and checking on your portfolio many times per day, the information overload can cause you to make emotional financial decisions like selling after a stock market crash. Money is made in the market over the long-term as the businesses you invest in expand their revenue, grow their earnings, and reinvest in themselves.
As an early retiree, it isn’t rare to see a 1% or 2% gain or loss in your investment portfolio in a single day. If you have a million dollars in your portfolio, that means facing the loss of $10,000 or $20,000 in one day. Suffering a five figure loss in a single day is never fun. Constantly watching your portfolio means spending even more time dwelling on these losses when they occur.
I have learned to accept these five figure losses, because I know five figure gains happen just as often. My trick to avoid the mental anguish of big daily losses is to avoid logging in to my investment accounts constantly.
It pays to focus on your investments occasionally to make sure your portfolio is within your asset allocation and that you aren’t inadvertently allowing dividends and interest to pile up in a holding account paying zero interest. But checking investment performance hourly or daily is counterproductive. You’re spending time that you could otherwise use to streamline your finances, explore other interests, or relax. I have learned to focus on the important things I want to accomplish in early retirement and not waste time constantly monitoring my long-term investments.
2. Keep Plenty of Cash in Your Accounts
That word “plenty” is all relative, but I’ve learned that I feel comfortable with $30,000 or $40,000 in cash, while others will need multiples of that amount in order to sleep at night. That amount represents about one year’s worth of retirement expenses for our household.
Cash is a big security blanket. If my investments became worthless overnight (which is very unlikely), I would have at least a year to rebuild my financial life without worrying about where to sleep and what I would eat tomorrow.
My large cash balance also means I can absorb a huge emergency expense (new car? medical catastrophe?) without worrying about liquidating investments, time delays in transferring money, and tax consequences of unexpectedly selling investments.
With today’s best interest rates barely above 1% on cash accounts, having a significant percentage of your investments in cash will be a drag on your performance. But keeping at least a few percent of your portfolio in cash or similarly liquid investments can mean shrugging off an unexpected expense or a sudden downturn in the market.
3. Have a Backup Plan B (and C, and D)
Given our annual spending rate of less than 3% of our investments, I feel very secure that our investments will last us the rest of our lives. That’s Plan A. It’s foolish to have an awesome Plan A and never develop a Plan B, C, or D. Severe market downturns like we experienced in 2008 and 2009 can happen again so it makes sense to plan for that possibility.
If our portfolio declines by 15% from today’s value, Plan B involves temporarily reducing spending and waiting for a market recovery. Economic recoveries usually begin a year or two after a recession starts.
Plan C would have us looking for some part-time work or supplemental income to keep our annual portfolio withdrawals to 3.5% or 4%. Plan C goes into effect if the market declines roughly 30% from today’s value.
If the stock market dropped by 50% from today’s value, Plan D is a temporary end to our early retirement. I would look for a full-time job in my old career or any job I could get. A 50% drop is unlikely but isn’t unheard of. The Great Recession lopped half the value off of the S&P 500 index between October 2007 and March 2009, for example.
Finding a job in the midst of a recession won’t be easy, but with over a year’s worth of living expenses in cash, I could take my time to network and investigate opportunities and not feel obligated to take the first job I’m offered.
Some variation of these plans could come in handy if unexpected expenses arise like major medical issues that require long-term care or a change to our nation’s income tax structure.
4. Don’t Worrying About Finances; Enjoy Retirement Instead
On a larger level, I have learned to focus on enjoying early retirement now and to not dwell excessively on financial issues that might arise down the road.
Your financial future will always be uncertain, whether you have $10,000 or $10,000,000 in the bank. In order to enjoy early retirement and not worry about finances, I keep my eyes off the real time stock tickers, I keep a year’s worth of expenses in cash, and I have back up plans in case my finances take a turn for the worse.
I’m left with plenty of mental energy to focus on what’s important to me today: reading a novel, cooking a nice dinner, playing with my kids, socializing with friends, and deciding whether to go to the pool or the lake.
Who has time to worry whether the Dow closed up or down today if you’re busy having fun, right?