Quick note: Mr. ONL gave notice Monday, so this is really happening! I’ll write about after I give notice in two weeks. And be sure to enter our pre-reveal contest! There are multiple ways to win, and there’s even a category for those who already know some of the details about us, including where we live. Get your entry in this week! Now on with the post.
It’s pretty amazing the mental evolution we’ve gone through in this early retirement journey. Just three years ago, we swore we would never work again after quitting, at least not in any capacity that would involve checking email outside of work hours (ski patrol could be okay, though, if it was fun). And our early retirement plan and “magic numbers” have been based on giving ourselves enough cushion that we could actually never earn another penny and still be fine.
Fast forward three years, and we’re mentally in a different place. Not only do we now realize that that strong aversion to future work was really just a knee-jerk reaction to then-current work stress, and not a permanent state, but we also realize that, duh, of course we will earn money someway, somehow.
Add to the list of realizations that the timing of economic cycles may not be ideal in our case, as well as anyone else on a similar timeline. We’ve absolutely benefited from one of the best bull markets in history, but we might also be retiring into a recession, which could trigger a cascade of sequence of returns risk. Not that we or anyone have a clue what will happen or when. But we all know this current run has to end at some point. (And we honestly thought that time would have come already, well ahead of our retirement. But no. Yay or boo?) The end of the bull run could be in our first year or two of retirement, which doesn’t bode well for our long-term odds of success, statistically speaking. Yet another reason to leave those “phase 2 funds” alone to grow so that even if phase 1 is rocky, we’ll be okay in traditional retirement.
We’re nearly to the end of the focused six years of saving that will deliver us to early retirement in less than three months now. And over that time, we’ve only had a few instances of rapid shifts to our thinking. Most of our thinking has evolved slowly, sometimes barely perceptibly. But if we compare where our early retirement income plan started (live off the proceeds of index fund sales, almost entirely), to where we are now (more diversified income streams), we see a fairly dramatic difference.
Let’s take a look at how our early retirement income is now structured, and why. Then tell us how you’re thinking about early retirement income in the comments!
Our early retirement income falls into three categories — income we’ll have throughout our entire phase 1 retirement (until Mr. ONL turns 59 1/2), income that we’ll have for only a few years of early retirement, and income that we’ll have eventually but don’t have yet (or at least don’t have it as cash flow). All of which maps generally to our phase 1 and 2 income and health care plan, but the actual plan is more nuanced than this now:
Ongoing Sources of Early Retirement Income
Because we can’t get out of counting dividends as income for both tax purposes and health insurance premium calculations, whether we cash those dividends out or not, we’ll use those as our very first source of income and cash flow. They’ll be largest in the early years, before we sell many shares, and gradually decrease in percentage of early retirement income as we draw down our index fund shares.
While the thought of selling shares still freaks my $#!% out a little, it’s always been the core of our plan. We’ve bought enough index fund shares to get us through all of our early retirement (supplemented by rental income later), assuming no economic catastrophes, and assuming no crazy spikes in health care costs. Of course, we can’t actually assume either, which is why there’s more to this post.
Temporary Sources of Early Retirement Income
Very Part-Time Work (Because Sequence Risk, and Health Care)
While we’d never planned to have to work in retirement, we also expected that the next recession would have arrived already. So we adjust. The data on sequence of returns risk suggests that a major adverse economic event in the first three years of retirement is the most potentially harmful, so I’ve had in my head that if we can avoid selling shares for three years, we’ll be beyond rock solid. (We’re already super solid and will be living way below the 4 percent rule, so I’m talking drilling-down-into-bedrock solid.) Then there’s the whole health care debacle, bringing with it all kinds of uncertainty about what our pre-Medicare health care expenses could be, and making us want to at least keep alive the possibility that we could ramp our income back up if we needed to, because we don’t think “just going back to work” is as simple or easy as a lot of folks make it sound. We’ve also realized that there are some aspects of work that we’re awesome at that we’ll miss, and so we’re open to doing some very part-time work in the near term to keep doing those things in small doses. But we’ll be very particular about what we’re willing to do. If we find ourselves having to check email while on vacation halfway around the world? We will have failed. But if we can give a little counsel here and there on projects we find super interesting, in a very part-time capacity? Then great. (And yes, we still think that counts as retired.)
Personal Loan Principal and Interest Payments
The personal loan we made will still have three years of repayment left on it at the start of 2018, so we’ll count both the principal and interest on that as cash flow (only the interest counts as income). Mainly because if we reinvested that money in new shares, we’d only have to sell more shares, triggering more taxable capital gains, and hard pass on that.
Related post: Why We Ignored The Experts and Loaned Money to Family
Early Retirement Income That Will Come Later
We bought our rental property with a 15-year mortgage, though we’re not planning to prepay it, despite how aggressively we paid off our primary residence. Right now, it’s actually a slight liability, working out to cash flow neutral, but because we’re in a high marginal tax bracket, the part that still counts as income is heavily taxed, putting us in the hole. But next year, our tax bracket will drop dramatically and it become truly cash flow neutral. And then it will be paid off in 2029, and at that point, net us sizable cash flow that will offset much of what we’d otherwise need to sell shares to get. Depending what the rental market does in the soon-to-be-disclosed place where our rental is, it could even cover most of our cash flow needs, though we’re not counting on that. (We’re counting on level rent in our calculations because we’d always rather project conservatively and then end up with gravy.)
Income Sources for Traditional Retirement
I’m working on a post on Social Security — and why we’re not including it in our calculations — but we still feel especially rock solid about the traditional phase of our retirement, assuming we don’t experience the zombie apocalypse before then, because we’ve been well above the amount needed in our 401(k)s for some time now:
We’re planning to be able to increase our withdrawals once we get to traditional retirement age, and so far nothing has shaken our faith that that will be possible. Of course, that’s still about 20 years off, so a lot can happen! And maybe by the time we arrive there, we’ll have a much more diversified plan for income like we’ve ended up with for our early retirement.
Let’s Talk Early (and Traditional) Retirement Income!
What sources of retirement income are you counting on that aren’t a part of our plan? Or do you follow a more streamlined plan than this? Want to play the part of retirement police and accuse us of not really retiring if we still work in a very part-time way next year? Bring it on. ;-) Notice that we aren’t planning on any backdoor Roth conversions in our early retirement income plan, and want to talk about that aspect of it? Let’s do it! Fire away in the comments.
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