The Best Way to Begin Early Retirement? Super Frugal Vs. “Normal” Spending

I’m all of five days into my official early retirement (Mark is a few days deeper in his), so not exactly an expert in what it’s like to be retired, but financially speaking, I’m feeling reminded of this in a big way:

There’s no easing into early retirement. You’re either getting a regular paycheck, or you’re not. 

We got our last paychecks last week, which were larger than usual because of cashed-out vacation time (an appreciating asset!), and it was definitely a strange feeling knowing that could be it. Like possibly forever. (Probably not forever, but still.)

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They might’ve said I have to work today to get my 401(k) match, but they didn’t say I can’t do it in a mouse onesie. 🐭 (Last day!! 🙌🏼 #earlyretirement) pic.twitter.com/jiALM3J2Ww

— Tanja | Our Next Life (@our_nextlife) December 28, 2017

In a perfect world built for financially risk-averse people like me, that last paycheck would stretch forever like the money equivalent of loaves and fishes, we’d never have to sell off shares of our investments, we’d all hold hands and sing campfire songs, and there’d be nothing but world peace. Except, just kidding, we’re talking about reality.

While we have a bigger cash cushion than we probably need (a little more than 2.5 X, or enough to cover at least two and a half years of living expenses) and can ignore reality for a while before we truly need to start selling shares, eventually we’re going to have to suck it up and click sell. But before we even get to that point, there’s a bigger question looming in our minds:

How much should we actually spend this year? 

Of course we have an amount budgeted, an amount that’s padded to allow it to be chopped down should we need to do so in a recession. But just because we can spend that amount, should we? Let’s dig into both sides, and then tell us what you would do in the comments!

Fundamentally, each of us pursuing this path needs to decide what kind of life we want to live, decide what that costs, and then save accordingly. While we have some good friends who are perfectly happy never eating at restaurants, not traveling much, and skipping the expensive hobbies, that’s not us. (Pop quiz: Anyone remember how many pairs of skis we own?) ;-)

And that’s why we saved as much as we did, to allow us to keep skiing and traveling and going to Coachella and living in Tahoe, where the cost-of-living is borderline vomit-inducing.

That’s all good in theory, but we know that we’re unlikely to spend exactly our budgeted amount each year. J.D. Roth wrote a great post about exactly that: how much his spending has varied year to year since he quit his traditional career. It’s nice to get that report back from someone who’s lived in early retirement for some time, because I’ve argued that we can’t assume we’ll have level spending forever in either early retirement or later traditional retirement. (Most especially the latter. Health care, y’all.)

So, thinking about where we are right now, as newbie early retirees trying not to blow our funds too quickly, we have two choices of how we could spend this year:

Spend “normally,” meaning what we planned for, going on all the trips we want to take and doing all the activities we have been excited to start.

Or

Take a much thriftier approach in this first year, spending less than we’d budgeted.

Let’s talk through the merits of each.

The Case for Normal Spending

The biggest argument for spending what we’d allotted is that we’re here! We made it! We worked hard and saved for years, and now it’s time to enjoy the spoils of victory. And also that there’s a decent chance we oversaved a little anyway, so we can afford to spend up to our cap each year without worry.

A different way to think about all of that is a question that I find myself asking frequently, about a wide range of topics: What would make it feel worth it?

What would make our years of hard work feel worth it? Living the fun early retirement, complete with spending, that we’d always envisioned? Or tightening our belts some more and doing less of the fun stuff? (Some of that description is for the sake of argument — there’s tons we can do for free or cheap, and we know that.) If we say no to a lot of things this year, will we end up wondering whether all the saving was even worth it?

The Case for a Super Frugal First Year

The biggest financial argument for going thriftier in year one has everything to do with where we are in this economic cycle, which is overdue for a recession or at least a correction. If we can spend less in the first year or first few years, we can significantly minimize our sequence of returns risk, and that ain’t nothing given the dizzying heights of the markets at this moment.

I wonder, though, if there’s a bigger psychological reason to consider a more modest spending level in year one:

To reset our baseline.

All of our planning for early retirement happened while we were drawing those steady paychecks. And we earned enough that we could save a lot and still make a few sloppy money decisions. We could cash flow a large federal tax bill without really slowing down our accumulation, for example, or overspend a little on a vacation and still be fine. We had a pretty comforting safety net.

That safety net is not entirely gone now, because we do still have the cash buffer, but there’s no new money coming in unless we work to earn more. And so those little overages here and there have become a much bigger deal, and something we need to train ourselves out of.

Going super frugal in year one could help us do that. If we see our total budget as our true budget plus a decent-sized contingency fund that we don’t plan to spend, then we create a new, albeit smaller, safety net to help us through this transition time.

Of course, that would mean saying no to more things this year.

In a Perfect World

In my imaginary, campfire song-singing fantasyland, this wouldn’t even be a question. We’d be naturally disciplined people who love budgets instead of the rebellious anti-budgeters we’ve been up to this point, markets would climb predictably so we wouldn’t worry about sequence of returns risk, we’d feel drawn to an equal mix of free activities and the more expensive hobbies and travel, and our spending would magically be level year to year. Also, entry to all Six Flags parks would be free, the Pillsbury Doughboy would be real and live next door to us so I could squish his little tummy on the daily (best ad of all time), and ice cream and pizza would be the healthiest foods of all. (Just throwing those last few things in there in case anyone reading has the magical power to turn my fantasy into reality.)

But until I hear that telltale Doughboy giggle from across the lawn, I’m accepting that this isn’t that perfect world. We have to choose one approach or the other: spend what we’d planned to spend with the possibility of hanging onto bad habits, or spend less to reset our minds and feel more secure, but at the cost of missing out on some things we’d been looking forward to.

Which Would You Choose?

Given the pros and cons of both approaches, which do you find yourself leaning toward? For those who’ve already retired, what was your approach, and was it intentional or accidental? Any pros and cons that I left out that are worth sharing? Let’s discuss in the comments!

And which path are we choosing? Stay tuned for the follow-up post on January 15!