We had the good fortune of saving for early retirement almost entirely during one of the best bull markets in history. Sure, we may be on the precipice of a correction (or worse) now, making me feel justified for thinking so much about sequence of returns risk for all these years. But we absolutely enjoyed more or less unmitigated growth during all those years we were socking funds away like squirrels preparing for winter.
And the fact is that what we did may not be easily replicable by someone starting now, just because of how the market cycles go, and the fact that none of this stuff is predictable.
On the plus side, while I’d never root for a recession because recessions hurt real people who don’t have safety nets, the next correction or recession that comes will provide an interesting and different perspective in financial independence blogs, most of which have only existed during economic good times.
But that’s not what we’re here to talk about today.
Today we’re talking about what we – Mark and I – would do differently if we were just starting to save today, and not six years ago.
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Our savings plan was pretty simple, based around an early retirement phase and a traditional retirement phase: keep maxing out our 401(k)s, even though our “phase 2” funds were already in pretty good shape, pay off the mortgage and throw everything additional into “phase 1” index funds that we could sell off without tax restrictions in the first 18ish years of our retirement. We were super fortunate in earning high incomes that provided much more than we needed to live, so we could still afford to pay off the mortgage aggressively and save in index funds even after saving $18,000 a year in 401(k)s. That kind of saving is only possible with a high income, and anyone who says it’s normal or easy for anyone is out of touch with reality.
Though we hadn’t planned to include a rental property into the mix, when it became clear that we could help a relative in need, we decided to tweak our plan and buy a house that we now rent out to the world’s best tenant. We also made sure to retire with three years of living expenses in cash, to allow us to avoid selling shares in an extended market downturn (this is standard retirement advice given to traditional retirees, and not something we made up on our own) and stockpiled much of that cash in our final year of saving.
What We’d Do the Same Way
Backload Cash Savings – Though we always maintained an emergency fund, even after we reached a basic level of financial independence and no longer would have panicked if we’d lost one or even both of our jobs, we knew we wanted to have that big cash cushion when we left work so we could minimize the likelihood that we’d ever be forced to sell shares when they were significantly depressed. We knew we wanted to build up multiple years worth of cash, but we didn’t want to do it too soon and miss out on time in the markets for our money to grow. So we saved the cash cushion for last and put nearly all our save- or investable money into our mortgage and taxable index funds until we had the house paid off and the index funds well stocked. That way the index funds could keep growing in value on their own while we piled up the cash cushion. If we’d done it in the opposite order, the cash would have barely grown but we would have lost out on market growth time for the investments.
Pay Off the House – For anyone on the fence, I can now affirm more than a year after paying off the house that it still feels amazing to know that we own all of this. We don’t lose sleep worrying that we missed out on gains. We locked in a guaranteed return, we freed up more money to save and invest in our last year of work and we know that we can live suuuuuuper cheap if we need to with property tax and utilities as our only housing expenses. We’d do this again in a heartbeat. Sure, we could have potentially gotten larger, though unguaranteed, gains if we’d invested that money instead of paying off the house, but we also would have had to save more to do so because we’d need enough passive income each month to make a mortgage payment. Plus, not having that debt hanging over us makes us feel lighter every day. You can’t put a price tag on that, but it’s worth a lot.
Do the Two Phases – Assuming that we were starting to save now with some assets already saved up, we’d for sure plan for two phases again. If we were 22 and had no 401(k) savings, perhaps we’d save everything as one big pool of money, but we were in our early 30s when we started really saving and we already had some home equity and retirement savings by that point, and it made sense to save for the early part of our retirement as its own thing. Nothing has changed in our thinking to make us wish we could redo that part of our plan.
What We’d Do Differently If We Were Starting to Save for Early Retirement Now
Hold Cash for Special Purposes – If we were starting right this moment, nine years into a historically long bull market, with valuations and CAPE ratios way out of whack, market volatility growing by the day and the potential for a trade war looming, we’d probably be tempted to go against everything we’ve ever read and try to time the markets. Which, in this case, would really mean holding back for a while and stockpiling cash to avoid buying high and then spending all of our accumulation years trying to crawl back to the starting line. And as for what we’d do with that cash, we’d either sink it into the markets after the crash hit, or…
Invest In More Real Estate – We used to own a condo in LA, and we thought long and hard about whether we wanted to rent it out or sell it. We decided we didn’t want to be landlords, especially long distance landlords, in part because it just sounded annoying, but also because with condos you hear a lot more complaints from people who think anything happening in the building is their business. It wouldn’t matter if we hired a property manager, we’d still hear from some of the nosier residents who knew us when we lived there if our tenants so much as sneezed too loudly. (I am exaggerating a little, but not joking – when we sold the condo, for months the downstairs neighbor kept texting Mark asking him to pass info along to the new owner. Whom we didn’t know and hadn’t met. Instead of just going up to talk to him herself.) I don’t really regret selling that condo because the capitalization rate (ratio of rent to mortgage cost) wouldn’t have been favorable enough in the short term, but turns out we were wrong about landlording. We actually don’t mind it at all, and sometimes lament that we should have bought more properties before real estate markets went on their current tear. We especially wish we’d bought a multifamily unit or two. So if we were starting now and were piling up cash, we’d be waiting for the next opportunity to get some bargains, and then grab a few rental properties to provide us with long-term passive income, as well as some insulation from market volatility. Who knows? We might even do that in our real plan if the right opportunity comes along.
Skip the Dollar Cost Averaging — True dollar cost averaging assumes you already have a chunk of cash on hand that you dole out to the markets bit by bit, and doesn’t include regular automatic investing each month or each pay period. That latter kind of investing is good and necessary for an automated investing plan. But for a lot of years, we dollar cost averaged our year-end bonuses, and one year even stretched a bonus out into enough investment installments to take six months. We’ve since been persuaded by research that that was an understandable choice but not the best one financially, and we should have given that money as much time to grow as possible, which it most certainly did not do sitting in savings, waiting to be invested. In our last few years of work, we put bonuses into the markets right away, but we’d start doing that sooner if we were starting now.
Create Another Passive Income Stream – Our investing strategy of buying broad index funds automatically makes our portfolio diversified, at least in terms of the markets. But it would be nice to be even more diversified in the long run, and to do that, we’d need to create another stream of passive income outside of market investing and outside of real estate. Maybe we’d get excited about microlending. Perhaps we’d try to find a way to do small scale venture capital (doubt it, though – so risky!). Maybe I’d be writing and self-publishing lots of e-books to try to create a stream of royalties. Or who knows – maybe we’d even buy a local business and pay others to run it. Regardless of what that looked like, we’d absolutely be looking to create at least one other passive income stream if we were just starting to save now.
Buy Bitcoin — Just kidding. ;-)
What Do You Think?
Is there anything you wish you’d done differently in your savings journey? Or anything that you’re happy with but that you’d do differently if you were starting now? Wouldn’t change a thing? Got questions for those ahead of you on the journey? Share your experiences, ask your questions or tell your favorite joke. We’re all ears… er, eyes. ;-)
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Categories: we've learned