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If we command our wealth, we shall be rich and free; if our wealth commands us, we are poor indeed. -Edmund Burke
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August 2024 will mark the tenth anniversary of my departure from practicing dentistry on a full-time basis. August 2024 will also mark the tenth anniversary since I lost the annual compensation that practicing dentistry full-time provided. This blog will outline what’s happened to me financially in the last ten years.
During this period between 2014 and 2024, I obtained my CRPC™ (Chartered Retirement Planning Counselor) designation, and I’ve been honored over the last ten years to assist people in making the decision to transition from full-time employment to full retirement or phased retirement. This transition period is a very stressful and emotional period in most people’s lives.
People facing retirement have many questions, most of which are variations of basic questions facing all potential retirees. Let’s consider some of the finance-related questions that most people facing Retirement ask, and financial situations that I have already experienced.
To simplify the discussion, I’m going to describe how the last ten years have affected my Income, Net Worth, Budget, and Spending:
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Income
As described in my previous blog post (See: A DECADE BEYOND THE CUBICLE: REFLECTIONS ON LIFE POST FULL-TIME WORK ) I made the decision to transition from full-time work to a phased retirement approach where I have gradually reduced my working days over the last ten years. This means that as my time spent working has gradually diminished, my practice-related income has also diminished. I continue to generate income even though the amount of income has gradually diminished over the last ten years.
While realizing that the opportunity to continue working, even in a limited capacity, is not available to all potential retirees, the financial impact of these extra and unanticipated dollars has been huge! Most retirees who fell that they need extra income haver the ability to find some part-time work to generate additional income.
Even small amounts of additional income can have a huge impact on retirement savings and retirement viability. The ability to generate an extra $10K or $20K in annual income means $250-$500K less in savings accounts is required.
What do I mean by that statement? If someone uses the 4% rule which dictates that 4% of available retirement savings can be withdrawn each year, then $250,000 in savings would be required to generate $10K annually ($250,000 x .04 = $10,000.) In the same manner, $500,000 in savings would be necessary to generate $20K annual income ($500,000 x .04 = $20,000.) Working enough to generate $10K in annual wages means $250K less in savings accounts is needed. The math is the same for any level of income generated. The more potential income generated equals fewer dollars required in retirement accounts.
It’s critical here to understand that this strategy of work replacing savings is only effective as long as income is being generated. Once a person fully retires and no additional work-related income is generated, then retirement income will have to come from non-work-related sources such as retirement accounts, Social Security, or other passive forms of income.
In my case, a huge additional benefit was that my working income was large enough to allow my retirement accounts to remain virtually untouched and to continue growing over the last ten years.
My initial thoughts after dissociating from full-time dental practice were to help the new practitioner to transition into practice, and then fully retire six to eight months later. I didn’t understand or realize at that time how beneficial working part-time would be to my future retirement plans.
In addition to providing purpose in retirement, the two big financial takeaways of part-time work are that part-time work afforded the opportunity to have fewer retirement savings and still maintain the same standard of living, and part-time work allowed my retirement portfolio to continue to grow without having to withdraw retirement funds for current income needs.
Not every job or occupation allows workers to pursue a phased style of retirement. But, some form of part-time work for compensation can make a huge difference financially.
My chief concern in the decision to continue working was not financial. The main reason I continued to work after becoming financially independent was that I still enjoyed treating and interacting with patients.
Ten years of retirement from full-time work has helped me to understand how beneficial it can be to have some type of moderate income from some type of part-time work.
I strongly recommend that any person who cannot continue working at their present job and feels financially unprepared for retirement should consider working part-time at some job to generate income. As in the example above, even small amounts of income can have profound effects on retirement income and retirement security.
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Net Worth
Portfolio Depletion (what is commonly termed “running out of money”) is a common concern among most retirees. Net worth is one of those essential numbers that should be established early in adulthood and tracked during a person’s working career (See: BEYOND THE NUMBERS: EXPLORING THE MEANING OF NET WORTH, CALCULATING YOUR FINANCIAL FORTITUDE: WHAT’S YOUR NET WORTH?)
Early in a working career, it’s not uncommon for Net Worth to be a negative number. The youngest workers normally have the shortest working careers and the largest debt load. People starting careers may have large debts which could include house loans, car loans, and student loans. All of these long-term debts will normally be listed on a Net Worth statement.
Since Net Worth is the aggregation of assets and debts, it’s normal for a young worker with fewer assets and greater debts to have a negative or minimal Net Worth. Why would anyone go through the exercise of creating a Net Worth statement when they are already painfully aware that they have very little money and lots of debt?
In its basic form, Net Worth provides a statement of present financial condition. Net Worth tells you where you are right now and even when that present financial condition is not good, a Net Worth statement represents the starting point for future financial growth.
Net Worth also represents the present financial condition of workers nearing the end of their working careers. This is important to potential retirees and current retirees because Net Worth now becomes the measure of financial fitness and ability to retire successfully. While it’s acceptable for a young worker to have a negative Net Worth, a very small or negative Net Worth for someone approaching retirement is a very unfavorable situation.
So, what’s happened to my Net Worth over the last ten years? The short answer is that over the last ten years, my net worth has increased by about 50%!
Shouldn’t Net Worth decrease after leaving work? For most retired families net worth remains constant or gradually decreases over retirement based on individual circumstances. No inflow into the retirement accounts and a constant outflow to provide for living expenses have a negative effect on portfolio balances. The 4% rule was created to provide a framework to withdraw funds from a retirement portfolio in hopes that it would not be totally depleted for at least 30 years.
So why has my portfolio increased in value? Good question! I have personally benefited from work-related income, which has lessened the need to withdraw funds from my retirement accounts. Additionally, my wife and I have benefited from a strong stock market, an aggressive portfolio mix, the cessation of re-investment of portfolio dividends, and the initiation of a small Social Security benefit for my wife. The combination of these different income sources has resulted in very little pressure on my retirement portfolio and as a result of these forces, my portfolio has had the opportunity to continue to grow over the last 10 years.
One of the other levers that can have a major effect on portfolio depletion is the level of spending.
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Spending
Most people think that spending during retirement remains linear (people will spend the same amount of money each year throughout retirement.) New research seems to substantiate that spending is in fact “U” shaped. The first 10 to 15 years of retirement are called the “go-go” years and spending is normally greater to account for increased travel, food and dining expenditures, second homes, home improvements, home renovations, and hobby-related expenses. After the first 10 to 15 years of retirement, expenses generally level off and remain that way for several years. Later in retirement, expenses climb due to increasing health, medical, and long-term care expenses. Hence, the ”U” shaped spending pattern, which is created by high expenditures early and late in retirement, and lesser expenses in the middle portion of retirement.
Early in my retirement, the combination of increased travel and dining expenses, along with Roth conversions created a higher-than-normal spending pattern. So, early in my retirement my spending level increased. Roth conversions increased my taxable income and that increased taxes paid. A higher taxable income also increased Medicare premiums through IRMAA (Income Related Monthly Adjustment Amount) surcharges. (The combined effect of increased discretionary spending, Roth conversions, and increased Medicare premiums caused a significant increase in spending in the first years of my retirement!) I finished doing Roth conversions approximately three years ago, and this has resulted in a net decrease in both taxable income and Medicare surcharges.
As I enter the second 10 years of retirement my spending has declined in relation to my early spending, but is still significant. My wife and I made the decision several years ago to spend money on experiences with our children instead of purchasing things. We also made the decision to transfer assets to our children now versus waiting until we die. These two things have increased spending above base living expenses.
What about our level of spending? Our basic needs are moderate and we are debt-free. We moved into a newer and smaller home which has further reduced our living expenses, taxes, and maintenance costs. Our cars are both paid for, relatively new, and require minimal maintenance. My work-related travel and business expenses have also decreased. If we removed legacy giving and shared family travel costs our basic living expenses would be less than during my working years.
Research indicates that most people spend between 50 and 90 percent of pre-retirement spending. Usually, the greater the pre-retirement spending, the higher the post-retirement spending. As a result of our extraordinary legacy and family travel expenses, our spending has remained on par with our pre-retirement spending or slightly increased!
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Budget
I have never been a budget-focused person. I have always viewed a budget as a financial diet, and everyone hates diets! My approach has always been to spend less than I earned. Each month provisions were made for debt obligations, basic needs, taxes, and investment contributions. Once those basic expenses were satisfied, then the bulk of my remaining income could be used for discretionary spending.
I currently track spending more closely as a source of current information and guidance, but my concept of budgeting has remained the same.
In the period of a person’s life where asset conservation trumps indiscriminate consumption, living on a budget may be a necessary but less-than-ideal lifestyle. Living with a very constrained financial outlook may necessitate a budget regardless of personal feelings about ideal spending levels. No one wishes to reach the later stages of life with very limited or totally depleted retirement assets!
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Final Thoughts
After almost ten years of retirement, I spend much less time thinking about finances. There is an unwritten financial rule that states that prior to retirement 90% of the time spent on retirement planning is focused on the financial aspects of retirement and 10% on all other aspects. It’s also an unwritten rule that after retiring this percentage gradually changes until 90% of the time is spent focused on the non-financial aspects of retirement.
The last ten years have proven this to be true. Once my retirement plan was formulated and implemented, all I had to do was allow my plan to function as designed with minimal interference and periodic monitoring.
Proper planning and plan implementation have allowed these first ten years of retirement to pass with better-than-expected portfolio returns. My portfolio is periodically monitored and rebalanced, but very little time is spent on portfolio management daily or monthly. My autopilot style of portfolio has generated a 50% portfolio increase (even factoring in the funds that are distributed annually for living expenses.)
I must admit that I do have a small allotment of high-risk technology and biotechnology stocks that I monitor daily. The emotional effect of a bad day in this subset is great, but the financial effect is negligible as the vast majority of my assets are invested in low-cost index funds or cash-like investments.
Due to the high-risk/ high-reward nature of these stocks, I view this subset portfolio as my “gambling” portfolio. I can trade and manage this small allocation of high-risk stocks at will without affecting my “real” portfolio. This small “gambling” portfolio gives me the opportunity to make numerous changes to that portfolio. During adverse market conditions trading in this small portfolio helps to prevent me from making unadvisable (stupid) changes to my larger retirement portfolio.
Work-related income has dwindled over the last ten years to the point where it is negligible, but the onset of Social Security benefits has offset the decline in work-related income.
We have not seen a decline in total spending due to our legacy and family travel expenses. The removal of these extraordinary expenses would most likely reveal a spending pattern that has slightly decreased over the last ten years.
All-in-all the first ten years of retirement have proceeded as expected with no significant financial upsets and the surprising benefit of a Net Worth gain as I approach the ten-year mark (even with significant extraordinary spending.)
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