Next month (November 2019) marks the 25th Anniversary of my early retirement in 1994 at age 38. Here are the five most surprising things I've learned during that period of time.
#1 -- If you're paying the 2% of assets in annual fees that Wall Street's business model demands, you need to save about twice as much money for retirement.
Retirement is a long term project. For most, it will be 30 years of savings, hopefully followed by 30 years or more of spending in retirement. Compounded investment returns are going to be a big part of your success. See link: The 2% Rule for Retirement Savings
I've always paid close attention to what I'm losing to fees, commissions and costs. When my portfolio was mostly long-term buy and hold stocks and I rarely made more than 1 or 2 trades per year, that gave me annual investment expenses of 2 or 3 basis points per year (i.e., $200 to $300 per $1 million invested.) Today I have about half of my assets in index funds, so my costs are a bit higher at 8 basis points overall.
After 25 years of annual withdrawals, my retirement portfolio has grown enough to make my spending in retirement less than a 1% of assets annual withdrawal. In effect, I'm comfortably living on the money most people are paying to a financial advisor or mutual fund manager.
#2 -- The "4% rule" for retirement withdrawals is very likely to leave you with more money than you can spend 25 or 30 years down the road.
Whenever the stock market reaches new highs, it's common for so-called retirement experts to warn that we're in new territory and the 4% rule no longer applies. Given that history, it was surprising to see this observation from financial planner Michael Kitces:
Note that "depleting principal" doesn't mean that your retirement nestegg goes to zero. Surviving 30 years without "depleting principal" on a $1 million portfolio means that you end that 30 year period with the same $1 million you started with, even after the 30 years' worth of annual withdrawals. Pretty amazing!
#3 -- It's easy for millionaire early retirees to get free Obamacare.
Americans are forced to spend twice as much money on health care than any other large industrialized nation, but receive poorer results as measured by life expectancy. However, as an early retiree living off an investment portfolio, you don't have to offer yourself up for the fleecing.
The Affordable Care Act (i.e., Obamacare) doesn't have an asset test for eligibility -- it only looks at income. You could have $100 million in Berkshire Hathaway stock and still qualify for a big refundable tax credit under the Obamacare law. It's actually quite easy to minimize taxable income by planning ahead and arranging your portfolio to focus on capital gains and returns of capital while limiting interest & dividend income. See link: Obamacare makes it easier for millionaires to retire early?
When I was doing my long term planning for early retirement 25 years ago at age 38, I expected to be paying about $20,000/year for health insurance by the time I turned age 60. I'm actually paying less than $20/year in health insurance premiums after taking the time to understand the Obamacare law. See link: Obamacare Repeal? My amazing story of drastically lower premiums.
Like most Americans, I still have a crappy health plan with high deductibles and co-pays that leaves me vulnerable the the depradations of "out-of-network" billing if I stumble into the care of an unprincipled doctor or hospital administrator. But at least I'm paying a premium more in line with what the health insurance is worth.
#4 -- People spend less as they age
While the "4% rule" assumes your spending will rise in lockstep with inflation, an examination of retiree's actual spending shows it declines as they age -- even including health care costs. This phenomenon makes the "4% rule" even more conservative.
#5 -- The Social Security Administration will "sell" you an inflation-adjusted life annuity for a lot less than a private insurance company would charge.
Nothing upsets annuity salesmen or "risk professionals" more than when you point out that delaying Social Security to age 70 allows you to "buy" an inflation-adjusted annuity at a big discount. For someone collecting the maximum Social Security check, it's about a $130,000 savings ($200,000 if you include the 50% spousal benefit.)
If you believe that you're likely to live beyond the age of 82 or so, it makes financial sense to delay the start of your Social Security benefits to age 70 if you can afford to do so. Delaying Social Security from age 62 to age 70 increases your monthly benefit by about 75%. A larger, inflation-adjusted Social Security benefit allows for smaller retirement portfolio withdrawals. Thus, improving the chance you won't outlive your money if you see the longer lifespan forcast for high income earners.
Resources for more information
The Growing Gap in Life Expectancy by Income: Implications for Federal Programs and Policy Responses (2015) -- The National Academies of Sciences, Engineering, and Medicine
Bengen, William P, �Determining Withdrawal Rates Using Historical Data�, Journal of Financial Planning, October 1994, pp 171-180, Volume 7, Number 4.
Investment Company Factbook 2019, ICI.org
You�ll Spend Less As You Age -- Time Magazine, Feb 26, 2014
Evaluation of the biases in execution cost estimation using trade and quote data Peterson, M., and Sirri, E.
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