Post FI Notes 006: Gone to Carolina With the Rule of 55

As an educator, he never made a huge amount of money, but with the bangin’ stock market of the 1990s, he figured he could double his retirement savings every five years for a few decades and become a millionaire. Would you believe that he actually met that goal over each and every five-year period?

He now finds himself at a crossroads as he plans to leave his career and move to a new area in his mid-fifties. His is not a fatFIRE story, but, as you’ll read, he’s got everything he needs to be happy, and he’s in a great position to enjoy a low-tax early retirement.

Soon, he’ll be drawing from his 401(k), which one can do when leaving an employer during or after the year in which one turns 55. That’s just one of many ways to get to your retirement accounts before turning 59.5.

If you’re interested in participating in one of three interview series, please download the most appropriate form for your life situation: FIRE Starter, FIRE Crossroads, or Post-FI Notes. To see other posts in the series, visit our Q&A archive.

 

 

Getting to Know You

 

You’re financially independent. About how much does your household spend in a typical year? How much could you spend while still abiding by the 4% rule?

My typical annual spending is currently about $36,000 per year.  My mortgage payment is $1,350/month and I try to keep all other expenses to about $1200 per month.  I haven’t retired yet (that’ll be next year, when the 403b ‘Rule of 55’ kicks in for me), but I’ve calculated that I could spend about $56,000 annually following a 4% withdraw rate.

I’m projecting spending about the same amount in retirement as I do now, and that gives me a $1,000/month cushion to go over budget, which still puts me under the 4% rate.  I’m more comfortable (at least starting out, in the first few years of retirement) with a withdraw rate closer to 3.6%.

 

Tell us about your household. How many people and at what ages? Are you supporting anyone outside of your home? Where do you live?

My household is just me (and a cat). I’m on the east coast, in the mid-Atlantic region, and I’ll be moving to western NC next year after I retire.

 

Are you still working? In what career? Did your work schedule or attitude towards work change once you knew you were FI?

I’m still working full-time through the summer of 2022.  I work in education, and the summer is a good time to transition in a new person to join the program I’m a part of.

I don’t think that reaching FI changed my attitude toward work. What I’ve realized in this final year is that at this point, my motivation to contribute to my program and serve my students well is internal – I’m not worried about getting a good review from my director, but I’d like to be able to give myself a good review.

I’ll probably do some volunteer work remotely for my program after I retire.

 

Was financial independence a long-term goal of yours? Did you think you might retire early or be able to do so when you first got started in your career?

I didn’t have the phrase ‘financial independence,’ but I had examples in my family of saving and investing, and managing personal finances well.

My grandparents rented out the second floor of their house.  My parents built a house when I was a kid and rented out the former house for years. My only memory of my grandparents was as a retired couple, and my father retired at age 53.  I made my first IRA contribution at age 20, so “saving for retirement” was a steady goal from the beginning of my career.

In fact, in my early 20s, I wrote savings goals I wanted to reach at 5-year intervals.  It was the 1990s, and stock market returns were great, so I optimistically reasoned that I should be able to double my investments every five years (plus add $2,000 annually to my IRA, which was the maximum contribution at the time).

I was starting with something like $10,000 and hoping to double that plus add $10,000 in the first 5 years.  The first goal was to have $20,000 at age 31, which would grow to $50,000 by age 36, etc….  (my math was to double the original amount and add $10,000 in contributions each 5 years).

It was a spectacularly naïve plan, but it showed me the power of compounding: in the later stages it had me going from $470,000 in savings to $950,000, then $1.89 million in a ten-year period starting in my early 50s.

Over the years, I’ve increased my savings rate well beyond the original $2,000/year in my plan, and I’ve actually managed to hit all of my 5-year goals early so far.  It still amazes me sometimes that such a simple plan I sketched out on scrap paper in my early 20s actually guided me to FI now.

 

Investing

 

How is your nest egg invested? Approximately what percentage is allocated to stocks, bonds, real estate, and alternatives?

I’m mostly invested in stocks.  I have about $450,000 in a 403(b) through my employer (all stock mutual funds); a little over $400,000 in a Roth IRA (again, all individual stocks, ETFs, and mutual funds), about $175,000 in a traditional Roth (mutual funds), and about $270k in taxable investment accounts.

The house I live in now is paid off, and I recently closed on the one I’ll be moving to when I retire, so the plan is to sell my current house (I expect to end up with about $300,000) and put $120,000 of that equity into a bond fund as a 3-year reserve to get me through a bear market without having to sell equities.  (I’ll spend some of the remaining equity on improvements to the new house, and put $30k aside as an extra emergency fund, plus have some left for fun things like travel.)

 

Are your investments primarily in tax-deferred, Roth, or “taxable” post-tax accounts?

It’s a mix of all three, with about 30% in Roth, 20% in regular (non-retirement) taxable accounts, and 50% in tax-deferred retirement accounts (traditional IRA, 403(b), etc…).

I’m planning to avoid income taxes in the first decade of retirement by pulling from taxable retirement accounts only up to the amount I can deduct, and taking the rest from taxable accounts (staying in the 0% capital gains zone), letting my Roth account grow.

 

Do you have investments in an HSA? How about 529 Plans?

I don’t have investments in either of these types of accounts.

 

What has been your best investment?

My best investment was grad school – I worked as a Graduate Assistant, and they paid my tuition plus just enough to cover my rent, food, etc.  That led to my career in higher ed., which enabled all of my other saving/investing.

Outside of that, I think my best investment has been a mid-cap mutual fund (closed to new investors) that has averaged a 12% annual return going back to 1996.  I’m in some other funds with higher returns over a shorter period (a Communications/Tech fund with 19% average annual returns that I bought in 2014), but I like to look at track records over a longer period instead of that 26% return on the dividend growth fund I bought a year ago.

I like the investment strategy of both my mid-cap and dividend growth funds (and I’m very happy with the VIG ETF I bought a few years ago), but I don’t expect the 26% that the dividend growth fund has yielded in the past year to be the norm.

 

Your worst investment?

I’m going to say that my worst investment was paying down my mortgage balance in the 1990s.  I could see that if I paid extra toward the mortgage balance, I would save X in interest over the life of the loan.  What I didn’t see at the time was that investing that money would earn me more than what I’d save in interest.

It was when I refinanced the mortgage at 2.25% and saw from my brokerage that I’ve earned a little over 10% annually on average since I started investing with them in the 1990s that I stopped paying extra on the mortgage, and I put that money in the market instead.

If I had taken that same money in the ‘90s and invested it in that mutual fund instead of paying down the mortgage, I would have a higher net worth today.

 

 

Post-FI Life

 

What do you like to do with your free time? How much free time do you have these days?

This section is mainly theoretical for me at this point. I’m looking forward to having more time after I retire next year. I have a guitar, a fishing rod, a motorcycle, and a vegetable garden.  My partner lives in western NC now, and we enjoy hiking.  And there’s plenty of work to do on my new house.  I don’t think I’ll have any shortage of things to do in my free time.

 

Do you enjoy travel? Tell us about a favorite trip you’ve taken.

I’m looking forward to some travel – seeing the Northern Lights is on my bucket list, and I’d like to tour some distilleries in bourbon country.  There are lots of little towns within a 100 mile radius of where I’m relocating that I’d like to explore.

 

Do you incorporate giving (money or time) into your post-FI life?

I will probably do some volunteer work.

 

What advice do you have for others hoping to achieve the financial success you’ve found?

Start early, and live below your means.  For 30 years now, I’ve had money left over at the end of the month, that I could put to work.

 

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I’ve shared my feedback privately with today’s guest. I wouldn’t want my opinions to influence yours. Please give your take in the space below!

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