Margins of Safety – How A Worrier Pulls The Retirement Trigger
Reading Time: 5 Min
I hear a lot from people who want to know how to pull the trigger on retirement. “Isn’t it hard to leave a steady paycheck?” they ask.
Heck yeah, it’s hard.
When I was stewing in the decision, I went looking for advice and discovered that I was not alone in my anguish. In the early retirement community, there’s actually a phrase that comes with the fear and the ongoing pattern of delay that results: One More Year Syndrome, where the uncertainty about whether your plans will hold up causes you to work “just one more year” to build more buffer.
At last! I was finally understood!
And what was the cure for this OMY syndrome that plagued us?
Here the words of wisdom were lackluster. The general advice seemed to boil down to Just Do It! Trust yourself and jump!
Just Do It? Just Do It didn’t work for me in PE class when I was asked to play dodgeball while wearing glasses. Just Do It didn’t work for me in making multi-million dollar investment decisions at work. “Just Do It!” kind of people don’t really seem like the kind to build retirement spreadsheets all day, and Just Do It wasn’t going to work for me in making one of the biggest decisions of my life.
In short, the crowd was saying the decision looked like this:
But I had to find a way to make it look like this:
Good news. I got there. And if you are feeling uncertainty right now, you will get there, too. Here’s how.
Margins of Safety
The best way to conquer your fear of the unknown is to have levers you can pull in the event of an emergency. So create a list of all the buffers that may not have shown up in your financial spreadsheet, all the levers you can pull if things go south.
Here is what I told myself:
Part-Time Work: My spouse or I could do some part-time work. Given that I retired at 28, it is extremely likely that at some point my interests will align with something that has money-making potential. Even if our nest egg took a hit, we could supplement for luxuries or larger one-time expenses by doing some paid hours.
Temporary Expense Reduction: Reducing optional expenses could help us ride out a significant number of bumps along the way. We have $6k allotted vacation for vacations each year. Taking a vacation once in three years during a rough time doesn’t seem like that large a sacrifice, especially as we can take comfort that it’s a temporary cut. Restaurants and entertainment can be limited to a few times a year if necessary in a tough year for the portfolio. In total, my discretionary expenses total $20k a year, or about ⅓ of my budget. There’s wiggle room to tighten up for a down year or two.
Downsized Home/Home Equity Loan: This seems to be a rarely talked about buffer. In times of extreme duress, we could downsize our home, or at least tap into the equity we’ve built up with a mortgage or home equity loan. If you are following a long-term strategy of index investing like we are, your issues will likely be just temporary cash flow concerns for a year or two while you wait for the market to correct. This is an excellent way to access the cash you need in the near-term without sacrificing significant upside by selling your stocks at a huge discount into a bad market.
Stock Options/Profit Sharing: I retire with certain profit interests similar to stock options with my former employer. I estimated the value of this conservatively based on historical performance, but there is a nonzero chance they end up being worth more than projected.
Market Upside: My safe withdrawal rate of 3.5% assumes a long term return of roughly 5.5% (building in inflation). From 1996-2015, the CAGR of the stock market has been 8.2%. It is much more likely that our nest egg will outperform our expectations than it is that it will underperform our expectations.
Potential Inheritance: While we have not built our plan on the assumption of any inheritance, but both sets of parents have indicated a desire to leave any excess wealth to their children.
Memorializing your thoughts in a bulleted, written list will give clarity to your chaotic thoughts. There is comfort in seeing these elements on a piece of paper since they don’t show up in the hard numbers of your retirement spreadsheet.
Then you can take this list and slowly start paring down all the explanations. When you’re talking to your spouse the first few times, you say “I’m thinking of retiring. Of course, I worry about______. I think the mitigants are ____.”
Over time, start shortening it. State your case in nine sentences instead of ten. Eighty words instead of a hundred. And then eventually you shorten it to two words. “I quit.”
Doing it this way creates a ramp rather than a giant cliff for your emotions to catch up with your brain. Over the course of several day or several weeks, you can create a hiking path down to your destination rather than one jump off a cliff.
For many of us planners, “Just Do It” is not the kind of advice that allows our gut to catch up with our brains. Verbalizing your margins of safety – the buffers that don’t show up in your spreadsheet – can be a way to let the rest of you catch up to what you know in your head will work.
It doesn’t matter how elegant and how dramatic your path is so long as you get to your final destination: you on a hammock in Retirement Land. I’ll save one for you with a beach view.