Financial Autopilot

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In an era of two income households struggling to make ends meet, my story sounds extreme. I retired from my career as a physical therapist at the age of 41 while my wife cut back to part-time work five years earlier at age 35. Some might think we spent a lot of time thinking about money.

That assumption would be wrong. We achieved financial independence by our early 40’s because we spent less time thinking about money than most people. We embrace financial simplicity.

We focused on getting the big things right from the beginning – advancing in our careers while not overspending for college degrees, housing and cars. We then put our financial lives on autopilot so we rarely had to think about money.

This worked amazingly well for us… until it didn’t. I recently wrote a post about struggling through the first year of early retirement.

Autopilot works well when cruising at 30,000 feet, but the pilot needs to take control of the plane for landing. Similarly, having your finances on autopilot is great when cruising along through the accumulation phase. But making a stressful transition demands taking control.

For the first time in years, we had to devote frequent time and energy to financial decisions. Frankly, it’s something we’re not good at.

We’re working on automating our finances for this new stage of life, including developing tax strategies and systems to manage cash flow. But this is challenging while fluctuating between net saver and spender from month to month and likely from year to year going forward.

So I’ve been reflecting on how putting our finances on autopilot got us to this point. I question whether playing to this strength is possible in early retirement.

Cruising On Autopilot

Before addressing my question, let’s explore the importance of simplifying and automating your finances. Eliminating the need to apply ongoing effort and minimizing emotions around saving and spending was one of our most powerful wealth building tools.

While I was still in graduate school, we decided to combine finances. Our goal was to be debt free (of my now wife’s student loans and car loan) by the time we were married.

She supported us financially while I finished school. We predetermined that every dollar I earned working part-time went to paying extra towards her debt. My first month of “real” paychecks as a physical therapist allowed us to complete that goal and become debt free, three months before our wedding.

From that point forward, we each contributed to our 401(k) to the level of getting the full company match. We continued living on my wife’s income while saving my full paychecks for the down payment on a house.

Once we bought a house, my first paycheck each month went to paying ahead on the mortgage. The second went to taxable investments.

We automated these transactions. In about seven years, we paid off our mortgage and directed that money to investments. We made few financial decisions month to month, or even year to year.

No ongoing thought, effort or willpower was required. Wash, rinse and repeat for a decade.

This was wildly inefficient and caused us to unknowingly pay thousands of dollars in unnecessary taxes and thousands more in investment fees annually. Despite our mistakes in not optimizing our finances, we were still in a far better position than most.

We had a fully paid off house and solid six figure investment portfolio by our early 30’s. Simultaneously we lived well while rarely thinking about money.

Adjusting Course Slightly

I started seeing early retirement could actually be possible and began reading FIRE (financial independence, retire early) blogs. JL Collins’ “Stock Series” empowered me and shaped my investment philosophy.

Sorting out our taxable investments took about three years. We gradually sold off unwanted assets to avoid getting crushed by taxes. Once we were rid of our old investments, we automated all new contributions and set up our accounts to reinvest dividends automatically.

Various bloggers shaped my thoughts about tax planning. We implemented a tax strategy of maxing out tax deferred saving. Contributions were taken directly from our paychecks and deposited into our 401(k) accounts. This lowered our taxable income to a level that we could max out Roth IRA accounts. So we automated that as well.

We made two major changes to cut our recurring spending. I switched my phone from one of the major providers to an MVNO plan. We also cut back to the most basic cable TV service. These two one time decisions save us over $100 every month without sacrificing anything of value.

The only other significant financial change we made was experimenting with credit card travel rewards. This involved occasional effort of opening a new credit card once every 3 months to get generous sign up bonuses. These rewards cut thousands of dollars a year from our travel expenses.

We were back on autopilot, but going faster than ever with the tailwind provided by cutting tens of thousands of dollars of spending each year on investment fees, income and capital gains taxes, and savings on entertainment and travel expenses. Better yet, this was accomplished with minimal ongoing thought or effort.

Traditional vs. Early Retirement

Most people think of retirement planning in two distinct phases. Working/accumulation is followed by retirement/drawdown. This dichotomy makes planning fairly simple.

When working, cash flow is the result of a paycheck. In retirement, cash flow can be created by a combination of social security, pension and/or annuity income supplemented by investment income that can be systematized.

Tax planning is simple within the framework of a dichotomy. Defer taxes that would be paid at high marginal tax rates when working by using tax deferred retirement accounts. Pay the taxes at lower effective tax rates when retired.

A similar strategy of tax loss harvesting can be  used to pay less taxes when working. Long term capital gains can then be “paid” in retirement at the favorable rate of 0% when income is low. Harvesting takes effort, but the decision process is simple and straightforward.

Most people, as we have always done, get medical insurance through an employer when working. Most retire when they are at or near eligibility for Medicare. This limits the options available.

However, Michael Kitces points out that the traditional dichotomy isn’t working for everyone, so more of us are choosing non-traditional retirements, such as semiretirement or mini retirements. This is especially true of early retirees who face unique challenges of finding reliable and affordable medical insurance combined with increased longevity and sequence of return risks.

Autopilot With Non-traditional Retirements?

Non-traditional retirements provide a solution to the fundamental challenge of retirement planning – a scarcity of time during our earlier (presumably healthier) working years, followed by a scarcity of money when attempting to simultaneously live off and preserve your investments in retirement.

Non-traditional retirements allow us to leave the grind of full-time work sooner, rather than being trapped by fear in one more year syndrome. Having some ongoing earned income provides flexibility, alleviates some stress of living off only investments and allows sidestepping sequence of return risk if you earn enough to not spend down investment principal.

A nontraditional retirement seems like a way to have your cake and eat it too. However, semi-retirements or mini-retirements are not a free lunch. While they may solve some challenges, they also can create new ones.

Rather than a black and white financial situation, decisions now become more gray. Creating adequate cash flow to cover spending in a simple yet tax efficient way is challenging.

Most early retirees face the annual challenge of how to obtain affordable health insurance. This requires ongoing finangling of your finances from year to year, especially for those relying on ACA subsidies to keep insurance costs affordable.

These gray areas require ongoing financial calculations and decisions that go against the simplicity that we desire.

More Questions Than Answers

Unfortunately, I don’t have great solutions for these challenges. I am not a guru with all the answers.

Writing challenges me to think about these problems at a deeper level as I work through them in my own life. It also allows me to create a forum for honest and intelligent discussion among like minded people, so we can help one another navigate this uncommon path through life.

If you’ve achieved financial independence by creating good money habits, and then getting out of the way while your finances ran on autopilot, how are you dealing with the uncertainty of early, semi, or mini retirements? What has worked and what has failed as you search for financial simplicity at this stage in life?

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