One of the biggest financial blunders that early retirees often commit doesn’t usually hit them until much later. Here’s a lesson from my own experience, one that ended up costing me over half a million dollars.
When I stepped away from Corporate America at 34, I assumed my days of earning were over. Back in 2012, I crafted a retirement income plan assuming a passive income of $78,000 annually, which would be just enough for a modest life in Hawaii. If the markets favored us, this could potentially rise to $117,600. Despite this planning, I overlooked a crucial aspect: the potential to earn and invest more aggressively, even in retirement.
Living in expensive San Francisco, our annual expenditure hovered around $100,000. Moving to a fully-paid house in Honolulu seemed like a financially sound move, ensuring we’d live within our means even on a reduced income. However, the reality of passive income and actual living costs soon hit hard.
Flexibility in earning was something I initially overlooked. I thought my investment risk profile shouldn’t change despite significant income from retirement. This was a mistake, especially during a major bull market, which I didn’t leverage to our advantage. From 2012 to 2014, clinging to a “4% mentality” — the belief that earning 4% annually was sufficient — restricted us financially, as I didn’t touch the principal sum, planning to leave it for philanthropic causes posthumously.
This conservative stance meant our investments underperformed compared to the S&P 500 significantly each year. I didn’t adjust my investment strategy to take more risks, falsely comforted by past financial crises like the Asian Financial Crisis, the dotcom bubble, and the 2008 financial meltdown. It was a classic case of being too cautious, resulting in lost opportunities.
By 2014, a pivotal moment came. A high-yield CD matured, and instead of reinvesting at a lower rate, I decided to switch gears. Observing that my overly cautious base income assumptions were limiting, I opted to aggressively leverage our finances. I took on a $1 million mortgage to buy a property, already shouldering a similar mortgage on our primary home. This aggressive move was far from traditional risk management wisdom — akin to betting heavily on a single stock.
I had made a similar risky investment back in 2007, which resulted in significant losses. Yet, it seems the lessons from the past dim over time. In 2014, I felt invincible, a misjudgment that could have led to financial disaster. It was only through sheer luck and some market foresight that the property investment paid off as the area gained popularity.
The lesson here is stark: even when you think you’re being financially prudent, there’s a risk in not adapting to changing economic environments. After recognizing my conservative stance was a financial straitjacket, I adjusted our investments to be more assertive, but it took recognizing those earlier missteps to spur this change. Now, in de-risking mode, I’m securing our gains by investing in safer, tax-free municipal bonds to ensure future stability, particularly for educational expenses.
The overarching lesson for early retirees or those considering it is to maintain investment flexibility. Don’t tether yourself to a single financial doctrine, like the “4% rule,” especially in dynamic markets. Engage with financial advisors or trusted confidants to keep your strategy responsive and robust. This approach isn’t just about expanding wealth but also about safeguarding against the changing tides of economic fortunes, ensuring financial mistakes become valuable lessons, not lifelong regrets.
