The Year of Living Negatively

June 30, 2022 somewhere in the Yukon Territory on the Alaska Canada Highway my wife and I overtook a significant mile marker, not on the Al-Can but on the highway of life. At the close of that day my wife worked what was likely her last day of her last full-time job and with that our earned income as a couple ceased.

I had stopped working full-time back in June of 2020 but my wife’s income had more than met all of our needs and though I turned the magical age of 59 and a half (the age at which penalty free withdrawals are permitted from an IRA) in February of 2021, we had not needed to draw any of retirement savings.

On July 1, 2022 that all changed.

I started saving for retirement in 1987. I was 26 years old, and Barbara and I had just returned from a 16 month trip backpacking around the world. Though we spent just $7 per day, we spent everything we had. We came home with a net worth of just about zero -- actually, a bit less than zero as we both still had undergraduate student loan debt. We found temp jobs, rented an apartment in Arlington, Va. And in July of that year, I found a regular job that offered a 403 (b) type retirement plan sponsored by ICMA Retirement Corporation. A rep. from the company came one day to explain how it worked.

It seemed like a good idea. I started putting in $20 per pay period of my own money into the plan and after six months on the job my employer started contributing a few percent to the plan on my behalf.

Even then I knew that neither my wife nor I was likely to have a traditional pension and future of Social Security seemed in doubt back then too. I wanted to be able to retire at an age when I could still enjoy it and realized that everything would depend on what we were able to save and invest.

Then I blinked and the day had arrived. After 35 years of living beneath our means, saving the difference between what we earned and what we spent, and investing it as wisely as we could, there were no more earnings. The spigot was shut and now we had to pull the proverbial plug and live on the water as it drained from the sink. It was a disconcerting feeling.

As it turns out, Social Security is still around. However, though I am eligible to apply this year, I have concluded that it will be better to wait until age 70 to claim as that will result in a higher monthly benefit for me and perhaps more importantly for Barbara should she outlive me. Barbara can apply for her benefit now but has not yet done so. While we decide on that, her benefit is also increasing each month we delay.

So, for the last year, we have lived mostly on our savings. I say mostly, because at the beginning of 2023, I took a part-time job with the Jewish Grandparents Network. The bulk of our living expenses, however, are still being drawn from savings.

Once over the shock of money moving in only in one direction – out, I needed to make a plan for how to draw and manage the flow. And since I am a DIY when it comes to finances, I needed to create the plan myself.

We had multiple goals that were sometimes at odds with each other.

First and foremost, we had to managing the withdrawals in such a way that they were likely to last as long as one of us was alive. Of course, the big challenge here is that for the most part, one doesn’t know how long one is going to live. It could be five years or it could be forty.

The quick rule of thumb is the “4% Rule.” This rule says that if you have a portfolio that is invested in 60% stocks, and 40% bonds you should be able to withdraw 4% of that in the first year of retirement and then adjust that amount for inflation in each subsequent year. Your money should last for 30 years. Outliving your savings is more of a problem that your savings out living you, so it makes sense to be conservative here. Some experts say 4% is too high and that the number should be closer to 3.5% or even lower.

The opposing goal is that you want to be able to draw not just enough to meet basic needs but to do the things you want to do. The whole idea of retirement is to have the time and the resources to travel and do the things you couldn’t do when you were working full-time. So, although you don’t want to outlive your savings, it doesn’t make sense to die with a bunch of money in the bank either if doing so means living a smaller life in retirement than you need to.

Lastly, there is the goal of minimizing taxes. The bulk our savings is in tax deferred accounts like IRAs. Uncle Sam kindly allowed me to stash away all that loot on a pre-tax basis. But now, the man with the red, white, and blue suit and matching top hat is camped on my front lawn. Each time I go outside, he wants to have a word. He says he wants me to pay income tax on that money I earned as long as 30 years ago. For purposes of taxes, each time I make a withdrawal from an IRA, it is taxed like earned income and if I go over a certain amount, it could push us into a higher tax bracket meaning more taxes on each additional dollar withdrawn. The Great State of Maryland wants its share too. That means the amount in the bank is actually significantly smaller than it appears.

Making things more complicated is future Social Security. When I do finally claim my benefit, it will reduce my draw on savings, which means that I can draw a more now than I could if there was no Social Security. I do that by calculating a present value for my social security payments, which considers the current interest rate, our future payments from social security and a guess at how long we might live. The longer I live the better the numbers look. And if I don’t live long, well then running out of money isn’t a problem!

In developing my withdrawal plan, I started with the premise that, if possible, I’d like to stay under the top of the 12% tax bracket. The next bracket (at least until 2025 when the current tax rates could expire) is 22%. That means that for each dollar drawn after that bracket is reached, you are paying 22 cents on each dollar instead of 12.

Fortunately, the top of the 12% bracket happens to be very close to the amount that we need to live on plus be able to do most of the things we want to do. It helps that though we travel a lot, we travel modestly – cooking our own food and sleeping in our car (van). But even if we live on less, it still makes sense to draw up to the top of the 12% bracket since in all likelihood, taxes will never be lower than they are today (but who knows?). We can save the extra in an after-tax account. The other reason to draw up to the top of the bracket is that eventually (for me age 75) our kindly uncle begins to get antsy about getting his share and you are required to withdraw from your pre-tax accounts. These are known as RMDs, required minimum distributions. If you haven’t taken enough in early years, you could find yourself in a higher bracket as you age with few options at that point for reducing your taxes.

Fortunately, when future Social Security is considered our burn rate is less than 3.5% even if we spend every nickel we withdraw.

Plus, I do now have a small income and even a little bit of money flowing in, makes a big difference psychologically. It helps justify small purchasing or indulgences; I might otherwise be inclined to skip. “A new iPad? Why not, I’m working.” “The fancier coffee? Why not, I’m working!” “A summer cottage in Maine… well maybe not”

Retirement is full of adjustments and many of them are psychological. I have friends who are in their 70s who continue to work at full time jobs. I don’t know what their financial situation is; perhaps they need to work (but I suspect not). They claim to love their jobs, which may be quite true. But part of the reason to continue to work full time when you no longer need to do so, is that work provides an easy sense of purpose, an anchor for one’s life, an identity.

For my part, coming to grips with the idea what I do for work is not who I am, finding meaningful ways to spend my time that is not work, and yes, enjoying spending what I saved has been a worthwhile endeavor.

Living negative can be a whole new way of valuing your time, your life, and your money.

The world’s a narrow bridge; fear nothing.