The Mechanics of Half Retirement

Half Retirement

As I’ve stated before, I am all about the philosophy of financial independence.  The so called why of FI.  Thus, I have warned readers not to expect to read much here about the mechanics.  If you want to learn about how to do a backdoor Roth IRA or even how to build a real estate empire, there are others out there who do it much better.  It is not that I don’t enjoy such conversations, it’s just not my wheel house.  I have found that perfect is the enemy of good.  I am good enough at these issues.  Perfection lies elsewhere.  However, as I have been contemplating my half retirement, it occurs to me that the mechanics of some of my economic decisions are actually worth talking about.

Moving from the accumulation phase to a more static plateau of net worth requires some thinking.

In Case of Emergency

I have never been a big fan of the emergency fund.  Since I have lived my whole professional life with a strong W2 wage and a hand in the business asset class, I have never had to think much about cash.  All I had to do was wait a month and the dollars piled in.  In half retirement, my W2 income will not exactly cover my monthly needs.  Thus, for the first time ever, I am going to build an emergency fund.

Given that we are much higher than average yearly spenders, I will likely need at least $100K to feel comfortable.

Since I expect to leave the nursing homes in about 6 months, I will stop investing new funds and let the bank account grow a little.

Drip, Drip

My yearly cash outlay for budgeting will be slightly higher than my W2 income once I enter half retirement.  So there are a few changes I will make in order to cover my expenses without the necessity of selling stock.  This becomes especially true when you consider that I will continue wanting to take advantage of the tax deferred space and contribute to both a 401K and a traditional IRA.  Plus I may consider continuing to contribute to my kids 529 plans, plus charitable giving.

Where will the cash come from?  My first move will be to disable the automatic dividend reinvestment in my taxable account.  I am paying capital gains anyway, I might as well use this cash as a cushion.  While I cringe to stop the dollar cost averaging, my goals are different now.  I want to leave my current investments alone in order to grow, but also have ready and easy cash flow.

While my equity allocation is not specifically made to produce dividends, my total market and international index funds will produce somewhere around $30K-$40K a year.

Another Kind of Dividend

I love real estate.  I have never minded being a landlord.  One of the great benefits, of course, is cash flow.  Up until now, I have always quickly invested my rental income into the stock market.  In half retirement, I will consider this easily accessible money as I would dividends.

Monthly rents will go directly into the checking account for spending cash, and also support my emergency fund.  The idea will be to feel like I am still getting a large paycheck even as my W2 has gone down.

The added benefit is tax deferral.  Since I take depreciation on all my properties, there is no upfront tax bill for all that money that I pull out in order to pay myself.

New Ventures

Although cutting down on the current loathsome portion of my current job, there will likely be other money making ventures in my future.  I am now part of a speaker’s bureau and have already accepted two keynote speeches for medical conventions.  I hope to do 5-6 of these a year which will provide some income.  Although the main purpose in half retirement is to challenge myself and grow, I won’t turn down a little extra money.

My blog continues to earn a touch.  I have mostly been using the income to attend FI related events like CampFI and FinCon.  But I have really not tried to pull the monetization lever yet.  If this blog continues to grow, I will consider it.

I am also not adverse to consulting in all its various forms, and from time to time an interesting opportunity falls into my lap.

Final Thoughts

Although half retirement will not mean an end to earning money, I will be squarely moving out of the accumulation phase.  The mechanics of my monthly cash flow are important to plan for in this new phase of my economic life.

The goal will be to both never touch my money invested in the market, as well as to continue to maximize my tax deferred saving.  I also want enough cash around to consider jumping back into the real estate market if the opportunity should present itself.

Life is changing.

So should my finances.