David Chen: Early Retirement & Key Lessons from a Community Member

This episode is brought to you by the New Retirement Planner Create a Financial Plan for free@newretirement.com. Welcome to the New Retirement Podcast. Today we're going to be talking with David Chen, the brother of a good friend of mine from high school and a member of our community. Through a combination of good habits and some good Fortune, David retired three years ago at the age of 53. And so we're going to be talking about David's story, some of the big lessons he's learned along the way and insights from his journey. He's got some interesting ideas and strategies he's pursuing around generating income in retirement, which we're going to talk through. And also he's learned some lessons in dealing with his own father's estate as his father passed away. And he wants to share that as well. And so a lot of really good real world lessons for us here. For what it's worth, until we got reacquainted recently, my strongest memory of Dave was getting driven around in the back was like golf GTI in high school where he was blasting Oingo Boingo music and he was driving his brother Joe, who was my good friend and myself around. And so it's kind of interesting hearing how his life has turned out and kind of catching up after all these years. So with all that, Dave, welcome to our show. Thanks for taking the time well.

Thank you. Happy to be here.

Dave, I'd love to first hear from you your own story about your career and some of the big when we were talking catch up earlier, sharing some of the inflection points that let you achieve financial independence in a way that wasn't standard. I think some of your good habits contributed to it. But it's interesting story and obviously has informed your perspective on saving and shifting to retirement.

Sure. Well, first I'd like to start with a lot of times when you hear from people, it's from the perspective of they got a large inheritance or something happened which people automatically tune out and they think that this couldn't happen to them. So that's part of the reason I wanted to come on and talk through my experiences because I think what I experience is what everyone else can experience at the same time. So my career is I've always been in it and I've got 32 years in it. I started at IBM in 89 and from IBM I moved to HP. I had 16 years at IBM. I moved over to HP for seven years and from HP I then moved to another company called CSC Computer Sciences Corporation, which ended up merging with HP a couple years later and became the company DxE. And I ended up retiring from them. But all of these companies that I just rattled off, they're all the largest four or five largest IT companies within the services industry. And I considered myself lucky to be able to work among almost all of them.

And I remember when we were talking, you shared that there was a moment in time, I think in 2013, where there was a transition happening with one of the companies and you made some big decisions and that kind of informed your trajectory a little bit.

Right, right. So in 2013, I was let go by HP. At that time I had four kids and they were young, they were all in sports. Essentially a vulnerable time in our lives. And it was shocking and scary. But as Steve Jobs had said, he had a quote, looking back on your life, you could only connect the dots. And he's absolutely right, because one of the lessons I had learned is that event singularly helped me achieve early retirement and financial independence seven years later, at 2020, at age 53. Like you said, that never would have happened had I not left hp. So a couple things happened from that event in which I don't think is intuitively obvious to people. I don't hear a lot of people talking about it. In being let go, it made me aware that 401ks that large companies had. Most of us are used to having a 401k right in battery, and we think that's the path to retirement. Well, what I've come to see is that 401ks can also be a handcuff. And the reason why is because while 401ks, I think are a problem appropriate in most cases. Right. They bring about average returns and as a trade off of that, you don't have a large selection to choose from. And I think that that's nice and safe. But in 2013, by being let go from HP, I had both an HP 401K and my previous IBM 401K, which I left at IBF. So at that time, conventional wisdom was if it was to roll them over into an IRA, especially if you're not close to 55, because of the rule of 55, where, where your 401ks, you are able to tap them early, I wasn't there. So the conventional wisdom is to roll them into an ira. And I did that. And when you roll them into an ira, you're not able to transfer the assets in kind. And what that means is whatever they're in, like a large index or a mid cap index transfer those assets one for one you have to liquefy into cash and move that into your IRA and then within your IRA then you pick the new assets that you want to invest in. Well at that time I was like pretty much everyone else. I had my 401k choices. I had no idea what to invest in. I was researching and learning. So what I did was since it was in cash at that time Apple was coming out with their iPhone, four new operating system and iPad upgrades and all that stuff. And I was a big Apple fan at that time in and I saw the fact that all the Apple stores were always busy. So I just put all of my retirement 100% into Apple. That was just before it split seven for one, right. Two, three months before. So then it split and then it split again and Apple as we all know the story just climbed like crazy. Crazy. So that flexibility that the IRAs gave me at the time that I would not have recognized had I stayed in HP because I was locked into my 401ks allowed me to achieve financial independence. So that, that's one lessons learned. And by the way, I'm not sure what people can do about that. What I advise people is once you no and by the way why we want to have more financial discussions. I think as a society most people don't like to talk about their money investments and things like that. But if you don't share information, hopefully there's somebody listening to this and saying wow, I didn't realize that maybe I should be investing in an IRA or looking to see if my 401k can do in service distributions. Which means while you're working you can remove your funds from your 401k into an IRA that gives you that added flexible investment flexibility. Right. If you don't know the ask or to even look for that then you won't be able to take advantage of these type of opportunities. Right. And so, so that's one lesson learned. The second lesson is learned is a very subtle connected dots linkage that I made. Because 401ks by their very nature are very diverse and safe. They get average returns. What occurred to me was the philosophy around working which is when you're, when you're in general investments, I'll say that it's not just 401ks but when you're in general index investments in which most people make that decision because it's very simple for all the right reasons, but because it gives you average returns. What I don't think most people Think about is that if a priority of yours is to retire early, then the average returns hurt you because the average returns are geared around a 30 to 35 year workspace. It has to be. Right? Because if it wasn't, then you would hear everybody touting, saying I invested in this one ETF and because of this I shaved 12 years off my retirement. I mean off my working. That, that doesn't happen. Right. So you can tell that the 4 to 8% return rate, percentage rate is geared towards 30, 35 years. It just has to be math wise as well. So I don't think very many people put that linkage together. So that's another lessons learned is if you want to retire early, you have to do a combination of things, which one of them I did by finding Apple. But I don't want to give the people the impression that's the only way to do it. Right. You do need to know how to swing for the fences in order to raise your average return. But that's only part of the equation. Then the other part is you have to have a large savings rate. So which means you have to live below your means. Right. And those two in combination will, will help you retire early. But that's stuff that everybody hears from all of the other fire podcasts.

Yeah, I mean I want to make a couple of quick comments here. So I agreed that those are the levers, right. That you know, you probably know Mr. Money Mustache. I remember I laughed when I first heard his name. But you know, he's Mr. You know, high savings rate. And yes, a high savings rate I think is what I've heard this from other experts. It's like it's the single biggest factor key to success. Yeah, right. What you did, you took a ton of risk. I mean, I think that we want to, I also want to be clear that for in your situation, you got a little bit like you made a good decision. Also in hindsight maybe it's a little bit, you know, fortuitous, right, that you, you made this bet on a company that has literally is driving the indexes across the board. I mean Apple's like the single biggest component of like the S and P. It's like whatever. It's a huge part of the economic success of this country. But there's never like a risk free return. Like if you're getting higher returns, you do have higher risk. I mean you do have some risk, you know, in. And something we're going to talk about later by having the concentration of one stock, like I've Talked to people, they've owned a lot of Tesla and it's really worked out for them. But, you know, we don't know. I mean, some of these valuations are really high on a relative basis for some of these equities. So you, you do have, you know, material risk. So eventually diverse. It's like what they say is you need to take a lot of risk to get rich, but if you want to stay rich, diversify and actually. Curious, did you diversifying after you kind of achieve a certain level of wealth?

I did. In fact, I diversified in two ways. The first is while I was investing, I said I shouldn't be 100% in Apple. Everybody through common sense would know that you should diversify. So I tried doing that. I went into Alibaba, I went into GoPro, those were doing their IPOs, same thing. I'm not just swinging for defenses in a dumb way. I'm selectively picking companies that at that time in 2013, you could see GoPro on a tear and so was Alibaba. Right. But both of them. The problem with them and why it's so hard to swing for defenses is that most, most companies end up petering out there. There's some trade off. It's very difficult, as we all know, to pick a good company. So I ended up liquidating and going back into Apple because I couldn't find another company that seemed to have a better trajectory. But also allow me to have some semblance of sleep.

Yeah.

I'll give you an example. Had I picked Tesla, Tesla grew more than Apple. But there is no way I would have been able to sleep during the five, six years that Apple and Tesla were both not growing very well. Right. I mean, they, they only appreciated over the past three years. I mean, there was six years of almost no growth that I had to live through and wonder if I made the right call. So it definitely wasn't easy. Now, your point on diversification, what I want to do with the lessons learned is, is you're absolutely right. But I think in terms of the different phases, right, because the accumulation phase is one thing. And that's the point is you, that I think you were also trying to make, which is you need to both save as well as you need to do certain things and take higher risk if you want to raise your rate of return. And that is the sacrifice you need to make if the priority is to retire early. And that's the linkage I wanted to make to people is because so many times when I talk with people and they all talk to me and say, how did you do it? And you start talking about some of the risk factors, right? Because you have to talk about risk. And they go, no, no, I can't do that. And they want to be safe. Well, there's no free lunch here. And so that's the linkage is if you want to take years off of your working years, you have to do something, one of these things, and that's tied into the state nature of the 401ks and things like that. Okay, now what do you do after you have a large portfolio? Yes, I did, I did take a look at diversification. But at the same time, diversification, you hear the same thing. Now, diversification by itself is not easy. It sounds easy. It sounds like it would be an easy process. But I'll give you an example around Warren Buffett. Warren Buffett let his Apple size of his portfolio grow to 47%. And most people would say he's nuts. But now he, he and I, we have the same problem. Even though I'm not, I'm not trying to equate myself to Warren Butter, we have the same problem, which is once you have a good investment, how do you diversify safely? That is the other key point that you and I have talked about, which is how do you not diversify or diversify for the sake of diversifying? And you are then diversifying either out of ignorance or not going into worse companies. Right. And so I think Warren Buffett has the same problem. If he's going to try to take his 47% of portfolio and make it safe, where would he go into that is safer at this point? Now, in hindsight, now that we all know the company that Apple has become, where would you put it, that won't have the same capital utilization, Right. The same growth, the same moat around it, and the same management team, they're hitting on all cylinders. So what would you pick? And I'll segue that into a problem that most people struggle with, which is what assets do you pick? Right. So I started off in looking at diversifying, picking Total Stock Index, right. Vti. I'm a big Vanguard fan because of low, low expenses. So I started off with a core holding of vti, total stock, and then branching into international, whatever. I've kind of flipped that around. And the reason why is because I've kind of seen the Total index also brings in all of these other companies that have a worse profile. Yes, it's diversified, but you're also diluting your potential gains for not a Whole lot more safety. So what I decided to do was I kind of switched my thinking. Instead of doing my core holding, let's say 40% into BTI, I'll do my 40% into something like SCHD. Right. The swab index, which kind of is a little bit of a unicorn now in which it gives you the same capital gains, but it also gives you a higher dividend. And it seems to be a good subset of companies where you still get the diversification. But what's happening is this. What I've decided to do is I've switched from going total stock index to the core holdings should be between SCHD and something like, like vym, which is. Right. The high dividend yield for Vanguard. Big high growth, quality dividend growth for Vanguard. So you'll, you'll see a method behind my Manus. What I'm doing is I'm creating a core around good quality dividend bearing stocks because I'm a believer that by focusing on dividends people will disagree. But by focusing on good quality dividend companies, you're actually getting the best of the best. The companies tend to be very good. Then what I'm doing is with that core, I'm then putting in 10% around the core. 10% being 10% into international, 10% into total stock, 10% into value stocks. Right. The bug index, 10% into Wellington and Wellesley. Right. Things like that. To shore up the core with what I think that the. Oh, and rents. Right. So I'm going into vnq, the total risk because the core dividends don't, don't have writs. So I'm shoring up the core with what I think it's missing. But the core is now made up of a dividend base methodology versus a blind total stock index.

Okay, so I'm gonna, I'm gonna play this back for you a bit. Okay. So you're working, you're saving. And I think one of the things you mentioned is you've always lived on like 70% of your income, right. So you've been able to save at a 30% rate, which is high, which is great. So that let you build up a pool of savings largely. And qualified accounts like your 401ks, you get laid off, you take a step back and you're like, okay, I want to take more risk. You make a good decision and put a bunch of it into Apple. Study that, diversify a little bit. But you're still thinking individual stocks. Just so risky. Keep riding on Apple. Get to this point where you've built A pretty big, very big portfolio. And at this point, we're going to talk about this in a minute, you start figuring out how you can turn that asset pool de risk it a little bit by diversifying. And then you're also doing some stuff around turning on income based on these assets, which we're going to talk about in a second. But like how much of your overall portfolio is still Apple? Is it like half or something? Is that what you're saying? Or you largely, I mean, you have to add. So I'm just curious how much you diverse. Because I am a believer. I mean the thing about individual stocks is, and Apple is obviously an exception, but versus the whole market. Like if you buy the whole market, you're buying, you know, the ingenuity. If you're buying the US like of every person working hard and hopefully they're running in a fiduciary way and like you're capturing their returns. Yeah. It's not going to get the same absolute return as like the best performing individual stock we've seen in recent history or maybe ever. But you're also not going to necessarily the same volatility. One thing I want to talk about later is also like Kodak, like we both grew up in Rochester. We saw this company that was like impossible, like incredible company. And then it imploded and went to zero, you know, which.

130 quickly too.

Yeah. So even though we're like, oh, Apple's indestructible, you don't know. I mean, we don't really know. Right. And if you have a huge concentration risk, I mean, they could come back and bite you.

Yeah. So. Yes. But, but that also points to something else. It doesn't come without pain. I'm going to talk about the pain at the end. Don't let me forget.

Sure.

It is, I think an important lesson also for people to see. It's one of the lessons learned. So once my portfolio got up to 10 and a half mil, how I diversified was once it hit certain points like 150 and 172, I had determined I was going to take from, from the top, sell high, buy low. Right. And it. That sounds way easier than it really is. So. But decided I was going to take off the top and like you said, diversify in order to save what we have. Because at that point gains aren't as important compared to the risks you take if something happens. When I say gains, I'm really talking about opportunity costs. Right. So a year and a half ago I diversified into fixed index Annuities to solve a couple problems. And what they do for me is if I diversify, I want to build up what's called my four, three, two, one plan. That's an easy way of remembering. If you think about it, 4, 3, 2, 1 adds up to 10. So the 4 is my what's called set and forget.

Yeah.

By the way, I'm a subscriber of the bucket strategy and we'll, we'll talk about the reasons why later on. But the three is my dividend bucket and the two is my fixed index annuity bucket. And then the one I'll call liquid, not quite cash, but they're liquid enough in which they're safe for an emergency fund and to use to address sequence return return risk. So that's the easy way of knowing my four buckets of 4, 3, 2, 1. The reason in building the FIA buckets is this. Most people will go through the traditional thinking of I'm going to build a bond layer, right? Okay, I've got the stocks that, that gave me the accumulation layer, Right. Or I mean the capital gains layer. So now how do you temper that? And they would go into bonds. But as you and I saw over the past two years, bonds for different variables, they're still subject to volatility. And unless you're going to pick individual bonds in which when you hold them, you'll get your money back, and then you live off of the interest that it's giving you, any other type of diverse bond vehicle that you go into BND or what, you can still take a capital loss, right. And so you're not assured that you're going to get your money back and it's not as volatile, it doesn't move as much, but you can still take a loss. And if you need your money now that I'm retired and I'm tapping my portfolio for income, when you need money in an extended downturn, your bonds have the same sequence risk. So what the FIAs, the fixed index annuities do for me is it keeps my principal safe. It still gives me income, it lets me defer as well. That's a third thing, because we're about to talk about, let's say Roth conversions, because that was a big driver behind my retiring early in order to do Roth conversions. If you pick any other type of annuity to fix the problem, you could pick an immediate annuity, but then an immediate annuity, you are fixing your tax position, if you will. So if most of your money is in pre tax like mine is, and most People are, if you buy an immediate annuity, that income will always be taxable income. Write a portion of it. So one of the lessons learned in early retirement is taxable income is the death of you. Right. Because it handcuffs you. And a lot of people don't understand and realize that until they're doing the financial calculations later on. But taxable income really hurts you. And so you want to do a lot of things in early retirement. If you're retiring later on, then sometimes there's nothing you can do about it. But in early retirement, you want to be able to address the tax. Tax issue.

Okay? So you basically generate income that doesn't count as it's not taxable income, you're deferring the. You're moving around the taxable income till later. So you can do Roth conversions in a. In a window. Is that what's happening?

Exactly right. As well as the entire annuity as a vehicle can be converted to a Roth. You can't do that with an immediate annuity or other annuity. Type your fixed annuity or fixed index annuity. And just to be clear, fixed index annuity is what I did, but you could always convert to a fixed annuity. The only difference is that you are picking the interest rate. Right. In a fixed annuity, you're locking in the interest rate. Fixed index annuity, you're indexing it to some index that's closely aligned to the market. So I hope to get a little bit more gain, but you'll never get less than zero. So I'm taking a little bit of risk there of zeros, but I'm taking far less risk than if it was an apple.

Right, Right. So I just want to. So the. Why do you call it 4, 3, 2, 1 in terms of the bucket strategy, are those like duration periods or you're just kind of the. The segments, the names you picked for the. The buckets that you.

Yeah, no, no, actually, the reason is even simpler than that, Steve. 4, 3, 2, 1 is the size of the buckets, okay? So I got 4 mil in a set and forget. And by the way, how you get a large set and forget bucket is you raise your dividend yield in your dividend bucket by. I have 85 assets. Right. A lot of people would say that's unwieldy. But the reason why is because I'm trying to raise my. My overall dividend yield is 10.6%. Right. So out of my $3 million dividend bucket, I'm cranking out 320 versus normally, if I put it in safe 3 or 4% dividend yield vehicles. I'd have to alloc a much bigger portion of my pen mo.

Okay, got it. Can we talk a little bit about what you're trying to do with Roth conversion? So you, you're like, okay, I can achieve. I've got a big enough asset pool, but it's largely unqualified. Then you're kind of looking forward. You're like, I need to fund my life. And I know you talked about I want to dial in something for my estate. Right. I want to dial in my income. And I think another interesting point you made is like, you want to be able to enjoy your income. Like, you want to be able to spend it, which I do see. Like I've seen you on social media. Like, hey, you're, you know, you're living your life. It's great. You're not worried about it. And then you want to be tax efficient as you're kind of like repositioning your assets. And one other quick comment is for a lot of our users, they like to go into retirement with their assets diversified across taxable, like they've already been taxed. You know, brokerage accounts tax deferred, the 401k and IRA that qualified money and then some tax deferred. Very often it's not very much, but then they're like, they're trying to get in that tax or, sorry, tax exempt vehicle, the Roth at the end. But I'd love to hear your story about, like, how you are moving between these buckets and what your strategy is.

Right, right. So on the Roth conversions, part of why I wanted to retire early is because when you figure out your tax strategies, you find out very quickly that the earlier you retire, the more years you have to be able to spread out your Roth conversions as well. As in my case, I want to take advantage of the years until 2025 of low tax rates. Right. Because of tax rates going up in 2025 or in 2026. And that's a tax risk, by the way, that everybody should acknowledge and know about and plan for. Right. And so as they're going through their calculations, the more I can spread out over the years until I have to do enough Roth conversions until I'm 63 because of IRMAA, which is the Medicare calculation, the bulk of my conversions is time to end at 63. So then I can do my remainder roth conversions at 200k a year from 63 to 70. And the rationale there is to 200k keeps me under IRMAA. So I don't have any IRMAA impact. And it stops at 70. So that I'm not stacking my Roth conversions on top of Social Security because I'm going to take Social Security at 70. And then my wife at 72, she'll take her Social Security at 67, her full retirement age until 7. She's two years older than me. Right, right. So that when she's 72 and I'm 70 and claim she'll be able to get her spousal support.

Okay, got it.

But you can see from a tax planning perspective, I'm trying to avoid stacking my Roth conversions on top of that Social Security payment I just told you about.

So you're planning on. Essentially you've been doing Roth conversions since you retired, right. Or right. You're starting now from, call it 53, 54. You're going to run them for 16 years until you're 70.

That's right. And the reason why I say it became obvious to me to retire early, that that's another lessons learned. Right. That I think is valuable for people to hear because as we know, people are always subject to the one one more year right thinking mentality, which keeps them on. And it's a scary thing for them to know, when do I leave to be able to start doing these Roth conversions? You don't want to do Roth conversions while you're working because you're just stacking your tax rate. You're locking in essential on top of the income that you have already. So in a lot of cases, that that doesn't make sense. So the way I figured it out was when I was working, when you figure out the tax advantages and what you're saving and you calculate that into your income and what you gain by working and staying working and what that additional money will do, like I said before, on risk, eventually the gains don't mean anything. Gains mean less to you than the risk. In this case, the gains in working, the extra income, as well as the loss of healthy time. Because you become acutely aware when you retire, your money stays in the background. But you know what really comes forefront your healthy years. Right. How you can do things, go out on a boat, you can do what we just did, go to Iceland and Arctic Circle and do the polar plunge. You can't do that if you're not healthy. That becomes ultimately the most valuable thing. Well, now you realize that your healthy years are diminishing. So once you factor all that in, it became easy to say, I'll retire early at 53 in my prime earning years. And the rationale was the amount that I would save in Roth conversions by converting early and letting it grow early in my Roth account was worth more than what it was working. I'll give you an example how people overanalyze this. People always look at tax rate and they say, oh, that's why I'm not converting now. It's because I don't want to pay the big lump. Well, if you think about what what happened to me, my Apple stock, just to use Apple as an example, but you can stretch it out over two, three years and it still works. My Apple stock, I transferred it in kind, did a Roth conversion. So I paid in my after tax bucket, the taxes like you're supposed to. And by the way, the after tax came from my pre tax account because I'm under what's called 72T distributions. We can talk about that. That's a way of early retiring, of tapping your portfolio early, before 69 and a half. So when I converted, I paid taxes on that Roth conversion. That Roth conversion came out of my taxable bucket. Went down.

Yeah.

Essentially my net income in that year went down and my Roth balance stayed the same. But because it stayed in Apple, think about what happened. Apple just went up 47, 48%. Right. At the beginning of this year was 125. I converted at 125 and a half, 126. Now it's at 189. Yeah, well all that happened is my taxable went down, but my what went up in the same year.

Right.

I haven't paid any taxes, if you think about it that way. And all those gains will now be tax free going on from here on out. So now most people say yeah, but my investments aren't like Apple. Okay, but you're getting 8, 10%. Right. So if you're into 24 bracket, let's say which means 370,000, you can convert. If you convert, don't worry about the taxes because if you're making 10%, you'll make it up in three years.

Right, right.

And then the rest of the years growth is all gravy. And then you don't have to worry about Social Security tax, IRMAA widows tax and estate tax.

Yeah. So but you have to have the ability to pay the taxes when you do if you're converting up to that level. Right. So if you convert. Yeah. 370,000 bucks and you're 24% tax bracket. Right. You're, you're walking off like 90, $100,000. Right. Of that's right, taxes.

So that was part of the calculation when I retired early, because I'm under 69 and a half. What I had to do was a calculation that limited essentially the amount of Roth conversions I could do in my early years up to 69 and a half. Which is why I call my 60, 61 and 62 years my big bang years. The reason why the Roth conversions are limited is because I, like you said, I have to pay the tax. The tax comes out of my pre tax, which then I can only take out so much under a 72T. Your 4 or 5%. So I had to calculate all that up from a bottoms up perspective to be able to figure out essentially how much can I pay in taxes in the year, which then told me how much can I convert? So I didn't do it from the perspective of how much can I convert. It was how much can I take out in my 72T limits here. Exactly.

Okay, got it. But you're paying for the taxes from the convert. I mean, all the money is coming out of qualified, including the dollars you're going to pay in taxes are coming out of that pool. Sums going in Roth. And then how about paying for your life? Like how about just the day to day? Is that from the. The annuity stuff?

Yeah. So that is total in the 72t. And for paying for my life, I mean, that goes to the lessons learned you and I were talking about about living below your means in the beginning. We talked about how we lived on 40,000 a year. And the most people don't. I get challenged all the time. How did you guys do that with four kids? We never had new cars, we never had any new furniture. We didn't have TVs. Right. I mean we made all the sacrifices you would have to in order to do that. And part of how I did that was I boosted my savings rate. I mean, I did Roths in 2000 before anybody else I knew even knew what Roths were. And how I afforded my Roth is I maxed out my 401k. When you max out your 401k and your HSA, you save enough because you're contributing pre tax, you save enough in taxes to pay for your IRA contribution.

Got it.

See, a lot of people don't think about it that way. And so. So that allowed me to contribute to both. Very little hurt on my part.

But now do you feel like your lifestyle has changed a lot? So you sound like you were Disciplined, had a high savings rate, you know, controlled your expenses. And I guess your kids are older now, so now you have a much bigger asset pool. You're dialing in your income. Do you feel like you're really enjoying your life a lot more?

Oh, absolutely. So life in retirement, when you don't have a schedule to live by and you get to do. You get to focus on all the things you always wanted to do to fulfill yourself. And at this stage, all my kids are out of college, you know, and my second oldest son is getting married next year. So you see them being successful. It's. It's a fun time of life to be in, which is another reason for retiring early. Between this time and when grandkids will come, that's the only time that we have to focus on ourselves and enjoy our lives.

A young single couple. Except you have money.

Exactly. Well, that's another thing. I mean, to talk about the benefits of retirement as a married couple, you get to focus on yourselves again. Because a lot of times I know many of your listeners are in the same situation. You're working so hard and you're trying to achieve your retirement goals that you and your wife, you end up talking at each other and not with each other. And that's all right. That's how all married couples are for generations and for all eternity. But very few couples get the chance that we do, which is retire early now, have a reset period where we get to just concentrate on ourselves and live the type of lives that we want. It's pretty cool.

That's pretty nice. I know. I see your adventure, so it's cool to hear about what you're probably adventuring.

So that's a great segue into my dad. Because like you said about enjoying life, not everything's all hunky dory, right?

Yeah. Yeah, for sure. I remember you were posting some stuff about your dad's patents and stuff like that, and then we chatted a bit. You shared a story that I think he was an engineer at Kodak. He had a strong career there, but he also had like a huge amount of risk. Right. He had, I think, a lot of company stock and healthcare and benefits and stuff like that, or pension and. But yeah, I would love to hear kind of like what you learned from that and then how that's affected your own thinking.

It's affected me in a big way. And this was another large reason for me trying to spread the word, if you will, because it was a key symptom of what I call financial arrogance that I See around in the early retirement and the retirement community in your own forum when I post and contribute you to. I can see it there and. And I'll talk about that in a second. So my dad passed away in November and until then we never talked finances or anything. We had the very typical father son relationship. In fact, I'm lucky to say over the past 12 years our religion or relationship really blossomed. And especially since I retired because I got a chance to, to spend time with him. I was in charge of taking care of his estate and it became apparent that he incurred a lot of debt. And his last 10, 12 years he was hounded by debt collectors and things like that. And I share that because I didn't realize how much of a burden that is and worry and strain the past 12 years has been on him. Completely. He hid that completely. He was a proud father and he hid that from us. Well, here's the reason why. It was eye opening for me. My dad worked for Kodak. He had a great retirement. He had a perfect retirement. He happily retired from Kodak. Kodak issued a retired one to one of two retirement phases where he got lifetime healthcare for leaving. But then what happened is you and I both know in Rochester Eastman Kodak, in one year they declared bankruptcy. They demolished the retirement plan. They got rid of the health care benefits that they had committed to. Their stock plummeted. And my dad was a loyal employee. He worked there all of his life. So I'd say not all, but a good chunk of his savings was in Kodak stock. He lost everything. Now on hindsight, if you were you and I, we could say, oh, he should have known better. But I guess the important point for all of us is how many of us make our retirement plans and our models. We all have models on how we're allocating assets. Just like you were talking about with me and where do you invest in and all that stuff. And we make decisions and we say, oh, I'll invest in the total stock market index into Total stock index will always be there. We don't know. Now I agree that the risk is low, but what happens is my dad also thought Kodak will always be there. And if you grew up in east in Rochester, New York, you were kind of blinded to that fact. You thought Kodak would always be there and providing for everyone. Right. And her stock would always be high.

130 year old company.

Right. I mean it's like exactly, exactly. So what happened is after my dad and that not just with my dad, I've talked to other people and out of privacy, I won't name or anything, but I would say there's five, six other people that I've talked with that I've consulted with because they know I early retired. They want to see what's happening and how to arrange their portfolio. They're in the same shape, by the way. It occurred to me that those are only the people that will talk to me. Right. And reveal things. So how many people in America are either eking by or barely make it or taking on a risk that they don't even know? A lot of people. When we talk about financial arrogance, I say that because people don't recognize the risk that they're taking on in managing their own portfolio themselves. And to quantify that risk or to kind of give an example, because most people won't acknowledge it. You and I both know all of us live through this. There was a time when all companies had pensions and that was the way it was. Then they slowly transferred that risk over by saying, hey, you can manage yourself in 401ks. You have all the flexibility in the world. Isn't that great? And IRAs and things like that. And then cash balance pensions came out and you could manage that. Well, intuitively, when I talk about that for the masses, I'm not talking individual people and their level of knowledge. You can acknowledge how scary that is. I don't think people realize how much risk got transferred from companies to people. And oh, by the way, I will also make this supposition if managing your portfolio was easy, 4%, right. Roll. I'll give you 4%. I'll do an annuity of 4% and I'll invest the rest and collect a difference if it was that simple. There is a reason why in my mind, when I look at companies, why GM made GMAC and why Apple is making their own financing companies. You know why finance is easy? Yeah, it's easy being the middleman and skimming off of transactions and, and making money off of interest. Right. The delta and interest. That's easy. What's hard is pensions. There's a reason why companies are going that way. But pensions. Why are companies getting rid of all their pensions? They can't afford it. Because it is not easy to manage your own portfolio when you have at fixed withdrawal rates due to risk. That's why I've kind of turned around on fixed index annuities, fixed annuities or income annuities, depending on your level of knowledge. Because if you don't know anything, like a member of my Family, then do an immediate annuity where you don't have to think about it. And here's the reason why I talk about financial arrogance. If I put a post in your form on, I'm thinking about putting part of my portfolio into an annuity, an immediate annuity. You know how many people jumped on my throat saying that's the worst thing ever and you should manage. The reason why is they think they can manage it themselves and they don't realize the risk to. To your retirement 20 years down the road to your portfolio. Now that's a good segue into risk. I acknowledge now that I don't have income coming into my portfolio, and I'm living on that. It's not just the risk of mismanagement or picking the wrong stocks. It's the risk of myself. If you manage yourself, you are always doing what you and I are talking about. Moving funds around, picking a better fund, a better return or doing something, you could very easily make the wrong decision. There's a risk of dementia. Once somebody I know, you know, in my neighborhood got dementia and drained their entire account, it's very sad. What do you do? Right? The people left behind who are in trouble, and then somebody else gets hacked. Every time I get a text from somebody, I wonder whether I'm being hacked, Right? And it very well could happen. Somebody could have. I could leave my cell phone someplace and somebod pick it up and this doesn't have to be now. It could be 10 years from now, 20, when I'm not of sound mind and not quick and I leave my cell phone someplace and they hack into my account.

How are you hedging that risk? Are you. Do you have an advisor or how do you. What are you doing now?

Yeah, so I do have an advisor. Gabby Metrum from Nim Financials. And then there's Byron Hardlam, a cpa. So just to give a shout out by. But essentially you have to surround yourself with a good team. And they've given me advice and counsel on not only. I'll give you an example to fix index annuity. One reason how I hedge on sequence returns in an extended downturn is they provide lifetime income. But I didn't want that. As soon as I say lifetime income, you should be thinking in your head that's good and bad because there's a right or wrong fee and you pay that rider fee even in a downturn. So you, you are losing money. Well, guess what? She was able to find income riders through carriers that don't charge a fee. And the reason why I like that, even though then you would be saying, yeah, but they're charging their expenses, they're recouping at some other place. You're absolutely right. But as long as they're not charging it in a discrete fee, then if, if the market, if I'm in a fixed index annuity and I go down to zero, guess what? They don't, they don't pay a fee. Right. I mean, there's no fees taken out. So the only time fees get taken out is if I'm in a growth scenario. And I gladly trade the up a little bit of upside for no downside and no fee. So that's how using those type of vehicles have I addressed sequence risk and principal protection. Right. And long longevity. There's other risk factors, inflation, all that other stuff that we can talk through at a later time.

Yeah. Well, I think just to recap this part, a couple thoughts. So I totally agree with you. Just to go back a bit, when we move from DB plans to DC plans, so from pension plans to 401ks, we basically shifted all this risk to individuals. And we went to every individual in this country and said, you're in charge of your own retirement. And now you have to be as smart as a CFO who was managing the pension before and manage your own investments. That's like a crazy idea. The progression has been basically early vintages. So like I'm a person who got a 401k and no pension. The initial defaults were terrible, the fees were high, performance was terrible. Remember looking at it didn't kind of go anywhere for a long time. Now in later vintages, like, okay, fees are lower, defaults are better. So people are defaulted into more risk, which is good. But yeah, just to go back from where we were, it's like people were making like no returns. Now if they take more risks, they're taking at least the market returns. You got control of your situation, took even more risk, got higher returns. Good.

Then you de risk.

Yeah. And then you eventually de risk, which is a good move. By doing these annuities, by the way, I'm going to. Also I'll link into. We did an interview with Glenn Nakamoto, who is another community member. And he. He was researching getting annuities. He couldn't get anyone to talk to him about it. And he's like, I want this income layer. I wanted Social Security and he wanted some guaranteed annuities to add up to a certain amount of guaranteed income to make sure his core must have spending was addressed, but he had a hard time finding people who would talk to him about it. But he ultimately did it because he felt like the math was right. And we can link to it, you can see all of his thinking. But what you're doing is interesting. You're, you're buying term annuities to get income for a certain amount of time and then you're also investing at the same time to recoup your principal so that you can recycle this in almost 10 year windows. But the interesting thing is by having the annuity, you feel comfortable spending it all. You're kind of like, well over a long duration, I'm confident in the market, so I'm happy to spend my money. Because I think another thing that happens is a lot of people, they go to retire. Well, first they're not sure they can retire and so they do one more year and they keep working forever. And then they go to retire and they're like, they don't want to touch their money because it's like their nest egg and so they can't spend it. And then time goes by and then they're 80 years old and they're like, I can't actually now I'm too old, I can't actually enjoy myself. So they miss that window of like actually using the money when it has the highest utility.

You're absolutely right. That decumulation stage is psychologically one of the hardest things about this, this phase in life. It's a good point you make. There's two, right? One is when do you stop working? That is a very difficult psychological step and sometimes it's made for you that decision. But a lot of times you have to decide yourself. But then the other is how after a lifetime of behaves of saving behavior, how do you flip that so that you can enjoy retirement? That's another aspect of annuities in which why I'm a proponent of them now and I'll talk about them through an example that I had a year ago when I was traveling with my wife through Europe. When I checked into the Prague Marriott, their concierge said that they were renovating so they didn't have it available, but they had three restaurants there at the hotel. And they said, we will give you a $200 credit it every night for the three nights that you're here and you can spend it at any of these three restaurants. We said, hey, great, that makes up for it. We're very happy. So every night we spent at a different restaurant and we spent the $200. And as you can guess, the spending of the $200 was what prime ribs should we have and what type of wine should we enjoy and should we have this appetizer? Maybe we'll take two appetizers because we like both of them, right? So then it kind of occurred to me, and it's kind of funny because I rem remember a conversation where I said, hey, this is a great example of finance example. My wife says, will you turn it off? Okay, But I, I digress. So on the $200, if you had told me that my portfolio just returned 200 that day, go ahead and spend it, what would have been my normal human reaction that everybody else would have done? Yeah, I'll spend the 200 bucks. You know, I don't know. With market risk, we're in it. Last year we were in a downturn, right? There was fear in the market and whatever. So Instead of spending 200, I might spend 150. I'll hedge a little bit, I'll spend 150, and instead of getting the best cut of meat, maybe I'll get the lesser cut of me, you know, whatever. That's how I get to the 150 and things like that. That's what all of us are talking about when we, when we talk about lower your cost, your standard of living, things like that, order to make trade offs, right? Because we're used to, in a saving methodology where you save money at the expense of something else so that you can enjoy something later on. That's the saving mentality, right? The scarcity mentality. Well now all of a sudden when you're decumulating, you have to spend it all. That's hard because of that behavior I just talked about with that scarcity, you think you need to make a trade off off. Well, if you're getting an annuity, think about the $200 that the hotel gave me. That's exactly like an annuity. The money comes in and you spend it. That's the natural human behavior because you know it's out of your control that you'll get it again next month. And there's something psychological. It's the same $200. One is under you, one is under annuity. And I'm telling you it makes sense. A big, huge difference in how you enjoy your retirement. So that's one lessons learned. The second lessons learned is you stop budgeting. Now I wouldn't say that for everyone, you know, saying you don't have to do this and all. But I talked to a couple other Retirees, I was astounded that they did the same thing because I thought I was the only one. Here's what happened. I was the type of guy, as I'm sure most of your listeners are too. I tracked every penny all the way back to 1989 in clicking and spreadsheets and stuff like that. I tracked everything that was my behavior simply because of the scarcity mentality. If I knew I was saving in one area, I could allocate it to another area. And you, that's how you track things. Once I got the retirement, it started with the first year. I start tracking everything naturally. It was natural to me and I it and it didn't take long. Two months in, in which I said, wait a minute, if I'm doing a fixed withdrawal on my 72T, why am I tracking everything in retirement? Because also it helps that you don't have savings buckets, retirement buckets. You, you don't have work buckets, closed buckets. Right. All you really have is a spend bucket on food, gas and fun. Right. I mean, it's very simple. So I said, why don't I just set up guardrails in which out of the total amount I carved out half of it, which was still higher than my 40,000 that I used to write. And I said, why don't I set up guardrails? So as I pass that in my spending, I'll start to kind of look and go, what am I spending on? Maybe I should cut back or whatever, but if I don't hit the guardrails, then I'm fine. So I stopped budgeting. I, I literally, it's been three years now. I don't, I couldn't tell you what I spend money on because I don't care. I don't. Look, we just spend money. And once you know it, the saving mentality is still very hard to break. We still nickel and dime, but the difference is we nickel and dime on what doesn't matter to us are you don't want to be my insurance rep. Right. I, I will beat you up on the cost of car insurance and umbrella insurance, things like that. Because I can and I don't nickel and dime on the fun stuff or food or going out to eat, you know that. Yeah. Travel and we just spend. And once you know it, I've never even gone past the first guardrail I set up for myself. It just naturally I'm waiting to do it. I may get more first class tickets and whatever, but you know, someplace just, just to do it. But we don't do it. And I suspect most of your listeners. And this is meant to. I don't say this like, oh, look at me, because I'm so, you know, because I have a big portfolio. I'm saying this so that people have a level of comfort knowing that in retirement you can make it. Because if you're early retiring, you didn't get here by just willy nilly doing whatever, not tracking your spending. Right. You got here through a series of behavior and this is how you can make it fun now. But you'll still be who you are.

Right. It's awesome to hear this. I'm going to ask you one more question then. And then I think I should wrap it up because I feel like we're going to post this and our audience might come back and say, all right, let's have Dave explain exactly what he's doing because I think that there's a lot of nuance to what you're doing, your strategies, which are pretty interesting. One thing that I know is that there's basically two classes of people in the world in terms of outcomes. There's people that go to retire and then they, they run out of money, and there's people that have money and they retire and they tend to like, at the end of their life have even more money. And I'm curious for you, are you trying. I've been, you know, there's a book, Die with Zero, which I have yet to read, but it's been recommended by multiple people. But, like, are you trying to dial in like a specific outcome or like, how do you think, how do you think that your own trajectory and your estate is going to end up up given the planning that you've done? Yeah.

I think because I am a natural believer in the market, it's a good question because it speaks to the nature of who you are from an investing mentality. Right. Because if you're not believing your market, you're going to invest in your checking accounts and CDs and stuff like that and whatever, then you probably will run out of money. But I'm a, a natural believer in the market. So these big indexes that I'm trying to get into, so I don't spend as much time managing my portfolio, I believe vastly outpaces my natural spending behavior. I'll give you another strategy that this financial team I was talking about, I didn't do it all by myself. It's a good strategy that I think. Right. I'll just kind of lay it out to you this way. There is a way you can use pre tax dollars if you have your own company to buy them out of a solo 401k vehicle. So you can use pre tax dollars to buy life insurance. The solution goes like this. If you could insure for a certain amount so that you knew what you were giving each kid. Because since I have kids, if you don't have kids, it's a different solution. But if you have kids, what would I give your kids? Because for a lot of people who are trying to manage your money, you're trying to think about what is the residual value, which is why you're adjusting your spending, your rate of return and your spend rate so that you kind of know what you're going to leave behind. But that's tricky, right? So you're taking all those calculations on in the forefront while you can do that through insurance. And I would venture to say that you do your next generations at this disfavor by giving them too much money. We had decided on a certain insurance level that you take the insurance payouts to each of the kids and the insurance proceeds were paid pre tax. So you're saving money that way and you are allocating. It's a different defined benefit. Now what you're giving your kids, well, now that you figured that out and that came out of your pre tax funds, guess what, you just took that entire variable out and your entire portfolio. You can spend or you can also give the charity. And oh, by the way, how we're addressing that just for people to give a little nuance right later on in life. One reason why I'm putting everything into Roths is so that later on I can do a crt, have the income from the crt, which is a charitable remainder trust. That's where I think a lot of people get it wrong, right? They dictate where they want their funds to go on their debts. What charities? Well, that's the wrong thing to do because the tax benefit comes to your heirs under a charitable remainder trust. You get to take that tax benefit up front, by the way, that can offset a Roth conversion and you get lifetime income and you're giving to charity at the same time, you know, so all of those are strategies that you can do on how to spend the money yet still have money to live on. And you're living safely because now you get to spend it all without worry because you've already provided for everyone out. So how's that in a nutshell for kind of figuring things out and de risking?

No, I appreciate it. That's super good. I mean, we're one of the things we're going to do and then we'll wrap it up is we are working on just like we built the Roth Conversion Explorer, we're going to build like a withdrawal retirement income explorer that lets you like pull different levers, try to, you know, move things around. And like, you're introducing a lot of ideas here that are interesting, like targeting your estate through insurance, doing the CRT to kind of capture the tax write off and income but, you know, still provide, you know, give to a charity. It's super interesting. So, David, thanks for being on our show to our audience. Thanks for listening. You know, our goal at New Retirement is to help anyone do better with their money and their time. Check out our community. Dave is part of it. I'm part of it. It's on Facebook. You know, you can come to our site, try our platform for building your own financial plan and you can do a lot of nifty, you know, getting organized, seeing what's possible, seeing how to be tax efficient, getting a better sense of confidence and control. All feedback is welcome. And then any reviews on itunes or anything are super welcome as well. We want to spread the word about this podcast. Okay. So with that, that, thank you and have a great day. Dave, thanks for being on the podcast.

Thanks for having me on.