Timing Your Retirement

I never understood why people hate jury duty.  Most seem to just gripe and complain about it.  I even have a friend who grew a beard and dressed like a hippie so he would get excused.  (It worked.)  (Of course, if you knew him, you'd know he was going to be excused anyway.)

Me, I always wanted to serve.  I saw it as my right and my duty to participate.  I also always figured it would be really interesting.  One day, when Fern was in Kindergarten, I finally got my chance.  The night before my big day, I was planning logistics with Rooty at dinner.  (We share a car.)  Fern was puzzled.

"Poppa, why do you have to go the courthouse?"

"I am on jury duty."

"What does that mean?"

"Well, I get to help decide who is a good guy and who is a bad guy."

Fern got up out of his chair and walked over to me.  He put his hand to my ear and whispered.

"If he has a gun or a mask, he's a bad guy."

Unfortunately, not all decisions are quite so obvious. Like, when to retire.  I first considered retiring in 2008 when I wasn't all that happy about work.  My company was going through financial difficulties and undertook a massive organizational rightsizing (translation: firing people).  I was one of three directors doing similar things, but the organization was being collapsed from three divisions to two.  So we had one director too many.  One morning, my boss and I were planning how to incorporate a new group into my team.  Just two hours later, he called me back to let me know I no longer had a job.

I never got an explanation.  But clearly, I was the odd man out, despite my top ranking and exemplary personal hygiene.  I didn't hold a grudge against my boss; he was as blindsided by the decision as I was.  And luckily, I found another job in the company within a couple of days.  But I was still upset and humiliated by the whole thing.

In contrast to my company's particular struggles, the stock market as a whole was a runaway bull.  The S&P 500 was just off its peak, and I was sitting flush.  My investment portfolio was at an all-time high, my stock options were worth a pretty penny, and my 401k was cranking.  I was very seriously considering pulling the ripcord.  I had even consulted several financial advisors...when the market crashed.

It was ugly.  The S&P 500 dropped from its peak of about 1560 in late 2007 to less than 700 by early 2009.  Many of my peers who had retired were back looking for work.  As for me, I no longer had the resources to retire.  So I stuck it out.

Fast forward to 2012.  My company was in financial difficulties once again and was going through workforce restructuring (translation: firing people).  But my personal situation was completely different this time.  First, I had three promotional opportunities to choose from, all of which would get me back into the executive ranks.  Second, the stock market as a whole was depressed (the market P/E ratio was well below its historic average), even though the economy was beginning to turn around.

So I retired.

"Deadwood, once again you completely exasperate me.  Your career is going well and the stock market is depressed, so you decide to retire?  I guess you're not as smart as you think you are."

In my defense, Slash, no one is as smart as he thinks he is.  But that aside, I know my decision seems counter-intuitive, so let me explain.
 
 

Retire when your career is on a high.

 
Being excited about work was one of the reasons I knew it was time to hang it up.  One of my favorite quotes comes from Jane Austen's Mansfield Park.  (Yeah, okay guys.  I also enjoy football...)  William has just made lieutenant and Fanny, his sister, is very proud of him.  Fanny wants to see William in his uniform, but won't have the opportunity until his return a year hence.

"...he would have been delighted to shew his uniform...had not cruel custom prohibited its appearance except on duty.  So the uniform remained at Portsmouth, and...before Fanny had any chance of seeing it, all its own freshness and all the freshness of its wearer's feelings must be worn away.  It would be sunk into a badge of disgrace; for what can be more unbecoming, or more worthless, than the uniform of a lieutenant, who has been a lieutenant a year or two, and sees others made commanders before him?"

Careers go through ups and downs.  If I had kept working, the excitement of the promotion and job content would have eventually worn away and I'd just be looking for the next promotion.  And there's really no end to that.  (At least for someone with my character flaws.)  So I figured I should leave on a crest and feel good about my accomplishments, my company, and the direction my career was headed.  That was a nice little luxury to take with me.

Retire when the stock market is on a low.

 
No one can time the market successfully.  By that, I mean It is virtually impossible to beat market returns by trying to jump in and out of it at the right time.  However, long term economic cycles are more predictable.  If possible, don't retire when the market is at unreasonably high levels (that is, when the market is much higher than its average P/E ratio).  Or if you do, make sure to have a little extra padding in your nest egg.

The following example helps illustrate this point:

Rich Mann and Rock Bahtum are both looking forward to retirement.  They are earnest followers of the 4% Rule and each has accumulated a nest egg of $2.5 M, supporting their $100 K per year living expense.

They both invest solely in the S&P 500.  (Not a smart idea, but they wanted to keep things simple to help me with this example.)  So they both receive the same exact total annual returns over the course of thirty years of retirement as is shown in the table below.

Here's where they differ:  Rich begins his retirement on Jan 1, 1984 and dies on Dec 31, 2013.  So in Rich's first year of retirement, he earns a 6% total return, on his second year he earns 32%, etc.  But Rock is time shifted.  He retires on Jan 1, 2000.  When he gets to Dec 31, 2013, his subsequent returns match those of 1984, 1985, 1986...1999.

So both Rich and Rock have the exact same average annual return of 12.6%, a colossal number.  We should all be so lucky.  Well, as lucky as Rich.  Rock, not so much.

"Wait, what do you mean by that?  They earn the same annual returns.  One is just time shifted from the other.  And you, yourself, said they have the same average of 12.6%.  So who cares?  Rich and Rock are exactly the same."

Not exactly.  The graph below shows how they each end up.  After thirty years, Rich dies obscenely wealthy.  He suffers two big blows to his net worth - the dot com bust and the housing bubble.  But in the end, he leaves over $35 M to his heirs.

Unfortunately, Rock runs out of money in his 26th year of retirement.  And that's with a very big, very unusual 12.6% average return.  Given a more reasonable 8-9% return, and his bank account is probably empty in about his 15th year of retirement.

What's happening is that Rich's and Rock's expenses are relatively fixed.  So when the market falls early on, Rock's expenses make up a much larger percentage of his nest egg than planned.  (And Rich's makes up a smaller percentage than planned.)  For Rock, the expenses just keep pounding away at his assets.  He never recovers.

The first couple of years of retirement are absolutely vital.  Two bad market years in a row, and you just may need to dust off that resume.  I've seen it happen.  Don't let it happen to you.

Jury duty ended up being even better than I had hoped.  When I told my sister about the case, the first thing out of her mouth was, "Were you the foreman?"

Well, of course I was the foreman.  I wanted to be the foreman so bad, I could taste it.  I mean, I've seen it a zillion times on t.v. and in the movies:

"Has the jury reached a decision?"

"We have, your honor."

It just doesn't get any better than that.
 
So as soon as we got into the jury room, I started working it.  I made small talk with as many jurors as I could.  I listened intently, told small jokes, laughed (but not too loudly), pretended to be intelligent (but not condescendingly so), and eventually, kicked off the meeting and led us through formal introductions.  And then, at just the right moment, just as a pregnant pause began to fill the room, I innocently asked, "Okay, so...should we decide on a foreman?"

It's all in the timing.