How do you live off investments without worrying about it?
June 28, 2024 6:16 PM Subscribe
I lost my job in Jan. I have a decent-ish nest egg, no debt, and calculated that I can live prudently without working. After 6 months I realize that I constantly worry about living off this money - because it feels uncomfortable spending without having a job - which I find extremely frustrating since I spent a good chunk of my life earning and saving it. Is this just how it works?
When I feel particularly uncomfortable, I create projections in Excel and end up with all sorts of calculations, using different rates of return, which I realize I'm doing in vain to make myself feel better. In fact, at a considered average rate of return, I should make ~50% more than my average cost of living, and so theoretically I could spend more, but I can't: I just look at it and try to convince myself that it's great that my hard work, saving and investment have paid off - but I'll then go out to the store and do a pretty frugal shop because, you know, I can't have extravagances while I'm not working. And this is all while the market's been performing well - I can't think what my shop will be like when it's on a downward trend!
I realize that this is entirely a first world problem, and I am ultimately grateful that I find myself in this position - I'm just wondering how other folks manage this. Or maybe this is just an example of social influence: that I feel discomfort because my friends are still working, and if everyone stopped working at my age too it would feel OK?
When I feel particularly uncomfortable, I create projections in Excel and end up with all sorts of calculations, using different rates of return, which I realize I'm doing in vain to make myself feel better. In fact, at a considered average rate of return, I should make ~50% more than my average cost of living, and so theoretically I could spend more, but I can't: I just look at it and try to convince myself that it's great that my hard work, saving and investment have paid off - but I'll then go out to the store and do a pretty frugal shop because, you know, I can't have extravagances while I'm not working. And this is all while the market's been performing well - I can't think what my shop will be like when it's on a downward trend!
I realize that this is entirely a first world problem, and I am ultimately grateful that I find myself in this position - I'm just wondering how other folks manage this. Or maybe this is just an example of social influence: that I feel discomfort because my friends are still working, and if everyone stopped working at my age too it would feel OK?
Budgeting. I made it all the way to retirement without having a budget, but now use one that allows decent groceries and includes projected/recurring expenses. Having it lets me sleep well and keeps me honest about impulse purchases. The budget is reliant on long term projections about the investments but I don't budget based on the full expected amount. So if I were using the above mentioned 4% spend down, I would budget based on 3.5% and adjust as needed after periodic review.
posted by beaning at 6:57 PM on June 28 [5 favorites]
posted by beaning at 6:57 PM on June 28 [5 favorites]
The above 4% ‘rule’ embeds a lot of assumptions like rates of inflation/loss of purchasing power of the dollar, ROI, lifespan, and risk of large expenditures such as illness. As Yogi famously said, “Predictions are difficult, particularly about the future.”
Perhaps you should consider getting a job; it will bring a little money in and, perhaps, reduce your anxiety. One goal, after all, is pursuit of happiness.
posted by sudogeek at 6:59 PM on June 28 [5 favorites]
Perhaps you should consider getting a job; it will bring a little money in and, perhaps, reduce your anxiety. One goal, after all, is pursuit of happiness.
posted by sudogeek at 6:59 PM on June 28 [5 favorites]
Hm. Maybe you can set some threshold on your accounts and say, if it goes below $X (call it the number you would need to comfortably retire, by your projections) I will start to worry, and as long as it's over $X I won't worry about it? Knowing that some alarm is set where you won't just, like, SPEND YOURSELF INTO CATASTROPHE is a good safety net psychologically. And assuming you're getting decent returns, seeing the number not only not arrive but not get any closer can be even more reassuring.
posted by Lady Li at 7:07 PM on June 28 [4 favorites]
posted by Lady Li at 7:07 PM on June 28 [4 favorites]
Another way of looking it: can you start to think of the return on your investments as income. So your $X investment is safe, but your $.05X income, a portion can go to spending and a portion can go to savings.
posted by Lady Li at 7:12 PM on June 28 [6 favorites]
posted by Lady Li at 7:12 PM on June 28 [6 favorites]
I'm thinking about a mid-to-late career gap, and I was wondering about this myself. While I'm not in quite the position you are, a conservative return on my investments would cover my basic living expenses. We as humans may never convince our monkey brains to feel comforted by spreadsheet math, but you may be more at ease if you have people you're engaged with who could conceivably work to get you employed in the future. There are lots of ways of doing this: volunteer work, sitting on boards, attending professional meetups. And who knows, maybe it'll lead to something paid you would enjoy doing anyway.
posted by ayerarcturus at 7:16 PM on June 28 [3 favorites]
posted by ayerarcturus at 7:16 PM on June 28 [3 favorites]
You’re still pretty early in the process.
You’ll probably need at least a year to detox from working all your life, and in that time you will actually see your savings grow despite the fact that you are not working. Actually seeing that happen made all the difference for me.
That doesn’t mean I don’t worry about it: about once every six months I freak out and go through all of it again just to make sure I got the math right. But day to day, I spend my money wisely and don’t worry about it too much.
posted by Tell Me No Lies at 7:31 PM on June 28 [9 favorites]
You’ll probably need at least a year to detox from working all your life, and in that time you will actually see your savings grow despite the fact that you are not working. Actually seeing that happen made all the difference for me.
That doesn’t mean I don’t worry about it: about once every six months I freak out and go through all of it again just to make sure I got the math right. But day to day, I spend my money wisely and don’t worry about it too much.
posted by Tell Me No Lies at 7:31 PM on June 28 [9 favorites]
Oh, I know this feeling! My situation is somewhat different, but we are partly living off savings and will be indefinitely. My strategy has been to take the 4% rule of thumb mentioned above, cut that in half and consider that my "budget." So in a good economic environment, I'm still "adding" to savings.
The other thing I do is look at our various investments (I had my savings in Vanguard and my husband in Fidelity, so we have two "pools" of money that we both own) and consider one of them "untouchable" and the other one "spendable." So when I take money out, I take it out of one of the Vanguard accounts. If I did empty Vanguard entirely, we'd still have a decent nest egg in Fidelity that is safe. Like, I'm not going to spend down the Vanguard money, but it's in the "allowed" bucket, and I don't need to think about it till it's depleted. (It is not; we are withdrawing slower than it grows.)
Thirdly, I do a small amount of freelance work at home. It's not much at all, but it FEELS like way more of a cushion than it actually is. Like, a very party time gig can really trick you into not worrying about this so much.
Good luck! Money is so fraught; it really is 90% psychological.
posted by gideonfrog at 7:35 PM on June 28 [5 favorites]
The other thing I do is look at our various investments (I had my savings in Vanguard and my husband in Fidelity, so we have two "pools" of money that we both own) and consider one of them "untouchable" and the other one "spendable." So when I take money out, I take it out of one of the Vanguard accounts. If I did empty Vanguard entirely, we'd still have a decent nest egg in Fidelity that is safe. Like, I'm not going to spend down the Vanguard money, but it's in the "allowed" bucket, and I don't need to think about it till it's depleted. (It is not; we are withdrawing slower than it grows.)
Thirdly, I do a small amount of freelance work at home. It's not much at all, but it FEELS like way more of a cushion than it actually is. Like, a very party time gig can really trick you into not worrying about this so much.
Good luck! Money is so fraught; it really is 90% psychological.
posted by gideonfrog at 7:35 PM on June 28 [5 favorites]
Another way of looking it: can you start to think of the return on your investments as income.
This. You will be taxed like it is income (if you are in the US), because...it is income.
posted by Toddles at 7:55 PM on June 28 [3 favorites]
This. You will be taxed like it is income (if you are in the US), because...it is income.
posted by Toddles at 7:55 PM on June 28 [3 favorites]
I recommend getting a low-stakes (ie, not hard, low pressure, easy to quit if you want to) part-time job. I love swimming and I think a swimming pool is a huge asset to a community, so I work 2 days a week at a swimming pool. This gives my finances a bit of a boost (every time I get paid it's like getting a free month's worth of groceries, a free tank of gas, and a free hotel room to visit my son and grandson) and also makes me feel like I'm contributing to society® without the stress and commitment of a "real" job. Also, I have a budget and I stick to it (I track everything on a spreadsheet) so each month I always know exactly how much I can spend or cannot spend.
posted by SageTrail at 9:17 PM on June 28 [16 favorites]
posted by SageTrail at 9:17 PM on June 28 [16 favorites]
You’re still pretty early in the process.
so I work 2 days a week at a swimming pool. This gives my finances a bit of a boost
Perhaps a bit of both? If you can spend a few hrs a week doing something to give you a modest paycheque that could be your fund for extravagance that you don’t feel bad spending. At the same time, it is a bit of a transition time to get used to that step change, relatively less disposable income, potentially a decrease over time of these savings balances you worked so hard to build up.
posted by koahiatamadl at 2:13 AM on June 29
so I work 2 days a week at a swimming pool. This gives my finances a bit of a boost
Perhaps a bit of both? If you can spend a few hrs a week doing something to give you a modest paycheque that could be your fund for extravagance that you don’t feel bad spending. At the same time, it is a bit of a transition time to get used to that step change, relatively less disposable income, potentially a decrease over time of these savings balances you worked so hard to build up.
posted by koahiatamadl at 2:13 AM on June 29
theoretically I could spend more, but I can't: I just look at it and try to convince myself that it's great that my hard work, saving and investment have paid off - but I'll then go out to the store and do a pretty frugal shop because, you know, I can't have extravagances while I'm not working.
You're doing it exactly right.
Most people in capitalist cultures have had it hammered into them from a very early age that extravagance is desirable to the point of being necessary. What you're currently going through is the process of finding out what it is that you actually need and my confident prediction is that six months from now you will be spending less than you are today and yet feel more contented with what you have.
You might care to lean into that by redirecting the mental capacity you used to devote to working toward the challenging project of continuously reducing the amount of money you need to spend in order to live completely comfortably while not feeling deprived of anything essential. This is something I personally derive huge amounts of satisfaction from, in large part because it lets me feel like my whole lifestyle sticks up the rude fingers to the advertising industry.
The key to feeling rich is not having boatloads of money, it's always having slightly more income than expenditure. If you can achieve that without having to sell your labour to somebody else, you've cracked the capitalist code.
posted by flabdablet at 3:32 AM on June 29 [11 favorites]
You're doing it exactly right.
Most people in capitalist cultures have had it hammered into them from a very early age that extravagance is desirable to the point of being necessary. What you're currently going through is the process of finding out what it is that you actually need and my confident prediction is that six months from now you will be spending less than you are today and yet feel more contented with what you have.
You might care to lean into that by redirecting the mental capacity you used to devote to working toward the challenging project of continuously reducing the amount of money you need to spend in order to live completely comfortably while not feeling deprived of anything essential. This is something I personally derive huge amounts of satisfaction from, in large part because it lets me feel like my whole lifestyle sticks up the rude fingers to the advertising industry.
The key to feeling rich is not having boatloads of money, it's always having slightly more income than expenditure. If you can achieve that without having to sell your labour to somebody else, you've cracked the capitalist code.
posted by flabdablet at 3:32 AM on June 29 [11 favorites]
If you want to read or chat with others having the same "problem", some good search terms are FIRE, Financial Independence Retire Early and the sub reddit /r/financialindependence. Most of the discussion is about accumulating the wealth, but there is also a lot of talk about the psychology of living off the money.
posted by CathyG at 4:59 AM on June 29 [5 favorites]
posted by CathyG at 4:59 AM on June 29 [5 favorites]
I faced this and initially took one approach then switched to another -
- The first year I made the leap to living off my savings, I decided that I needed to keep a base of XXX then, on January 1, calculated the excess and withdrew that amount from my investments over the next couple months and stressed less because I knew what was in my checking account and could easily live off this, even with extravagant amounts of spending. Honestly, I was less focused on my investment balances, and mainly looked at my checking account for how much I had.
- The second year, the market dipped and my investment accounts dropped below my base of XXX. This was a scary year and I lived quite frugally while I waited out the market. Since that time, I have been taking out 4% of XXX each year around January 1 and living on that for the year. Financially, probably not the smartest idea to draw it all on January 1, but the reduction in anxiety is worth it. My investment accounts are slowly growing and I now have a comfortable amount above XXX, but I will continue to just take 4% above XXX since it gives me an amount I can live on comfortably. Someday, after this balance has grown a lot, I will probably withdraw a larger sum (right now I am thinking it will go for purchasing a new car, all cash.)
This second strategy allows me to rest easy regarding my finances.
posted by eleslie at 5:08 AM on June 29 [2 favorites]
- The first year I made the leap to living off my savings, I decided that I needed to keep a base of XXX then, on January 1, calculated the excess and withdrew that amount from my investments over the next couple months and stressed less because I knew what was in my checking account and could easily live off this, even with extravagant amounts of spending. Honestly, I was less focused on my investment balances, and mainly looked at my checking account for how much I had.
- The second year, the market dipped and my investment accounts dropped below my base of XXX. This was a scary year and I lived quite frugally while I waited out the market. Since that time, I have been taking out 4% of XXX each year around January 1 and living on that for the year. Financially, probably not the smartest idea to draw it all on January 1, but the reduction in anxiety is worth it. My investment accounts are slowly growing and I now have a comfortable amount above XXX, but I will continue to just take 4% above XXX since it gives me an amount I can live on comfortably. Someday, after this balance has grown a lot, I will probably withdraw a larger sum (right now I am thinking it will go for purchasing a new car, all cash.)
This second strategy allows me to rest easy regarding my finances.
posted by eleslie at 5:08 AM on June 29 [2 favorites]
What you’re describing is very common. Retirees are comfortable spending “income” but less comfortable spending “capital.” Behavioural Economists call this a ‘cognitive bias’ and a big part of the investment industry exists because people worry about running out of money and sit on more money than they need to.
A couple of things you might do:
1: find a fee-only financial planner to review your situation and create a plan for you. An expert saying you can spend $x per month might be the external validation you need to give yourself permission to spend with less anxiety.
2: consider an annuity. An annuity is an insurance contract that pays you monthly income for life in exchange for an initial lump sum payment. This converts some of your capital to monthly income.
It’s possible that your anxiety in this situation is a math problem: you don’t know how much money you can spend sustainably. It’s also possible the issue is more psychological. You’re essentially retiring, and this is a different phase of life. Spending down your assets makes you more aware that your time in this world is going to run out. The financial planner will make projections that will probably show you that you are going to run out of time before you run out of money. Think about how you will make the most of both.
posted by thenormshow at 6:49 AM on June 29 [5 favorites]
A couple of things you might do:
1: find a fee-only financial planner to review your situation and create a plan for you. An expert saying you can spend $x per month might be the external validation you need to give yourself permission to spend with less anxiety.
2: consider an annuity. An annuity is an insurance contract that pays you monthly income for life in exchange for an initial lump sum payment. This converts some of your capital to monthly income.
It’s possible that your anxiety in this situation is a math problem: you don’t know how much money you can spend sustainably. It’s also possible the issue is more psychological. You’re essentially retiring, and this is a different phase of life. Spending down your assets makes you more aware that your time in this world is going to run out. The financial planner will make projections that will probably show you that you are going to run out of time before you run out of money. Think about how you will make the most of both.
posted by thenormshow at 6:49 AM on June 29 [5 favorites]
I’m not personally able to live on savings/investment income, but I do have a cushion that’s often hard to believe in, partly because of the deep precarity of people around me. I can’t do anything about that, but what I can do is reasonably assess if I’m living within my values, which goes a long way toward helping living within means, and allows me to help people to the extent I’m able.
A great book I always recommend is the old “personal finance” book “Your Money or Your Life”, by Joe Dominguez and Vicki Robin. I have a 90s edition that has some super outdated savings/investment advice that assumes conventional savings accounts have actual returns of interest, so ignore that.
The part you should read (which is most of it) is the part about what they call Financial Integrity, by which they mean figuring out who you are and what’s important to you. Work, play, spend, and live as close to that profile as possible and you will be relatively peaceful and secure because you won’t be chasing your tail.
posted by toodleydoodley at 7:52 AM on June 29 [1 favorite]
A great book I always recommend is the old “personal finance” book “Your Money or Your Life”, by Joe Dominguez and Vicki Robin. I have a 90s edition that has some super outdated savings/investment advice that assumes conventional savings accounts have actual returns of interest, so ignore that.
The part you should read (which is most of it) is the part about what they call Financial Integrity, by which they mean figuring out who you are and what’s important to you. Work, play, spend, and live as close to that profile as possible and you will be relatively peaceful and secure because you won’t be chasing your tail.
posted by toodleydoodley at 7:52 AM on June 29 [1 favorite]
>>A couple of things you might do:
>> 1: find a fee-only financial planner to review your situation and create a plan for you. An expert saying you can spend $x per month might be the external validation you need to give yourself permission to spend with less anxiety.
>> 2: consider an annuity. An annuity is an insurance contract that pays you monthly income for life in exchange for an initial lump sum payment. This converts some of your capital to monthly income.
A VERY hard favorite on this comment, especially the fee-only financial planner advice. But also the annuity part.
I'm still working, but I also have a bit of a scarcity mindset which (if you're not familiar with the term) might be of interest. I meet with my planner once a year, and he patiently listens to my freak-outs and then pulls out some charts and scenarios and helps ease my mind.
The second bullet point about insurance is also worth exploring. My planner helped me understand the new world of "long-term care coverage". These are basically policies that are a hybrid of disability and life insurance that are designed for adults on the "younger" side of the age continuum. You either give the insurance company a lump sum of cash, or commit to spreading out the premium over 10 years. For sake of the math lets say $100K.
Like life insurance, this premium immediately has a much larger value (again, for convenience lets say $150K) but this value also grows over time. In return, if you ever get to a point where you need long-term care (there are pretty clear definitions of what this means) then you start getting paid monthly benefits that (depending on the specific policy) you can use however you like (for the sake of argument let's say $6K/month). You could use it for living expenses, rent, food, whatever, or even pay an informal caregiver (family or friend).
Now, say you never need long term care and you die, or you're on this long term care plan for a year and then you die, the money you put in doesn't disappear, it goes to your beneficiary.
So for me at least, this gives me peace of mind, it's something above and beyond health insurance and/or medicare. It also doesn't replace your traditional savings, it's a backup to that. It acts as a buffer that quiets my brain because I know that even in a worst-case scenario where my savings have dwindled and I am infirm, I have this cushion.
posted by jeremias at 1:49 PM on June 29 [4 favorites]
>> 1: find a fee-only financial planner to review your situation and create a plan for you. An expert saying you can spend $x per month might be the external validation you need to give yourself permission to spend with less anxiety.
>> 2: consider an annuity. An annuity is an insurance contract that pays you monthly income for life in exchange for an initial lump sum payment. This converts some of your capital to monthly income.
A VERY hard favorite on this comment, especially the fee-only financial planner advice. But also the annuity part.
I'm still working, but I also have a bit of a scarcity mindset which (if you're not familiar with the term) might be of interest. I meet with my planner once a year, and he patiently listens to my freak-outs and then pulls out some charts and scenarios and helps ease my mind.
The second bullet point about insurance is also worth exploring. My planner helped me understand the new world of "long-term care coverage". These are basically policies that are a hybrid of disability and life insurance that are designed for adults on the "younger" side of the age continuum. You either give the insurance company a lump sum of cash, or commit to spreading out the premium over 10 years. For sake of the math lets say $100K.
Like life insurance, this premium immediately has a much larger value (again, for convenience lets say $150K) but this value also grows over time. In return, if you ever get to a point where you need long-term care (there are pretty clear definitions of what this means) then you start getting paid monthly benefits that (depending on the specific policy) you can use however you like (for the sake of argument let's say $6K/month). You could use it for living expenses, rent, food, whatever, or even pay an informal caregiver (family or friend).
Now, say you never need long term care and you die, or you're on this long term care plan for a year and then you die, the money you put in doesn't disappear, it goes to your beneficiary.
So for me at least, this gives me peace of mind, it's something above and beyond health insurance and/or medicare. It also doesn't replace your traditional savings, it's a backup to that. It acts as a buffer that quiets my brain because I know that even in a worst-case scenario where my savings have dwindled and I am infirm, I have this cushion.
posted by jeremias at 1:49 PM on June 29 [4 favorites]
Just to give you one data point, my parents had an opportunity to do this and decided not to because they made me and my siblings. Humans are very expensive to raise.
posted by robot cat at 3:32 PM on June 29 [1 favorite]
posted by robot cat at 3:32 PM on June 29 [1 favorite]
It appears that the OP is not in the USA (if I read the profile correctly). Of course it's possible (???) they are still due SSA income at some point.
Also, for others who may read this thread, also keep in mind that some States tax Social Security, some do not. Also, depending on the total of non-SSA income and SSA income you may owe more in Federal taxes than before you starting drawing your SSA.
I am not a tax preparer, I just know what my CPA told me. Please directly contradict me if I am wrong.
posted by forthright at 4:37 PM on June 29
Also, for others who may read this thread, also keep in mind that some States tax Social Security, some do not. Also, depending on the total of non-SSA income and SSA income you may owe more in Federal taxes than before you starting drawing your SSA.
I am not a tax preparer, I just know what my CPA told me. Please directly contradict me if I am wrong.
posted by forthright at 4:37 PM on June 29
Response by poster: Thanks everyone for your extremely helpful answers. Just to address the last comment, I'm not currently in the US, but will receive SSA income (at some point!).
posted by my log does not judge at 9:54 PM on June 29
posted by my log does not judge at 9:54 PM on June 29
Annuities are generally terrible investments that take huge fees and exaggerate expected returns to the extent that companies exist to buy people out of them so if you are going to choose one you have to do like 10x the due diligence of other types of self-managed investments.
posted by The_Vegetables at 8:00 AM on June 30 [2 favorites]
posted by The_Vegetables at 8:00 AM on June 30 [2 favorites]
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The rule of thumb is that you can spend 4% of your wealth per year and live off that forever.
If you have Social Security coming to you (assuming you are in USA), then you can spend more than that, and then drop back to 4% when the SSA funds kick in.
posted by intermod at 6:41 PM on June 28 [6 favorites]