Level Up Your Retirement

I played a lot of video games as a kid. My loyalties were to Nintendo—and almost exclusively the early, original Nintendo games. I’m talking Super Mario Brothers, The Legend of Zelda, and Contra, to name a few of my former faves. When I started college and especially medical school, my free time evaporated quickly along with any remaining development of my video game skills.

Why, you may be wondering, am I blathering on about video games in a post about retirement? Because of the concept of the level up.  For those unfamiliar with gamer parlance, a character in a video game “levels up” with progressive success in gameplay, and is rewarded with new abilities or access to new items or areas within the game. Your character might gain the ability to hurl balls or fire, for example, or come into possession of a powerful magical talisman.

You can level up retirement, too

Many of you reading this dream about and aspire to an early retirement. Me too. Each of us has an idea of the baseline level of spending necessary to maintain a desired lifestyle. At a minimum, one needs to cover the basics of life: food, water, shelter, clothing, transportation, insurance, etc. Most retirees will want some level of discretionary spending on top of this: travel, gifts, booze, and entertainment, for example. Needs and desires can vary widely for a multitude of reasons.

But beyond this baseline spending, we move into the territory of a leveled up retirement.

Each retiree’s vision of taking retirement to the next level may be quite different. One might drool over a fancy new car, another over an exotic international vacation (ahem, me). Some, like Scrooge McDuck, might take comfort in all that extra cash they are swimming in.

The cost

If you read enough early retirement forums, you will be familiar with the concept of OMY—one more year. As retirement approaches, the demon of uncertainty sitting on your shoulder can start to whisper, “Why not work one more year, just in case. Hehehehe!” All joking aside, it can be a paralyzing, perpetual, and often unnecessary delay of retirement for some.

Despite the risk, I indulge the specter of OMY in this exercise. In fact, I go a step further and imagine what retirement will be like if I delay it by either 2, 5, or 8 more years. Each of these time periods results in a theoretical “level up” in my retirement lifestyle, but at a cost I do not take lightly—precious, precious TIME. Do the benefits outweigh the cost?

My level up numbers

Once I have hit my retirement nest egg number—that which can cover my anticipated, baseline expenses in perpetuity—the rest is gravy. But gravy is delicious, so maybe I want some on my retirement potatoes.

For this thought experiment, I decided to examine three levels of increasingly decadent retirement. I anticipate saving about $150k per year going forward. Extrapolating those retirement savings over my additional working years—and assuming 5% compound growth—I arrive at how much extra cash I should have in my nest egg. Then, using a 4% withdrawal rate, I estimate how much additional annual spending I can expect.

Each level up increases my retirement powers: first to a Knight, then a Grand Wizard, and finally a powerful retirement Demi-God.

What can I “buy” with those additional years of work? Let’s explore some aspects of retirement in which I might level up.

 

Travel

Travel is now, and will almost certainly remain in retirement, my largest category of discretionary spending. As you can imagine, it was not difficult to come up with this list.

• Knight: My travel habits would probably not change much at this level. I might loosen the purse strings a bit on accommodations or take an extra international trip, but I’ll still be flying coach.
• Grand Wizard: Now we’re talking. Business class is certainly within reach for long-haul flights. I would still likely skip it for Europe, but seriously consider it for places further afield. A fancy-schmancy hotel or private transport in lieu of public transport would be in the cards at this level.
• Demi-God: For me, the most appealing use of an increased travel slush fund is simple: more travel. I could also pay for family and friends on very special occasions—think a charter plane trip or a mansion rental. Sure, I could fly first class myself, but travel is more fun when you can share it with others.

Everyday luxury

If you decide to spend all your extra dough in this category, you might just become a “baller.” These expenses wouldn’t be the first place I spend my money, but if I must…

• Knight: Better wine or craft beer. A little more eating out if I want, and picking up the tab at the restaurant. Nothing earth shattering.
• Grand Wizard: Time to let my hair down! I’ll be hitting some of the nicer restaurants in town on the regular. If the night goes well, I might pick up the tab for everyone as I dance on the bar. (I will be regretting most of these activities come morning.)
• Demi-God: Weekly massage? Don’t mind if I do. Box seats to my local professional sports team? Why not. Michelin starred restaurants? Only if I get to meet the chef!

Market crash

“Protection” against a market “correction” is perhaps the most practical reason to consider a level up of retirement, and underlies many of the other level up possibilities discussed here. I won’t retire until I am confident that my drawdown strategy puts me on solid ground. But if the markets hit some bumps along the way, I’ll relish a little extra confidence that I won’t need to return to work.

• Knight: An extra ~$13k per year will help me—both monetarily and psychologically—weather a few years of flat market returns without breaking too much of a sweat.
• Grand Wizard: Even a year or two of recession won’t phase me with a $34k extra cushion.
• Demi-God: If my early retirement is cursed with financial crisis à la 2008, I might see 25% or more of my savings evaporate (assuming a 50/50 equities/bonds portfolio). At Demi-God level, a disaster of that proportion will merely drop me near my baseline nest egg and spending levels.

Corollary: If one is particularly risk averse and nervous about a market correction, a larger nest egg could allow one to maintain a more conservative portfolio throughout retirement—with the understanding that increased portfolio stability will sacrifice the potential for growth. One could, for example, produce near-guaranteed income by investing primarily in bonds and/or purchasing an annuity with the extra nest egg money.

Unanticipated expenses

Just as a leveled up retirement can mitigate against a market downturn, so can it provide a buffer against unexpected (aren’t they always?) emergencies or other wrenches that life tends to throw in your financial gears.

• Knight: My son is messing around at the bowling alley and knocks his teeth out with a bowling ball (my brother actually did this). I am on the hook for a few thousand in dental work, but with a level up I will walk away with a good story to tell rather than credit card debt.
• Grand Wizard: Some chuckleheads in D.C. decide to cut social security benefits in half beginning in 2030…oops. I might swear a bit, but not lose sleep. A friend or family member needs a “loan” to cover some short term emergency expenses; I can make it a gift instead.
• Demi-God: Significant ongoing expenses not included in a retirement budget can be game changers—think long-term nursing care for an ill parent, or a special needs child who requires lifelong financial support. A large financial buffer helps lessen the shock of such events.

Which level is best?

I’m lucky, and the magnitude of my fortune is not lost on me. Not only is early retirement within my reach, I can realistically fantasize about luxuries that would have been unthinkable to me in childhood.

I realize many (most?) early retirees are content to enjoy a simple retirement, and I totally get that. I’m sure I could be perfectly happy as well. I went a little crazy and douchebaggy with my discussion of the more…discretionary…expenses above, all in the name of fun. But fantasizing about expensive wine and designer clothing is not the point I hoped to emphasize with this post.

Much uncertainty surrounds an early retirement, especially with a potential 40-50 years of retired life ahead of me. A leveled up retirement can provide peace of mind and a financial safety net in the setting of a recession or unanticipated expenses—particularly to someone prone to hand wringing about future uncertainty.

Do I plan to level up? The answer is not so straightforward. You see, I kinda, sorta enjoy my job. I plan to work part-time for a period of time—perhaps many years—before I fully retire. Working part-time after I have “won the game,” i.e. hit my retirement nest egg number, is a different way to level up, but with much less risk compared to full retirement.

Either way—in part-time work or early retirement—I should have more time to get into video games again.

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What would you do with that extra money? How do you decide if one more year of work is worth the extra benefits?