Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar, Inc.

Ptak: Our guest on the podcast today is Tanja Hester, whom The New York Times referred to as the matriarch of the FIRE movement. For the uninitiated, FIRE stands for financial independence/retire early. Tanja is the author of the Our Next Life blog, and she is also author of the book Work Optional: Retire Early the Non-Penny-Pinching Way. Tanja and her husband Mark retired in 2017 at the ages of 38 and 41. Her blog is devoted to chronicling their journey and sharing guidance for others who might be considering an early retirement.

Tanja, welcome to The Long View.

Tanja Hester: Thanks so much for having me.

Ptak: You wrote a terrific piece for MarketWatch arguing that this would be a pivotal moment for the FIRE movement that might shake out some of the bad ideas that had taken hold in that community. What are some of those bad ideas? It seems like a lot of them revolve around people retiring without enough of a margin of safety built in.

Hester: Yeah, I think like any large community that grows, over time you get more and more diversity of ideas and diversity of thought, and really much like with any investing, everybody is brilliant in a bull market. Everyone's ideas work, nobody's failing. And so, I think that a lot of the ideas put forth in more recent years have not truly been tested. And I think, unfortunately, this financial crisis, whatever it shakes out to be ultimately, is going to test a lot of the ideas that are put forth. I still think all of the fundamentals of the early retirement or what I call the "Work Optional" movement, you know, it's really just the idea of saving enough so that you can live on your passive income.

It's really not a revolutionary idea. But I think that you have over time as that bull market got longer and longer and longer, and people felt more invincible as investors and also as people came in who were younger and hadn't necessarily lost a ton in 2008-2009, or who hadn't been deeply scarred by earlier crashes like dot-com bust, that you've had folks who haven't necessarily experienced hard times as an investor and got really, I think, overly optimistic. So, you had some folks pushing for safe withdrawal rates from portfolios that aren't sustainable. You had folks pushing people to retire on less than $1 million, which could easily be wiped out with one or two healthcare crises, given the state of U.S. healthcare.

So, there are multiple ideas out there, I think, that really all do go toward that more aggressive side, relying on a high growth future, relying on a future in which we can predict healthcare costs, of a future in which there are no cost ramifications of climate change, which really, we need to be understanding that there are a ton of unknown unknowns out there and building a movement and a community around that idea. So, sure, it's going to take people a little bit longer to get there to their early retirement goal, but it will give them a lot more peace of mind and safety ultimately. So, I think it's worth it. Obviously, millions of people are now out of work, who had jobs a few months ago. But I think that in terms of FIRE specifically, this will be long term a helpful thing to get us more ideas instead of the kind of fringy more aggressive ones.

Benz: Tanja, I know you've thought a lot about return sequencing when putting together your own plan. So, let's talk about that issue and talk about how you've structured your plan so that it's resilient in the face of what could be kind of a long running recession and trouble for the stock market.

Hester: Yeah. One of the things that I think is not talked about enough in early retirement and work optional circles is the fact that early retirees are vastly more likely than traditional retirees to hit a bad sequence of returns. And that's based on an analysis done by Karsten Jeske, who blogs at Early Retirement Now. He's a Ph.D. economist and has broken this down. And the simple reason is that traditional retirees tend to retire around a nonfinancial milestone. They turn 65. They get their pension, a spouse is sick, and they have to retire to take care of them. I mean, these are reasons that tend to be driven by other factors where early retirees tend to retire in clusters, which we've just seen a big cluster of folks retire early in the community at the end of a long bull market, and so you actually are much more likely to retire into a recession. Of course, no one could predict a recession like this one is perhaps shaping up to be. This is obviously much larger, different than other events we've seen. But it is something that I think early retirees have to pay special attention to is making sure that you're not harming the entire success of your retirement portfolio by retiring at a bad time.

And so, for us, we did a few things. I'm a big believer in what I call the two-phase early retirement approach in which you save for early retirement as a separate phase of life than traditional retirement. And so, we have our 401(k) dollars socked away, and we are just not touching them unless we hit an emergency or something truly terrible happens. And that money will just grow until we're 59.5 and older, and then we'll shift to living on that. But so, we have this separate pool of just regular taxable investments that we're primarily living off of until we hit almost 60. And the idea being that even if we fail now, we're still protected in our later years. We're not bankrupting our future selves in an effort to stay solvent now. So, that's the first thing and I think a really big thing is just kind of insulating future us from the risk of the present.

The second is by having a sizable cash cushion. That's not a very sexy thing to say to people who love investing, but I'm really a big believer in having two to three years' worth of cash in a savings account, high yield, something like that. And so, we definitely have that. We also separately have a bond allocation that would support us for multiple years beyond that. And another thing that isn't particularly sexy, but we paid off our mortgage before we retired. I think having a paid-off home allows you to live very cheaply if you need to, and it gives you some added insulation. So, if times get tough, you can take your spending down to a pretty low level. I'm not a believer in the kind of ultra-frugal camp of FIRE of living on rice and beans. In fact, I really don't think that's a majority opinion. That's just a sexy thing to write stories about. But it is nice to know that we can shrink back to that level and protect our whole portfolio if we need to.

Ptak: You used the word different before. You were investing during the 2008 market crash but still working. How does this market swoon feel different to you now that you're retired?

Hester: Well, I mean, obviously, I have a real stake in it in a different way. This is money that we need to live on, not necessarily right this moment, but in the foreseeable future. And so, seeing things dip feels very different than back in 2008, when we had a lot less invested, and it was all abstract. This was just some unknown future date when we might pull it out. And so, yeah, seeing stuff go down is never fun, but it wasn't as meaningful. So, I think it still affects us differently. But I think we've also gotten a lot more practice. We've seen market ups and downs before. We've seen the Great Recession. We've seen that recovery. It gives us perspective to remember that, hey, even if stuff is scary right now, things do come back over time. We know that the markets have always had positive returns across each decade. Whether that will be true in the future? No one knows. But we can certainly be hopeful about it. And I don't know a thoughtful way to wrap that up. Sorry.

Benz: That's OK. So, how did the 2008 financial crisis make you want to pursue an early retirement? You've written about this. And on the surface, it seems kind of counterintuitive in that this financial crisis and big market sell-off reduce people's investments and force them to continue working longer. But you've said, it actually influenced you to kind of want to think about an earlier retirement. So, let's talk about that thought process.

Hester: For sure. I honestly think we're going to see something similar with this crisis. I think we're going to see more people interested in at the very least securing their financial independence if not eyeing an early retirement. To me it's being able to, as the book title says, make work optional, something that you can choose to do or not to. But for us, that was very much by the realization that I think what was happening prior to the Great Recession, but certainly was reinforced by 2008-2009. The system is not built to look out for us. We as individual investors are at the whims essentially of much, much larger forces. In 2008, it was the moral hazard and that over leveraging and securitized mortgages, and all those things. Now, it's a global pandemic over which we have no control. But seeing then all the dominoes fall across the economy, seeing millions of people lose jobs right now, we're seeing that happen at a faster pace than ever before. In 2008, it was seeing all the homes be foreclosed on, and all the people forced to short sell, things like that, that you realize that if you allow yourself to be vulnerable, or if you're in a position of vulnerability because of limited opportunity, that that's just an incredibly scary thing. And so, I think for us and a lot of people in the FIRE movement, it's really in some sense, a fear-based reaction. It's saying, "I don't want to be vulnerable to that; I want to take my financial security into my own hands." And I just don't see an outcome of this current crisis being that people are going to say, "You know what, after going through all that, I'd like to be more reliant on my job. I'd like to be more tied to this scary and vulnerable thing." I think you're going to see more people come out of it as we did in 2008 and say, "I want to be in control to the extent possible."

Ptak: But given the way this is affecting broad swaths of the economy, don't you think in some ways that it shrinks the potential pool of those who would be equipped to make the kind of change you described, however well-reasoned it might be? And your reasoning is--it seems sound in a lot of ways. But it just seems like this has been injurious to such broad swaths of the population that that they really wouldn't have the option to go and do those sorts of things. Isn't that right?

Hester: Oh, no doubt. I think you're going to see more people having the desire. I think, at least in the short term, fewer people able to execute it. But I also think it's an often-overlooked thing, because media tends to like to tell stories of people who were able to retire at incredibly young ages. What's often overlooked is the fact that a huge number of people doing this are not making massive salaries. We know a lot of people who've been able to do this who are teachers or public employees at fairly low levels, or dual income households that don't earn six figures combined, even still today. And so, I don't think it's true to say that people won't be able to do this after the recession. There will be fewer people probably who can do it in a handful of years, or who can retire at 30 or 35. But I still think it's going to be a good motivator for folks to save what they can, and that's just going to give people more power in the future, which is only a good thing.

Benz: So, I want to talk a little bit more about sort of the logistics of a FIRE portfolio and how that would work in the face of the kind of market environment we're in right now. So, you've written critically about the 4% guideline or sometimes called the rule for retirement portfolio withdrawals. Sounds like some FIRE proponents just kind of take it and run with it, but you've been critical about it. So, let's discuss the system that you use with respect to setting your withdrawal rate and maybe why you think the 4% guideline really does not work in the FIRE context.

Hester: Yeah, the 4%, I'm just going to shorthand it as "the rule" because that's what we most frequently call it even though I always put rule in quotation marks and do criticize it as you said. The main reason that it doesn't work, I think, honestly for all retirees, but especially for early retirees is that it is fundamentally based on the idea that all of your expenses will keep up with inflation or actually get cheaper over time. And we live in a world in which that's no longer true primarily for one reason, and that's healthcare. Healthcare right now is increasing at about 3 times the rate of inflation every single year. And that's not an expense that you can frugal your way out of. You can save money on groceries; you can choose to live in a very inexpensive home and an inexpensive place. But healthcare costs what it costs for the most part, and even when we have different cost models put in place to try to give consumers more choices, we find that we as consumers are actually really lousy judges of what is effective and important for our health and what isn't. So, it's just a world in which we have to expect our expenses to go up every single year and that immediately tosses essentially any safe withdrawal rate, but especially the 4% safe withdrawal rate.

And so, again, this is heavily influenced by Big ERN, Karsten Jeske, who writes that blog Early Retirement Now, but he's done a lot of analysis to show that a 3% or even a 3.5% safe withdrawal rate is much safer. And I tend to push people to go as close to 3% as you can because of healthcare but also because, again, future unknown impacts of climate change, which early retirees are much more vulnerable to than our older people who have fewer years to spend on the planet to see what's going to happen. And we also see things like housing and groceries, things really right now are outpacing inflation at alarming rates. So, we have to account for that.

In terms of our plan, we have a pretty complicated spreadsheet that I don't necessarily recommend anyone replicate. Both my husband and I each built our own models, and then built in different sets of assumptions. And then looked at them and found that they matched and felt like that was pretty good confirmation. And so, we built our plan around that and it's also--again, in case that's not clear to folks, it's very conservative. We are basing it on 1% to 2% real returns over time adjusted for inflation, which is, I think, by anyone's measure, really, really conservative. And we have, again, that cash cushion and multiple contingencies. We could downsize our home, for example, or sell our rental property. So, we have these things built in that not everyone will be able to replicate.

I think having a plan, building in a safe withdrawal rate, assuming low returns, assuming minimal Social Security, things like that, those are good ways to make the plan safe, where you don't necessarily have to do all the bellyaching that we did in building a plan. But certainly, the more contingencies you can build in or the more questions you can think about, the better.

Ptak: What assumptions are you making for nonhealthcare inflation in those models that you've constructed, and has that changed recently?

Hester: We tend to aim a little bit high in terms of what the Fed and others project. So, we're aiming for 2.5% to 3% inflation year-over-year for nonhealthcare. But I do think--you know, we're expecting to see some inflationary effects from the stimulus package; there may be more of those. We'll have to reassess that and see where we are.

Benz: You have an interesting system for actually extracting cash flows from your portfolio, deciding which assets to tap for cash. Can you talk about that--about how you set that up?

Hester: We use a pretty simple CAPE Median strategy. So, we are just looking at the ratio and looking at therefore, should we sell stocks or bonds right now. Until January of this year, we were selling only stocks based on that because stocks have obviously been priced high relative to CAPE, but ...

Benz: So, cyclically adjusted P/E ratio is CAPE.

Hester: Yes, exactly. Thank you. And so, that's something that we have felt good about thus far. But again, like everything, we may be revisiting that in the future. We're not wed to that approach for the duration, but it's what we've used thus far.

Benz: So, just to expound on that, the basic idea in play is that when stocks look expensive based on CAPE, you would be a seller of stocks and then when they become more fairly priced, you would leave them alone and potentially sell other assets?

Hester: Yes, that's right. And I should say our investment strategy is pretty simple and straightforward. We own about five different funds in the bulk of our taxable investments, and they're all index funds. So, we've got some bond index funds, primarily stock index funds, but we've got some ability to look at those across S&P versus total market. But it's not like we're comparing 100 different assets to one another.

Ptak: And so, by CAPE stocks have looked relatively expensive for a while now. So, is an (implication) that you've been drawing steadily on the equity part of your allocation, and do you find yourself at a time like this skewing more heavily towards cash and fixed-income investments for that reason?

Hester: I think theoretically, yes, that would be true. In reality, we got a little bit of a head start by not needing to withdraw from our taxable investments in our first year of retirement because we accidentally earned a little bit of money that we weren't planning to earn. And so, that just gave us a little bit of extra cushion. And we started withdrawing in earnest last year. And as you said, stocks have looked expensive. So, we've exclusively sold those. We did our last sale back in January. And we typically would sell about a quarter's worth of expenses in shares to convert to cash. But we did a little bit more than that because we had a feeling that the virus was going to get bad and things are going to turn down. I am not a stock-picker or a stock-timer. But we did get lucky with that prediction. And so, we're in a position to get to wait until sometime this summer, perhaps even later, because I think like everyone, we're not spending on things like travel right now. So, our expenses are lower than usual, which is stretching things. But once we get to summer, then we'll be able to look at where things are. And yes, we might potentially start tapping into some of those bond holdings. Or we might just decide to stick with the cash cushion depending where things are. So, it's an adaptive strategy that will continue to evolve.

And I'm certainly not an investment pro like you two are. So, I would not pretend to have the knowledge that you have. We really are fans of trying to have an informed but simple approach to both investing and withdrawal that doesn't require a lot of complicated calculations that honestly we just aren't qualified to make.

Benz: You talked a little bit about inflation and what sort of expectations you're modeling in there. How about tax rates? How do you get your arms around, like how to think about what taxes will be much later in your retirement? Do you give any thought to that? Or do you just extrapolate out from where taxes are now?

Hester: Yeah, it's a good question. And I don't think that we have a clear sense like any one of what to expect in the future. So, we're primarily looking at what we expect to pay now. We have also looked at what would happen if tax rates went higher. A really nice thing about early retirement because we don't have anything--you know, this may be the only time I ever say it's nice not to get something like Social Security. But the nice thing is we do actually have a ton of control over what our taxable income ends up being. Dividends are really the X factor, the thing we can't control at all. We do have a little tiny bit of rental income, although that is mostly erased by depreciation, which will give us another 22 years or so of protection there. But in terms of what we sell, we can reverse engineer that to some extent. And so, that's a really nice thing about both the tax rate and healthcare costs because early retirees, before you qualify for Medicare, are predominantly buying healthcare off the exchanges, and the premium you pay is based on your income. And so, the ability to reverse engineer by either choosing to do or not to do a Roth conversion, by choosing how many shares to sell so that you know exactly what your capital gains are going to be. Things like that give us a lot of ability to adapt. So, that, I think, is just as important as what we project as future tax rates is knowing that we have some ability to kind of wiggle our way through all of that.

Ptak: You recently tweeted one of the things that was giving you peace of mind through this is that you and your husband own your own home. Is owning one's own home an essential ingredient to early retirement?

Hester: It's absolutely not essential. In fact, we probably know more people who are currently retired early who don't own than do. And among those who do own, most of them still have some form of mortgage. We know that we are outliers in both owning the home and being mortgage-free. But I think for the reasons we've talked about, it really is a wonderful thing for peace of mind. One, you know, people will argue all day long about how it's so much better to get the growth of the markets versus paying down a mortgage that's at a fixed low rate. And sure, that's theoretically true. But at a time like this when returns are negative, or when you may not want to have to sell shares to pay that mortgage, not having that payment is a really wonderful bit of insulation. It's also a nice hedge against sequence of returns risk because we're not having to sell shares right now to pay the mortgage. And it's, again, just peace of mind, which I think investors tend to undervalue. We tend to look at paper returns and not kind of the mental and emotional returns. But knowing that right now we've got a roof over our head and, so long as we pay our property tax, we're good is something that is pretty hard to replace. I feel incredibly grateful for that.

But I absolutely don't think it's necessary. People can successfully do this as renters. It's just a different approach. And you have to, I think, build a bit more risk into your model because you have less control over future rental rates, and you're going to know that you're going to have to keep withdrawing stocks at a time when you might not want to in order to pay that rent, but it's certainly something you can work around.

Benz: You referenced that you have rental property, and it seems like that's a familiar theme among many people in the FIRE community that they are subsisting at least in part off of rental income. So, I guess, a question that I sort of turn over in my head related to that is, does that potentially add risk to the plan in that someone's overall financial wherewithal has the potential to be sort of overly leveraged to the community where they live and where they might own a home as well as this rental property? Like how should people think about that issue in terms of thinking about like total net worth?

Hester: Yeah, I appreciate this question a lot. And the truth is, even though we have a rental property, I am not pro rental property. We have a single property that we bought. It was not part of our original plan, but we bought it to be able to house someone we care a lot about who was running out of options, and we, in fact, are negative on cash flow on it. We have to pay a little bit of income tax, which otherwise it would be cash flow neutral. Once it's paid off, we will get meaningful cash flow from it, but that's many years down the road. So, it wasn't something that we did as a source of passive income. And in fact, it is not that.

I think your point about being overly leveraged is a really important one. It's one that I don't think the community talks enough about. And at a time like this, in particular, where you see so many Americans struggling to pay the rent, I think it's a really scary time to be a landlord. And so, knowing that we have one single tenant with a very solid government pension is incredibly comforting. I think if we had multiple units, that would be much, much scarier for us. And so, it can be a great way to achieve financial independence. But I don't think it's a guarantee. And I think that the risk of it is not talked about enough.

Ptak: It sounds like that's an example where you called an audible and improvised a bit just given what life circumstances had presented to you in that moment. What did you take away from that experience? Does it inform the way you plan now?

Hester: Yeah, it certainly wasn't audible. It was something where it did require a big outlay of cash. It does require more work, for example, on our taxes now. It's not something that we ever envisioned. But it feels good to us because to me and to my husband, Mark, there's no point accumulating this level of wealth if we aren't going to use some of it to help people we care about. That is important to us. And so, it did feel like something that was aligned to our values and what's important.

In terms of how it informs things moving forward, you know, I do think we always want to stay flexible to some extent of willing to learn, willing to look at opportunities, but also fundamentally trying to leave things on autopilot as much as possible. I think the biggest thing that we learned was, I looked at that property, I fundamentally made that decision of what to buy, I looked at what the rent market could support and what the house cost and I didn't pay enough attention to what the income tax would be. And so, it felt like we were going to go cash flow neutral, not counting the initial costs, obviously, but it felt neutral from the beginning, but it has never been. It has continued to be negative. And that's a long-term investment we're willing to make because it is something important to us.

But I think that that piece is often just not thought about. I think people tend to look at all their investments, whether it's market investments or real estate, and forget about the tax implications. And that's something that we really do think a lot about now driven in large part by that choice and our experience of it.

Benz: You mentioned your husband, Mark, and I'm curious to know, like how you went through this journey as a couple. Was he on the same page with you? Was someone first to this idea of we should retire early? How did you sort of advance along that road?

Hester: Yeah, I hear from a lot of couples, or especially men in hetero couples who tend to say, "You know, I can't get my wife on board with this. How do I get my wife on board?" And I think, you know, we did not have that experience. We were both instantly on board. We even joked about early retirement well before we actually started envisioning any kind of plan. For me, it was very driven by the fact that my dad has a genetic disability and I knew that that was likely in my future. And so, I didn't want to put all of my big life goals off until my 60s when I might have very limited mobility. And so, that was my primary motivator. And I think for Mark, it was very much, you know, we were both in really high-stress, taxing careers and recognizing what a toll that was taking on us. And I think he didn't want to live that life for another 40 years. So, those two things together, as soon as we realized that this was actually possible, we were both there.

But I think that that really stems from the fact that we both have had from the beginning a really clear, shared vision of what we want life to be, and what's important to us. And that's, I think, where I recommend people start the conversation--is not what expenses can we cut, or what isn't necessary, which tends to feel like a very blame-driven conversation, but instead come from a place of, "Hey, at the end of this, like, what do we want to be able to look back on? What do we want to say we did, what do we want to have accomplished, and what does that life actually look like and then how do we shape our money to help us get there?"

Ptak: And so, if I may, how would you answer that question right now, like living a life of purpose and sort of when you get to the end of this what you've left behind not to cut to, in some ways, it's like the ultimate question. But since you're on that topic may as well elaborate a bit.

Hester: Yeah. I mean, I wrote a chapter of the book all about this. So, I think these are good questions to be asking. And we often don't give ourselves that time to think about that. We're so focused on the day to day that we don't look at the big picture of: What do I really want this to add up to? What is my life heading toward right now? And is that where I want it to be heading? For us, we did a lot of this work early on in the planning to actually get granular and not just say, "OK, like, we have this broad vision together, but we really said--what does that look like?" And we boiled it down to three different thematic areas that we think our life focuses on, which is creativity, service, and adventure and all the better if a couple of those can overlap. So, we love world travel. We're not able to do that right now with all the travel lockdowns and whatnot. But we hope to be able to do that again at some point soon. Service is really important to us. We're both presidents of local nonprofit boards, and we volunteer in other ways, and I view in many ways my blog and podcast as service projects because they are not for profit. And so, those are things that really feed my soul. And Mark would say the same thing about his volunteer work.

And then, creativity manifests in a lot of different ways. But it's writing and podcasting and doing things that are musically focused. We go to a lot of concerts and festivals. That's important to us. And so, that feels right to us. We've been test driving that concept for a few years now. And it feels like we've got about the right mix. So, we always want to keep contributing to society in some way, whatever that looks like as we go through life. I couldn't tell you what that will look like in our 60s compared to now. But I think thematically it will be similar.

Benz: I want to talk about kind of the budgeting side of all of this, like how you make it work, because you have talked about how this doesn't need to be a life of deprivation. Let's talk about how people can kind of thread that needle and balance spending on things that are important to them versus making a FIRE plan work.

Hester: Yeah. I think when we talk about budgeting, people tend to come to that as an exercise in "What do I need to give up?" And I think for us, we definitely have the experience of trying that and failing miserably at it and figuring, you know, hey, we are not line-item budget folks. And so, early on, we realized that what worked for us was to only keep money in our checking account that we were allowed to spend. Any money that had to be accounted for elsewhere, we would move out immediately. So, some of it would go straight to savings, some would go to a separate fund for things like rent or for big insurance bills, that kind of thing. And any money there, as long as we didn't overdraft, as long as we were good on cash and could make it to the next payday, we were OK. And knowing that that worked for us, we really instituted a system that I love and think will work for a lot of folks who don't necessarily feel like they are great at saving, which is what I think of as the un-budget or non-budget, which is just hide money from yourself.

And so, I started very simply when I was early in my career by having my paycheck split, so $50 of every paycheck went to savings. And I didn't really see that money. And a few months later, I looked and had a few hundred. And sure, that's not a huge amount of money, but it's more than I had ever saved at that point. And we continued to use that strategy till the very end. So, using that to increase our automatic investing year-over-year whenever we got a raise, increasing our 401(k) contributions until we were maxing out. And so, the idea was, we tried to just keep our level of spending even year-to-year. We tried not to inflate our lifestyle. And then as we get raises, we would funnel all that new money or any bonuses we got into our investments or into paying off the mortgage so that we didn't feel deprived. We didn't feel like "Look at all the stuff we're giving up." We just felt like, "Hey, we're just living our lives. We're not inflating it, but we're very comfortable. And as our income grows, so do our investments."

If that works for folks, I think that can be an incredibly effective strategy. It maybe doesn't feel like you're saving a ton in year one or year two, but over time, it really, really grows. I also think this moment in time could in a strange way be an opportunity because we are all at home right now. And most of us are spending less, and it's a good way whenever we get back to whatever that new normal looks like to say, "OK, what are the things I want to add back and to be really intentional about those?" To say, "OK, well, I lived without this thing for however many months it ends up being, do I really need to spend money on it again?" And there's a good chance that for a lot of us will realize that there were things we never needed to begin with. And so, if we can avoid spending on those, it's a good opportunity to save.

Ptak: It sounds like for you one of the things that you can't live without is travel. We've referenced the fact that you and your husband love to travel. And so, maybe you could talk about just that aspect of your budgeting and how you make that work and make it affordable. And I suppose it only makes sense for you to also talk about what the first place you would like to go to once COVID leaves? Where that's going to be?

Hester: We are really hoping that we can go to Japan again. We went there in our last year of work and loved it. And we've been talking about seeing if we could go there next winter, maybe to ski and then also have some time in the cities. So, we'll see if that's possible. But yes, absolutely, we love travel. To us, it's really the centerpiece of early retirement. And it's the thing we couldn't do much when we were working. We could travel for maybe a week at a time. But now we generally go for about a month or so to different countries. And it feels so different in the best way possible.

In terms of budgeting, we do a few different things. So, the first is we try to travel off-peak. We spent a month in France the year before last, and that was in November. And so, yeah, it's still France, it's still expensive, but it was so much cheaper going in November than it would have been going in August and it was still for the most part totally lovely. A few things were closed; we had rain some days, but it was still a terrific trip. And so, a lot of our travel tends to be spring and fall in kind of that shoulder season, when there are so many more deals to be had, places are a lot less crowded. And that's really our first strategy. Beyond that, we have a ton of travel points that we accumulated back when we were working. So, we're sitting on a few million airline miles, some credit card points and hotel points as well. We've spent down a lot of the hotel points, but we are able to subsidize things. So, we'll tend to pay for independent hotels in smaller places, but then use the hotel points on hotels in the big cities. So, we stayed at the Renaissance in Paris on Marriott points, same in Leon. And we've done the same thing in other places. So, we use the points and cash kind of interchangeably but look at how we're getting the best value and that helps us cut some of the prices down.

Benz: Thinking about how other people could potentially adopt an early retirement, what are some of the key questions that you would urge someone to ask if they're thinking about this sort of lifestyle change?

Hester: Yeah. I don't think that early retirement is for everyone. If you're a person who says, "Well, what would I do all day?" then by all means keep working. There, I think is no desire among any of us in the community to push people to say you have to quit your job. For a lot of folks, work provides purpose and meaning and joy and social interaction. And those are all really important things to consider that I think, frankly, we don't talk about enough. I think people don't often say, "I'm retiring early, and here are the things I'm going to miss about work, or here are the things that I'm going to have to work hard to replace, because I'm not going to get that sense of community or that sense of being valued anymore."

So, for those who do have a long list of things you want to do, that's great. I think ask yourself are there things in your life right now that you're spending money on that you would be willing to give up to get to that future vision, not that this is all about deprivation, but most of us do tend to spend all the money we earn and that's just sort of how our society works and how our economy works. But if there are some things you could see yourself cutting back on, or if you could even just commit to keeping things level and not spending more when you get a raise, and then you can commit to your career in a really big way, assuming that we still have careers to go back to at the end of this recession, crisis, whatever it ends up being. But if you can find a way to either trim or grow or preferably both, and then you can be clear-eyed about what it is that you'll be losing--we tend to say, "Hey, you know, work is stressful, therefore, all of work is bad, or I don't like this thing about work, so therefore, I don't like anything about work," and that's just not true. It's important to look into the nuance and say, "OK, this part is frustrating, but this part feeds my soul in some way or this part makes me feel valued or makes me feel smart or feel talented, or feel part of a community in some way." And then, ask yourself, "Am I willing to do the work to replace those things outside of work?" So, it might mean doing a lot of hard work to form new communities. It might mean getting involved in things that take a lot of effort. It could mean any number of things, and it's going to differ based on what it is that you currently get out of work. But it's important to know, "OK, yes, I will do the work to replace that." And if not, then I would say, hey, save more, invest what you can, but sit tight, keep working until you have a vision or a feeling of commitment to the work that's going to come once you get to the next step.

Ptak: What's one thing you learned that you wish you had known before you retired?

Hester: Oh, gosh, so many things. I think it's important to say early retirement life is not perfect. You're still you, things still happen that cause you stress. People still have challenges in their relationship. Everyone I know who has been in a couple has gone through some solid stress after retiring, because you have to figure out essentially entirely new life roles with one another and that is a big thing, even if it's positive and by choice. And so, that's important to acknowledge and in fact, I know quite a few couples who've split up after retiring early. I think that's important to acknowledge, too. But I think the biggest thing is really that we wish we had gone a little bit more slowly in the journey. We went from setting our early retirement goals to retiring in about six years. And that was, of course, not starting from scratch. We had some home equity; we had some traditional retirement savings. But it was still a really, really quick timeline. And I think in hindsight, we wish we had given ourselves another year or two, taken all our vacation time, spent a little bit more money while we were working instead of being so focused on savings. Because, you know, we still were able to do this at a very young age. If we'd take a year or two longer, we still had been young. It's not a rush. I think that's an important thing that I'd love to go back and tell past me is enjoy the journey more, enjoy this chapter of life of work.

Benz: I have a more mundane question, which is the role of Social Security in your plan. I think you've indicated that you're not really putting a lot of weight on having Social Security with respect to your plan. So, let's talk about how people should think about that and potentially haircut their expected Social Security benefit to account for potential changes to the program.

Hester: Yeah, it's true. We do not count on Social Security. And if we get it, we'll view that as gravy to your earlier question about taxes. If we do get Social Security, and that pushes us up into a higher tax bracket, there's never a point at which your marginal tax rate reaches 100%. So, we'll still be better off if we do get it. What I recommend to folks is that you count it or don't count it kind of depending on your age now. If you're already over 55, there's a pretty good chance that you're going to get it close to the levels that we're seeing now. And so, counting on it, but maybe at a reduced level, like maybe 70% of what your expected current benefit is, is a good idea.

The challenge with early retirement is Social Security is factored on your 35 highest earning years and if you retire in your 30s, 40s, or even 50s, you might have quite a few zero years in there, because it only looks at earned income, not passive income. And so, you're going to have a very reduced benefit regardless. And so, counting on very little Social Security or even none is really smart for those especially under 50 right now. But for those over--if you're counting on it, what you can do is you can think of it as kind of a healthcare buffer. The projections right now are that within the next decade 100% of the average Social Security check is going to pay for medical expenses above and beyond what Medicare covers. So, that's going to be really tragic news for people who are wholly reliant on Social Security and have no other resources to pay those medical bills. But for folks who've been able to save additional, that can sort of serve as a buffer to cover those unaccounted-for healthcare expenses that maybe even go beyond that 10%, 15% inflation that we're all currently counting. So, that's my recommendation. I think it's OK to count it to some extent, but I think for everyone, regardless of age, don't count on the full projection at this moment because it almost certainly will go down.

Ptak: You mentioned healthcare, and paying for healthcare is one of the huge obstacles for would-be early retirees. How do you and your husband handle that and factor it into the planning that you do and all the possible eventualities that could await either of you?

Hester: I'll be honest. It is by far the most anxiety-producing part of the plan just because there is so much in it that could change. Healthcare is so politicized in this country. The current structure of the exchanges and some advanced tax credits to help people pay for it, that could all go away. We could go back to a world in which we're reliant on catastrophic coverage only. We hope to always have traditional health insurance. We aren't interested in these alternative options that save money but sacrifice a lot of potential peace of mind in the process. And so, we right now are really trying to be conservative and projecting high increases year-over-year. We always project to be able to spend up to the out-of-pocket maximum in addition to premiums if we need to. And that gives us so far because we haven't needed that it gives us a nice wiggle room in the budget. But that to me should really be a nonnegotiable for folks is making sure that you can always afford good, solid, reliable health insurance. Good not meaning that you're going to love the insurance every moment, we still live in America, but that you're not going to be reliant on something that may or may not ultimately pay your bills. And so, yeah, there are no easy answers on this, because it is just something that feels a bit like trying to stand on quicksand. But we've tried to account for that as much as we could by just dramatically overbudgeting.

Benz: What about Medicare? We talked about Social Security, but do you factor in potential changes to Medicare with respect to your plan?

Hester: That's a hard question because for us Medicare is still at least 22 years away for Mark, right. And it's entirely possible that the enrollment age could push back later by the time we get there. So, there are just such a vast number of unknowns that we really don't try to forecast what that's going to look like. But what we have done is we've built in our two-phase plan where we're living off taxable investments now, and we'll shift to tax-advantaged investments later, is if things go at even a very, very modest growth rate between now and then, we will be able to double or possibly even triple our spending by the time we get to our 60s. And that's by design. That's because I don't necessarily want to clear the snow off my driveway when I'm 60. I would like to be able to stay at a nicer hotel perhaps when we travel instead of staying in the budget-basement kind of places where we stay now. And so, that's always been part of the vision. But it was also very much to allow extra funding for healthcare things because there are just so many unknowns. Mark and I both have health conditions in addition to all this. So, we know that we're going to have expenses, but we don't know what the system is going to be like to provide for us. And so, for us, it's just about adding as much cushion to our spending in the future as we can.

Ptak: You may have mentioned it before, but in terms of how your plans have formed around things like long-term care, or maybe how you would advise others who are in a different life stage to think about long-term care, especially if they're planning for early retirement. Do you advise insurance? Are there other solutions that you would favor?

Hester: I really am keeping an eye on this. At this moment, I don't think that the existing options for long-term care insurance are particularly great. For most people, they're very expensive. There is no guarantee that the level of benefits will stay steady over time even if you keep paying your premium unlike other types of insurance. And so, even if you buy a product, there's no guarantee it's actually going to provide what it says now it will provide at the time when you need it. And so, I really lean toward people putting themselves in position where they can age in place because Medicare covers almost no nursing home coverage. They cover very short rehabilitation center stays if you do something like break a hip and you need a little bit of help relearning how to walk. But then, you're expected to go back home. And they're not going to pay for that stuff long-term. But they will cover some level of in-home care. So, a really good way to insulate yourself and what we're doing is ensuring that we always live in a home where home healthcare workers could come in, where we could set up a hospital bed if needed, where we could function even if we can only live on one level, things like that. I think that the movement toward tiny houses or RV living is great when you're younger, but you need to be able to have flexibility in your plan to live in a different arrangement later on so that you can stay at home and aging in place and therefore give yourself a little bit of insulation. But certainly, I hope that as we go through the years and decades that we're going to have more of an understanding of people's needs as they age, and that hopefully Medicare coverage will become a bit more generous.

Ptak: Well, Tanja, this has been great. Thanks so much for your time and insights and for sharing your perspective with our listeners. We really enjoyed having you in The Long View.

Hester: Thanks so much for having me. This was terrific.

Benz: Thanks, Tanja.

Ptak: Thanks again.

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Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.

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(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)

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