It’s a glorious spring day in the Twin Cities. I’ve got a curbside table at a nearby coffee shop with serviceable patio furniture for writing. Gotta love early retirement.The last time I biked down to a java stop to write a blog post was back in the spring of 2018, nearly six years ago. Back then I figured I had it all figured out, this early retirement challenge. Financially anyways…Come to find out, I missed a few key adjustments. Early Retirement Financial FolliesSure, I had all of the basic boxes checked: Saved up a healthy stash, paid off big debts (house, cars, student loans), and I even replaced our life and medical insurance since I wouldn’t be able to rely on those juicy employer benefits anymore.In short, I got nailed on the CASH FLOW aspect of early retirement. It’s crucial to build up a war chest in real estate and tax advantaged retirement accounts, said every early retirement blogger since Moses.But if you don’t know how to free up some of your stash to pay the bills every month, you could find your favorite shirt pitted out from anxiously brainstorming cash flow options. Early retirement: Yes, sweat the details.Case in point, we got hit with an unexpected sewer line replacement that set us back $18K and change. I had planned on maintaining a cash account of around $30K, but half of that was set aside for planned exterior home repairs this year until THIS came up. Dang.Oh, and guess what happens if you have kids older than 10 with teeth as bad as your own… That’s right, BRACES! I should’ve seen this one coming, but I thought kids had to be teenagers to qualify for the metal gear. Get with the times, Cubert!! That’s another $5K bogey to solve.So you see, big things can and do pop up. We’re fortunate that neither of these expenses will hold us back from enjoying our daily lives when so many others struggle just to find affordable housing, child care, and healthcare.Still, if I’m going to write about how great early retirement is, I need to get my sh*t together so as not to mislead any of you fine readers, or to kid myself into thinking all is hunky-dory. Hunky and Dory How to Ensure Sufficient Cash FlowMy biggest biff was the most important adjustment before early retirement: I didn’t prepare for sufficient cash flow. I know it sounds obvious but for some reason I was asleep at the wheel on this one.The “big plan” was to save up a huge chunk of money in our Vanguard post-tax account, throwing in $5K “bricks” at VTI (Vanguard’s total stock market ETF) whenever the market tanked. It worked out quite well, actually. The problem is really a stupid one though – I’m reluctant to draw down what I had worked so hard to build up.Stupid. Stupid. Stupid. I really have zero right to complain, but I think this is the phenomenon that affects many retirees. We Americans are never satisfied with what we have, and if we have to eat into what we saved, we flip into scarcity mode.The “big plan” required me to build up roughly 10 years of “gap year” money to get us by until age 59.5, when the 401k can be tapped penalty free. But I figured, nah… why not instead try to get to that age and still have all that gap year capital intact? Here’s the other kicker. Say I wanted to access those VTI “bricks” to solve our cash flow woes, what’s holding me back? Capital gains tax. Since our VTI appreciated in a major way these past few years, the tax implications of selling are not very appealing. (Side note: This makes donating highly appreciated stock a wonderful charitable giving option!)For example, if we sell off $20,000 of VTI to supplement the rental income and Mrs. Cubert’s take home pay, the tax would look something like this:VTI Current Value: $20,000VTI Cost Basis (What we paid for the stock): $12,000Appreciation: $8,000Capital Gains Tax (15% – Married filing jointly, meeting IRS income threshold of $94,051): $1,200It’s not a “horror story” amount like the sewer line repair bill, but it still stings. However, if we didn’t have our business incomes to supplement us, we’d be taking out up to $100,000 (higher in part due to the bogeys mentioned earlier).VTI Withdrawal of $100,000 (Tax @15%, Assuming 33% gain): $4,950Again not terrible, but I something I need to work on getting past – being consumed by tax avoidance. Turning Your Gap Year Savings Into Sustainable IncomeIf I could rewind the tape about five years, the one thing I’d do differently is invest most of our post-tax dollars into sustainable income investments, like SCHD. SCHD is the Schwab US Dividend ETF. It holds 100 high-yielding dividend stocks and has been around since 2011.I like SCHD because unlike VTI’s dividend yield of 1.4%, it has a yield of 3.4%. Those extra 2 percentage points make a huge difference when income is the name of the game.If you’ve got $100,000 saved up in post-tax dollars, the difference of 2% is $1,400 vs. $3,400. And that’s just year 1. SCHD has a track record of >10% annual dividend growth over the last 10 years. (That’s in addition to sheer appreciation of over 40% since 2019).Now, say you’ve been able to squirrel away as much as $500,000 in SCHD for your 10 or so “gap years” (i.e., until it’s 401k draw down time, when you turn 59.5. And by then you’re okay with eating into your 401k, since required minimum distributions are, well, required.) The dividend pay out would be almost $16K (after taxes). And that’s just year one! SCHD Dividend Yield, Assuming 10% Annual Dividend Growth and 7% Annual Appreciation: There are some important assumptions made in the chart above. One is that SCHD will grow at a 7% appreciation. The key one though, is the dividend growth of 10%. Since you’re taking out all of the income from dividends, there is no “drip” or reinvestment. You’re no longer in the “stash” phase of life, so there are $0 in annual contributions.With these assumptions in mind (which rely on the past 10 years of historic data), you can expect to live off $69K per year, by which time your 401k is ready to be tapped. And as an added bonus, you now have an invested “nut” that has nearly doubled in value, to nearly $1M. How to Achieve Cash Flow In Your First Few Gap YearsThe trick to all this? It may be slim living for the first few years, but it sure beats relying on VTI alone ($6,500 in year 1 dividends, to roughly $28,000 by year 10).Alternatively, you could plan to draw down the $500,000 at $35,000 per year (after taxes). Assuming a healthy 9% appreciation of VTI year over year, you’d wind up with ~$430,000, which isn’t awful by any means, but not nearly as appealing as doubling your investment with SCHD.To bolster the lower yield in those first few years, there are covered call ETFs with yields of 7-10% that will not offer much in the way of growth, but they will provide a boost of added dividend income from day 1.Specifically, I’m putting 25% of our post-tax dollars to work with JEPI and JEPQ. These are JP Morgan’s Equity Premium Income and NASDAQ Equity Premium Income ETFs. It’s tempting to put more than 25% into these instruments, but I’m keeping a cap of 25% to favor the growth prospects of SCHD (as well as its lower admin fees!)To be clear, I didn’t just wave a magic wand to add SCHD, JEPI, and JEPQ to my portfolio. It’s been a carefully timed and executed rebalancing within the post-tax account. Unlike a 401k or IRA, rebalancing in the post tax world requires you to understand the nuances of tax-loss harvesting. For every long term winner, I had to find a long term loser to offset capital gains.Fortunately, I had a number of bone-headed stock investments that provided losses to offset some of the VTI gains. After selling the winner and losers, proceeds went straight into SCHD, JEPI, and JEPQ. Other Cash Flow AdjustmentsBeyond turning your gap year fund into a dividend yielding income source, these are helpful adjustments to make when you choose to no longer rely on a W2 paycheck for cash flow:It’s okay to start using your Health Savings Account for medical bills. This one took a while to sink in. I was indoctrinated with the notion of maxing out the HSA and never using it for medical expenses. It’s an amazing triple tax advantage savings account, to be sure. But now that you’ve achieved financial independence, it’s time to start using these dollars to offset the medical bills that come up. (DO keep making the maximum contributions each year though!)Stop contributing to IRAs. If you’ve got a substantial 401k or two, there really isn’t much benefit to throwing more dollars at your golden year accounts. Sure, the Roth IRA is a nice way to mitigate taxes later on, but if you don’t plan to work full time in retirement, your taxes on RMDs and social security will not bankrupt you.Keep side hustling! There is some truth to the power of never “retiring”. The key nuance is this: Retire from the at-will job that doesn’t bring you joy. But keep busy with work that gives you purpose (volunteer your time, care for family, raise a family, gardening, part time barista, REALTOR, etc. etc.) It’s not so much about the extra cash flow, rather, it’s about maintaining your contribution to your community and soaking up the social energy that helps us thrive.(Now if only I could get paid for my new pickleball addiction…)I’d love to hear from you in the comments. Are there adjustments you’ve had to make in retirement, or are you uncertain about plans for the gap years?RelatedJoin the Legion of Cubicle Doom!Sign up to have new posts and special updates sent directly to your inbox.Thank you for subscribing.Something went wrong.We respect your privacy and take protecting it seriously