Before we begin, here are some ways you can help victims of the Russian invasion:
Mindy and I are fortunate in that we still have income. Mindy’s day job at BiggerPockets and side-gig as a real estate agent pay all of our bills and more. Plus, this blog spits out some spare change. We’re so thankful that we make good money from pursuits we hadn’t even considered when we started our financial independence journey. More on this later.
What if Mindy wasn’t working though? The question I was thinking about the other day was this:
How would we be withdrawing money if we had no income?
Early Retirement Withdrawal Strategies When It All Goes To Hell
No one wants to sell assets when Mr. Market is naughty:
The dreaded sequence of returns risk is what every early retiree worries about. To put it simply, sequence risk is withdrawing money when markets are down early in retirement. This reduces the compounding effect which in turn decreases future returns and increases the chances that you’ll run out of money.
We’re fortunate in that we’re not withdrawing money yet. If we were, here’s what we’d do.
Have a bigger cash buffer in the first place
We have about $5,000 in cash right now. I don’t like cash. It isn’t working for you. Even worse, it’s losing purchasing power to inflation. However, having a little cash sitting around helps smooth out withdrawals when Mr. Market is naughty. I plan on having a dynamic withdrawal strategy:
If the markets are doing OK: I’ll sell assets on a monthly basis to fund our lives.
Correction or bear market: I’ll take money from our cash pile.
We’d have about 6 months of spending or $25,000 in cash.
Immediately stop dividend reinvestment
As I write this, the dividend yield for VTSAX is 1.35%. For every $1,000,000 invested, VTSAX spits out $13,500. Currently, we reinvest dividends. However, if the markets crashed, I’d stop dividend reinvestment and harvest the cash. This strategy wouldn’t do much for us because:
- Half of our investments are pre-tax and inaccessible.
- Our post-tax investments are mostly growth stocks which don’t pay dividends.
Currently, the proceeds from post-tax dividends amount to around $5,000/year. Also, dividends take a hit when the world goes to hell, so I wouldn’t rely too heavily on them.
Rein in spending
Mindy and I live a fairly frugal daily existence:
- We haven’t had a car payment in a decade
- Property taxes here in Colorado are cheap
- We don’t buy fancy food
- Our children go to public schools.
- I put solar panels on my home which pay my electric bill
As a result, luxury spending (mostly travel) takes up an outsized portion of our budget. With trips this year to Seattle, Europe (I hope!), and San Diego, travel will account for at least 25% of our annual spending. Again, this is a large number because the money we need to fund our daily existence is minimal. The good news is if we had to tighten the belt, all we do is substitute camping trips for European adventure and we’d save a ton.
I’d consider tapping our line of credit
If we burned through our cash pile and the markets were still down, I’d consider borrowing money from our line of credit. (I wrote about this strategy here.) Currently, the APR is 1.36% and we have a sizeable line of credit so I’m not worried about a margin call:
The risk to this strategy is that a market downturn outlasts low interest rates, but it’s a risk I’d take on a small scale. (To learn more about margin lending, see MMM-Pete’s article here.)
Our situation isn’t binary and yours probably isn’t either
I have yet to meet an early retiree who sits around all day and does nothing. One of my friends creates games to sell on Etsy. Another turned her love of taking pictures into a side hustle selling stock photography. Yet another is a part-time carpenter. Many of the scary articles you read about sequence risk assume that the early retiree will make $0 for the rest of their life. What if you retire on a million, plan to spend $40,000 in year one, and have a hobby or passion that generates $10,000/year? Your 4% rate of withdrawal just went down to 3%, putting you in an incredibly safe spot.
In our case, Mindy will not always work at BiggerPockets, but she’ll retain her real estate license. I love to write, so I’ll continue on with this blog and perhaps the podcast will generate money someday.
War Of Attrition
My goal is to outlast a downturn. I don’t want to sell assets when Mr. Market isn’t happy. So, the next consideration is how long a downturn lasts:
The average breakeven since 1928 was 26 months or just over 2 years. In the modern era, the average was just shy of 17 months or around a year-and-a-half to get back to even. Half of all bear markets have seen breakevens lasting less than a year while one-third have taken 2 years or longer.A Wealth Of Common Sense, Ben Carlson
I think that we could be in for an extended downturn now. The world was already suffering from supply chain bottlenecks. Now, we have more of them caused by a horrible war that may not be over any time soon.
Unfortunately, the world has pivoted to authoritarian figures with narcissistic and nationalistic goals. AKA, jerks with egos. Authoritarian regimes do the world no favors. Those who want power are the ones least suitable to have it because they’re the most likely to abuse it.
We could be in for some tough times, but it will pass. Perhaps, the war will cause the world order to shift and we’ll arrive in a better place. Over the long term, markets move up and to the right.
It will be OK.
If people were silent, nothing would change.–Malala Yousafzai
Again, if you’d like to help victims of the war:
More 1500 Days!!!
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