Before we begin, here are some ways you can help victims of the Russian invasion:
Not Yet…
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:
Save The Children
Unicef
Doctors Without Borders
care
Red Cross
IFAW
More 1500 Days!!!
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Mile High FI podcast:
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- YouTube: My channel is mostly devoted to home improvement, but I have some other material coming up soon too.
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- Twitter: Spontaneous, often insane, ramblings
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Making sure Mindy keeps working is probably the best strategy.
I’ve tried to get my wife to work harder, but it’s hard to keep her motivated as I go golfing 🙁
Good luck to us all!
“Making sure Mindy keeps working is probably the best strategy.”
Haha, I like this! As long as she does!
Not having to touch that magical nest egg feels warm and fuzzy.
“I’ve tried to get my wife to work harder, but it’s hard to keep her motivated as I go golfing.”
Haha, I can’t see that ending well!
I love your writing, and your calming tone and advice. Thank you for your service.
Assuming one is already covering one’s expenses with income, what would your ideal portfolio look like if you could create one from the ground up?
Your goal was to to $1,000,000 by February 2017. It 2022 and you are over $4 million.
Somehow a million was going to be enough but now you feel the need to develop complicated plans to keep it at a 4x+ level of what you thought you needed. You have only $5,000 in cash because you NEED to have all your funds working for you.
You need to make a transition. You clearly have enough, by your own definition. If you cashed out your entire $4+ million and put it into laddered USA Government bonds (3%) and took out $100,000 each year …. At the end of 50 years you will still have $6 million remaining. Your own ‘incredibly safe’ 3% is over $120,000 per year forever.
I would respectfully suggest that you declare success on preparing for FIRE, retirement or whatever you want to call accumulating $4 million. You did a good job, take a victory lap and STOP actively investing for growth.
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Derisk your portfolio even if it costs you future earnings. If VTSAX isn’t right for you, then limit individual investments to 1% to 2% of your net worth. The easiest way not to worry about tomorrow is to take about 5 years of spending (perhaps around $500,000 for you) and stick it into cash and USA bonds (not a bond fund). What ever happens tomorrow, you can forget about it for years. And if changes are ever needed, you will have years to ‘adjust’.
Unless you are an active investor because it is a hobby (and I know lots of these guys), you don’t need a line of credit or any debt. You can even put your credit cards on autopay and check online every few months.
You are wasting your time worrying about acquiring wealth. You have done it and now all you are doing is literally wasting some of the time you have left on something you really don’t need to do.
Worry about doing what you really want to do (including not much of anything for awhile if so inclined). Worry about how you can help your kid get a better head start in life. Worry about how you can spend a few dollars to make Mindy’s life a bit better (however you and her want to define better).
Understand that you have reached a finish line and now it’s time to do something else.
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I’ve been retired for decades. I follow my own advice. And I spend a ridiculous amount each year. But I spend very little time worrying about money. I worry about time. And that feels right.
In any event, I wish you all the best.
Thanks for that insight on the decades looking back.
I guess the fear is that inflation will not remain as low as in the past, but ends up being 5-10% for a decade. Better to remain in growth assets when you need them rather than getting eaten by inflation.
I speak from a country that has had it’s lowest inflation in the past decade at 4 to 6% per annum, when the norm is 10% to 15% – you cannot wish for low inflation forever, you need growth assets. Bonds after tax will just lose too much value to inflation. It’s especially interesting at this point where we go from low to high inflation at high stock multiples, and low yields.
But I agree 100% with your point that when you’ve won the game, you don’t need to worry as much and can take risk off if you aren’t enjoying yourself =)
Charlie,
Being conservative rich mitigates most inflation impacts. Most people have little savings and use almost 100% of their income for day to day living costs.
Rich people have substantial financial reserves (the definition of rich) and often use only a fraction of their annual income on living expenses. Often way less than half. Additionally, some components of inflation impacted expense might be entirely missing. Two examples: Housing is often 30% or more of annual living expense for much of the population. A rich person probably owns a fully paid for home. And insulated from home price rises and rising interest rates. On a smaller scale, a retired person doesn’t have commuting expenses which means saving on gas, vehicle repair and even vehicle acquisition. Even where the cost is the same, it is smaller as a percent of income for the rich person.
(see: https://economistsview.typepad.com/economistsview/2011/03/the-cost-of-food-and-energy-across-consumers.html )
In moderate inflation, less than 15% per year, the stock market will tend to rise with inflation (except for the stagflation special case). And rich people have more assets in the market. In the USA many rich people have or will have pensions and social security later in their retirement to help offset inflation. And their are even bonds you can buy that move with inflation, my Treasury TIPS are currently yielding 7%+.
You can derisk a portfolio and have it on autopilot and not worry too much about inflation. I’d also suggest that even if you believe strongly in inflation, you should be ‘moderate’ in your response/planning and not ‘go all in’. Your strong feelings (and mine) will at times be wrong. Once you are rich (in your terms), it is not important to match or beat the market. It is important to put yourself in a position where you cannot lose enough to not be rich. Any time I make a big portfolio change (about every five years or so), I do run it through a MonteCarlo simulation to make sure the outcome for a lifespan 2 decades longer than mine will ever be will have a result of a 99%+ likelihood of not failing (which is different than success).
Bottom line, investing for rich folks can be simple and low in effort. Including handling inflation.
Who is giving out 1.36% APR on margin loans these days? How did you work that deal out?
ETrade! I negotiated the rate with them.
Interactive Brokers is offering 1.33% as I write this on March 24, 2022.
I signed up with them several years ago and put part of my holdings there and played around with their site for a year before I took a small margin loan. Another year passed without incident so I finally pulled the trigger and took out a large margin loan to buy an investment property for cash and haven’t looked back. I now have taken several margin loans to buy property and in some cases have even lent friends money so they can get my incredibly low rate. It’s real and it’s easy.
Sign up here and get a $1K startup bonus (and to be transparent, I get a $200 affiliate fee!)
https://ibkr.com/referral/william6403
Carl, another well thought out, logical blog post. I completely agree and appreciate that selling when Mr Market is naughty is not desirable. 100% agreed.
I just have to ask one question and excuse my directness:
If you did not save your money to spend it later, why did you save it in the first place? There has to be a logical reason to defer spending the money on near-term pleasures. What is the goal of the activity? Just curious. ?
Hey Crusher!
Money! Yeah, great question! A couple of thoughts:
1) Big stash: We never planned to have this much money. I certainly planned to have a buffer, but I never dreamed that I’d have THIS amount of money. Crazy.
2) Spending: If there is something I think would bring me happiness, I buy it. Some recent examples:
We have a nice house and good cars. There just isn’t anything I really want. Well, maybe an electric car, but I’m waiting to see new models. However, I’ll probably buy or order one before end of year.
Hey Carl: very fair answer! I just got done reading Die With Zero so I am sure that played into my question. 🙂
It has been super fun following your journey over the years. Congrats!
Out of all these reining in spending makes the most sense to me. So many ways you can do this including finding a place you enjoy going to abroad and spending 3-4 months there. There are so many countries where you’ll spend a fraction of what you do at home and you can still keep your lifestyle at the same level you’re used to back home.
Yep, so true. Portugal or Colombia or Uruguay all sound lovely.
Hi Carl,
I follow your blog since last year and recently found your mile High FI Podcast. Since then a binch hear the episodes form 001 onwards on my lunch walk every day.
In one of the early episodes you talked about visiting Germany. Will this be part of your trip to Europe? If so and you do a stop in Cologne, let me know. Maybe we could meet on a Koelsch (https://en.wikipedia.org/wiki/K%C3%B6lsch_(beer)).
Greatings,
Martin
Martin!
Thanks so much for the awesome offer!
We will be flying into Frankfurt and then heading to Berlin and Munich. From the map, I don’t think that we’ll be in Cologne, but if we are, I’ll certainly look you up. If you happen to be in any of those place (we will be in Germany from 6/8-6/16), please let me know! I’d love to buy you a beer and give you a Mile High FI shirt!
Hi Carl,
Berlin and Munich are both almost six hours away by car. Maybe for you American that is a trip for a coffee ;-), but for a German guy that is a lot.
And the offer with the beer was meant the other way around.
I’m interested what you say about the beer in Munich after you stayed there. They have a lot of breweries and beer gardens there.
When will you be in Munich?
Greeting
Martin
Haha! You are correct; Americans love their cars and love to drive. However, I never expected you to drive anywhere!
If we decided to make a trip up to Cologne when we’re in Frankfurt, I’ll let you know.
We will be in Munich from June 12th through the 15th. I’ll definitely report back on the beer!
That would be greate. Just let me know via email in advance.
Enjoy your stay in Germany in any case.
You have chosen two great cities. Both are also very different in terms of flair and people.