As we mentioned back in our very first post, the primary focus of this blog is to help you avoid the financial mistakes we’ve made in the past. And over the years, we’ve made A LOT of mistakes:
- We purchased our first home in the summer of 2007, at the peak of the housing market; a decade later we're down six figures on this adventure
- Three years later, in what turned out to be the bottom of the market, we bought two brand new cars and a luxury wedding instead of investing in the stock or real estate markets
- We didn't invest much during the rebound years from 2010 – 2014, but the small amount we did invest was in high-cost active funds
- We made every mistake in the book on our rental real estate project with our tenant from hell
- We purchased a new home in 2016, right after the housing markets fully recovered in our area
That's a lot of mistakes, and costly ones at that. I recently listened to the ChooseFI episode featuring Big ERN discussing sequence of return risk, and considering I'm just a few months (weeks??*) away from pulling the early retirement trigger, you'd think this discussion would have me quite afraid… but this is simply not the case. Instead, I'm more optimistic about our FI status than ever!! With our history of mistakes, and propensity for bad investment timing, why the hell would I be optimistic? Am I an idiot?!
No!!!** The truth is, people have a tendency to remember their bad decisions more than their good. When things go right, you barely remember them. But when they go wrong, it's all you can think about.*** For the wife and I, lowering our annual expenses helped raised our savings rate to the point where the mistakes above were mere bumps in the road, rather than roadblocks. What's more, each mistake taught us a new lesson on how to hedge against them in the future.
What If The Market Crashes… Right After We Retire?
Sequence of return risk is a concern. Mad Fientist had a nice discussion of it back in 2015, and Big ERN has an entire series dedicated to it. The idea is that if you have back luck, the market could crash and stay depressed for the first five or more years of your early retirement, creating a perfect storm that causes your portfolio to be one of the few failures of the 4% rule. Scary!
I'm not afraid, however. Given our track record, I'm simply going to assume this will happen to us. Knowing our luck, if I pull the trigger in January, a 20%+ market bear should happen just a few months later. Rather than worry, I'll simply focus on what's in my own circle of control. With low expenses and a bit of flexibility, we can afford to be unlucky! How?
Instead of retiring in January, I could work an extra year or two to reach Fat FI, brute forcing my way past sequence of return risk. This is a perfectly viable option: a 3.33% withdrawal rate is, according to J.L. Collins of The Simple Path To Wealth, “as near a sure bet as anything in this life can be.”
While straightforward, working longer to reach Fat FI is absolutely not the right option for me. I really can't stand my job right now, and the thought of being in a cubicle prison for another year or two makes me absolutely miserable. Besides, even if I did hold out for Fat FI, it would likely be unnecessary in the long run. We've seen time and time again that perfection is the enemy of frugality. If there's a good chance I'm already FI, I don't want to keep working longer just for the hell of it.
Instead, to hedge the risk, I'll test the early retirement waters a little earlier, while the wife continues working one more year. She enjoys her job a bit more than I do, so this makes sense for us. Even on a single income, our low cost of living ensures our savings rate will still be over 60% for that additional year. Should the inevitable market crash happen, she'll continue buying shares on sale.
After the additional year, if markets are still on sale, maybe the two of us will trade places. Remember: my worst case scenario is everyone else's everyday scenario: I go back to work. But I wouldn't go back into the previous rat race: instead of a high stress, high-paying job, I'll take up something I actually enjoy instead.
Get Paid To Do What You Love!
By careful design, our lifestyle costs us only $25k per year. Month after month we've systematically reduced our expenses. We paid off our mortgage and live in a low-cost of living area. In FI, we'll qualify for the best healthcare and college tuition subsidies, and we'll be in the lowest possible tax bracket. What this allows is for our entire luxurious middle-class lifestyle to be funded on a near minimum wage salary. How can I gamify this?
I enjoy working out but hate paying membership fees. What if I become a part-time trainer at the gym? Pick up certification, teach some courses? I'd get free gym membership, help others achieve their fitness goals, stay in top physical shape, and get paid to do it.
I love coffee, but hate paying coffee shop prices. What if I become a part-time baristo at a local café? I'd get to work in a relaxed environment, meet new people, drink coffee, and get paid to do it. Many of the larger coffee chains even provide pretty sweet benefits… win-win!
I like going to Disney World, but hate paying the ridiculous ticket prices… you get the idea! By having such a low-cost of living, I can play the “how can I get paid to do what I love” game, even if the pay is mediocre by traditional standards. I'll never need the salary (or associated stress!) of a high-paying corporate job ever again.
How About A Side Hustle?
I don't need to make a full $25k a year to combat sequence of return risk, however. I'd only need to supplement a few thousand dollars a year, hence part-time or seasonal work becomes an option. In fact, this amount is so low, I could mow lawns or give piano lessons a few times a month and come up with an extra $5k a year!
The key here is to replace FEAR with FLEXIBILITY. I'm not the guy who's going to sit on his butt in retirement and watch Netflix all day long.**** I'm going to be working on things I'm passionate about, like creating new content for this blog, writing a book or two, and producing music. With time and hard work, some of these passions could easily become profitable side hustles!
Worst case scenario: we pull the early retirement trigger now, start a family, never make a dime on side hustles, and have to go back to work doing something we enjoy for a little while down the road, if necessary. Remember the FI milestones we defined? If the market drops 20% the day after we pull the trigger, we're simply Flex FI, and our probability of having enough money drops down to a still respectable 82%. As I discussed with Brad and Jonathan on my ChooseFI milestones podcast episode, I'd rather claw back the extra years of FI now and have a great chance of success than continue working in my cube farm for a few more years out of fear.
But What About HEALTHCARE?!
Nothing causes fear quite like healthcare. This is a popular (and somewhat controversial) topic I'm asked about all the time. For the wife and I, we do indeed have healthcare premiums baked into our $25k annual spend that correspond to the current ACA subsidized rates. They're quite affordable because our “income” (money withdrawn for our annual spend) in FI will be so low.
If the ACA is repealed, we’d consider moving to a state that had its own health exchange. For example, MMM had affordable high-deductible coverage in CO long before the ACA existed, so I know it’s possible! If the ACA sticks around but the subsidies are reduced, we'd need a bit more cash to stay insured. Luckily, all the solutions I proposed above for sequence of return risk above apply just as well to this scenario!
What's more, the wife and I have also been maxing out our HSA accounts for quite a few years now, so we have a nice healthcare cushion. Enough to where we could stay put for quite a few years and see if the healthcare situation stabilizes here in FL. If we're able to stay in good health for a while longer, our HSA investment balances will continue to grow, providing an even larger safety net for us as we age.
The key here is to once again replace fear with flexibility, and of course, do what you can to stay healthy! I refuse to stay handcuffed to a large employer simply for the piece of mind of health coverage. Instead, I'll take my chances and handle changes as they occur.
Hell, with all the extra free time I'll have in FI, I'll be able to add another hour or two of fitness to my schedule every day, trading a risk that is outside of my circle of control (what if healthcare law changes?) for one that is completely inside my circle of control (what if I sit on my ass in a cubical for 10 hours a day as my health deteriorates?)
So what do you think? Should I keep working in my cubicle, packing away cash for another few years as my health declines and my morale plummets in a job I loathe because I'm afraid of never making another dime in my 60+ year retirement? Or should I take the plunge and move on to something meaningful, something I'm actually passionate about?
Here's the thing: you can't prevent every possible negative occurrence. There are many forms of risk you'll need to balance between on your journey to FI. Sequence of return risk is one example, but it's also relatively small in the grand scheme of things. It helps explain a small proportion of failures in the Trinity study's 4% rule.
If you love your job, have a great work-life balance, and don't mind working extra years to increase your chances of success by an extra percentage point or two, then, by all means, go for it. But this just doesn't resonate with me. My advice? Prepare as you would for any other life change, do your due diligence, and then handle issues as they occur. Don't let fear scare you away from making your move.
- What if the ACA goes away?! I'll move to a state with a health exchange.
- What if the stock market loses 50% of its value?! I'll go back to work for a year to take advantage of the sale!
- What if social security goes away?! That's OK – I wasn't counting on it anyway!
- What if Bogle's crystal ball is right and returns over the next decade are lower than average?! Good thing my annual expenses are low enough to supplement with a small side hustle.
- What if one day I wake up broke?! If I've already reached FI once, I'll do it again – faster and with fewer mistakes the second time around!
- What if the world ends in horrible nuclear winter or an asteroid impact?! Well then, I'm sure as hell glad I didn't spend my last few years in a cubicle!*****
You get the point. We've already been through so much on our Financial 180 that these things just don't scare us anymore. Shit happens. Be flexible. As an investor, you just can't get rid of risk altogether. The best you can do is trade one form of risk for another.
In engineering, we multiply the probability of occurrence of any given risk against the cost associated with that risk to determine a relative ranking. Risks that aren't high enough on the radar get put on the back burner. If those unlikely risks turn into actual issues, management transforms said issues into “opportunities”. This is just a fancy way of being flexible.
In our case, each issue we encounter on our journey will turn into a valuable learning “opportunity”, and a great new post for this blog! You might want to subscribe – it could be a wild ride!
*I might not make it longer than a few more weeks of full-time employment – now that my 401(K) is vested, my tolerance for dealing with BS in the workplace is surprisingly low.
**The wife begs to differ. But for other, non-financial reasons.
***Have you ever purchased something only to watch it go on sale a few days later? This happens so often that we joke the items actually go on sale because we purchase them.
****OK, at least not every day.
*****Cubicles get such a bad rap. Are they really that bad? Yes. Yes they are.