gearing up

When the Crash Comes // Recession-Proofing Our Retirement Plans

We consider ourselves to be optimists, generally. I wrote a post on it a while back. Even if we might have things we’re unhappy about in the world at large, we’ve been pretty darn fortunate in our lives (a combo of hard work, support from others and legit luck — adding up to a solid bootstraps story). So — generally speaking — we’re optimistic about our upcoming early retirement, and our longer term “real” retirement.

But — and you can call me neurotic or superstitious or anything else you like — I also have a sneaking suspicion that things mostly work out only because we plan for what we’ll do if they don’t. Like last week when I was stuck in air travel hell. I irrationally yet sincerely believe that the only reason my supposed-to-be one-night trip ended up being three nights — and not four or even five nights — was because I had packed extra clothes and was fully prepared with warm outerwear, in anticipation of this very thing. I call it the anti-jinx, and though I know it’s not really a thing, I am also pretty sure it’s a thing. (It’s totally a thing.)

Current snowcover in the U.S., with lots of snow in the mountain west.

When it’s snowing everywhere in the west, flight delays and misconnects are inevitable. (Hint: We live somewhere in the pink zone!)

Think of it as a corollary to Murphy’s Law, which states that anything that can go wrong will go wrong. If instead, you prepare for all of those things that could go wrong, then maybe, just maybe, they’re less likely to go wrong. (Admit it — there’s a sick logic to it.)

I’m aware that this is a fairly wackadoodle worldview, but I’m also positive I’m not the only one in the FIRE community who thinks this way. Besides, Mr. ONL was a boy scout, I was a camp counselor, and being prepared is just hardwired into both of us, superstitious or not. Though it sounds deeply pessimistic to focus on all the bad stuff that could happen — bad optimists! — we find it reassuring to know that we planned for as many possible scenarios as we can think of. Sure, we can read about comforting-sounding things like the four percent “rule” all day long (“rule” in quotes because there’s no guarantee it will bear out in the future — we really should call it the “four percent best guess”), but knowing the long-term historical tendencies of the markets won’t stop bad things from happening to us in the future. The only thing that will protect us? Being prepared.

It’s easy to be optimistic when you’re prepared.

When the Crash Comes // Recession-Proofing Our Retirement Plans / Financial Planning to ride out market downturns, a financial crisis, or a market correction or crash

Market Crashes and Recessions Are a Fact of Life

Bad financial things are essentially guaranteed to happen — to us and to all early and regular retirees. Our investments are going to lose value at some point, maybe massive value, maybe at many times. We could endure long periods of stagflation. We’re already overdue for a recession, historically speaking. And pretending that crashes won’t happen, or that we’ll get a predictable historical average return on our investments like clockwork every year, only makes us ill-prepared to weather the storms. And that sounds — pardon me while I throw up at the thought — horrible.

As my dad recently reminded me, he only regained his 2008 balances this past year for some of his mutual funds, and I didn’t even ask if that was accounting for inflation. (I’m guessing not.)

And remember 2008? It was ugly. We were invested at only a small fraction of the level where we are now, but even with smaller numbers, it still took our breath away how fast our money (at least on paper) evaporated. We learned the lesson that we can’t always bank on going back to work, and the markets straight up nosedived. The Dow lost a full 50 percent in 17 months — 56 percent for the S&P. (The Balance has a fantastic play-by-play history of the crash, for those who want to relive the horror, or who weren’t yet old enough to absorb it at the time).

Of course 2008 was a special case, an especially bad crash and ensuing recession, and not something we’re likely to see every few years. But even in that case, most investors (not including my dad, apparently) were made whole again within two to three years. (Less than two years for European FTSE investors.)

With that comes a huge caveat: A huge driver of the post-2008 recovery was the U.S. federal government’s intervention, namely the bank bailout and later stimulus package (those “American Recovery and Reinvestment Act” signs are still visible at many a road and bridge construction projects across the land), and it’s hard to know if a fully GOP-controlled Congress and White House would take a similar action, given their apparent disagreement with Keynesian economics.

But regardless of which party is in charge, historically the average time from market trough to new market peak in bear markets is 684 days, about 22.5 months, a number that’s likely skewed higher by the especially long 1974-1982 recession. In market corrections — dips between 10 and 20 percent — the average correction is 107 days, just over three months.

Long-term, there’s no question that investing in the markets still pays off, so dealing with crashes and recessions is all about playing the waiting game.

Donut and coffee

When will we not play the waiting game? When the coffee’s hot and the donut’s fresh. It’s not all kale smoothies and kelp noodles over here! (Though that donut is gluten-free, of course.) ;-)

Our Market Crash Game Plan

Let’s pretend that it’s 2018, we’re fully retired (yay!), and we don’t have any lingering attachments to our old jobs. Over the course of a few weeks, the markets start creeping down, and then suddenly they start dropping big time. In a few short months, we’ve lost 25 percent of our index fund value.

At this point, just before the crash, our cashflow is coming primarily from dividends from our index funds (about 25 percent of our annual budget), monthly payments from our personal loan (about 30 percent of our budget), rent we collect (a negligible 5 percent or less) and sale of investment shares (40-45 percent of our budget). But now we’re guessing the dividends will shrink and we’re leery about selling shares with the markets way down, because that could lead to our biggest fear coming true: running out of money before we hit phase two of our retirement.

What’s our plan of action?

Task 1: Cut spending

This should be a no-brainer for any remotely frugally inclined person. Our post-retirement budget is padded enough that we could easily cut 25 percent out of it by cutting back on travel and entertainment, and could more painfully cut it back by 40 or even 50 percent by going into ultra-frugal mode (think: beans and rice for most meals, and never going above 55 degrees in the house — which isn’t that much of a stretch for us, because keeping a cold house is our most freakishly frugal quirk). Those budget cuts conveniently align roughly to market recession stats — a garden variety recession tends to be somewhere in the range of 25 percent off market peak, while a major recession like 2008 is more in the 50 percent range. We’ll cut our spending to more or less match the severity of the crash. Fortunately, we feel confident that we can cover our season ski passes in all but the very bleakest budget scenarios, so there will still be joy in our lives.

Task 2: Stretch our cash cushion

We plan to have a little over two years worth of living expenses in cash when we retire sometime this year, but that’s two years of regular years’ living expenses. If we cut our spending, perhaps dramatically, that automatically stretches our cash farther, letting us go longer before we have to sell shares we don’t want to sell. But we’ll also try to stretch that cash in other ways, by doing any travel that we have planned but can’t cancel on miles instead of dollars (together we’re sitting on more than 1.6 million air miles, and though we know they’ll continually be devalued, we still expect them to last us a good, long while), bartering for goods and services locally, and generally taking more of a hustle attitude, even if we don’t expect it to be easy to find paid work.

Task 3: Try to hustle

Though we don’t buy the myth that we can “always just go back to work” (for a whole bunch of reasons), we will certainly try to earn some money if the economy is tanking! We doubt our main career skills would be in especially high demand if others in our fields are getting laid off, but we’re scrappy and would try hard to figure something out.

Task 4: Be smart about what shares we sell

Ever since Mr. ONL found Darrow Kirkpatrick’s 2015 post on Can I Retire Yet? on the best withdrawal strategies, we’ve been convinced that the CAPE Median Strategy is the way to go when it comes to selling our shares. And it applies whether the markets are up or down. Go read the post, but the short version is that we sell shares of stock funds when the markets are up, and sell bond funds when the markets are down, rather than selling blindly across all asset classes, and the CAPE (cyclically-adjusted price-to-earnings ratio, named by Robert Schiller) median helps us determine which assets to sell when it’s time to sell. Though in a lower spending scenario we’d be reducing how many shares we need to liquidate in a given year, we’ll never be able to escape having to sell some, especially once we get lower than an adjusted two-year cash cushion at our reduced burn rate. Though we’d do an analysis based on the particulars at the moment, we’d expect to leave our stock funds alone to recover in due time while selling only bond funds during this downturn.

Task 5: Exercise contingencies judiciously

Our hope is that the first four tasks will get us through most market corrections and crashes, and we won’t have to proceed farther down the task list. But if we do, we’re ready with our long list of contingencies. Of course, most of these contingencies are things we can only do once, so we don’t want to blow them capriciously. If and only if we absolutely had to, we’d consider one or more of the following contingencies:

  1. Downsize into a smaller house (only worthwhile if the local market adjusts — currently small houses have an almost 70 percent higher price per square foot of medium houses like ours because of heavy demand for “starter homes”).
  2. Refinance our rental property from a 15-year mortgage to a 30-year mortgage to take out cash and increase cashflow in the near term.
  3. Take out a mortgage on our by-then-paid-off home.
  4. Get roommates or Airbnb tenants in our spare bedrooms.
  5. Rent out or sell our house and live in an RV.
  6. Sell the rental property.
  7. Take cash out of our well-stocked 401(k)s and eat the tax penalty.
Chez Our Next Life in the snow

Home sweet home… until downsizing makes sense.

But What About… ?

Our basic market crash game plan doesn’t account for every possibility, and is built around more run-of-the-mill crashes with fairly short recoveries of three years or less. But what about other bad stuff that could befall all of us? Let’s run a few other scenarios. What if we’re hit with…

Long-term stagflation: Though stagflation isn’t something the U.S. is accustomed to, it’s something the Japanese know well. If it happens here, we’ll be in long-term belt-tightening mode, or might consider something more drastic like geographic arbitrage, with a temporary move abroad to a low cost-of-living country, until things pick back up here.

A super-extended market recovery, like five-plus years: If we’re selling only bond funds, which make up a minority stake in our portfolio, we’ll run out after five years or so, give or take, maybe sooner. So a recovery that takes us past our bond cushion will require us to get creative, finding other ways to cut costs, sucking it up and selling some stocks in sub-optimal position, or maybe cashing in one of those contingency cards. Everything would be on the table at this point: asking for a reassessment to lower our property taxes, renegotiating our insurance deductibles, finding cheaper internet and cell service, you name it.

A Great Depression-scale market crash of more than 75 percent: It’s hard to imagine a second Great Depression happening without some other global-scale event like world war or a climate cataclysm. In which case we’ll be reacting to a lot more than just a major economic event, and it’s hard to predict what we’ll do. In that case, we might be mighty glad that we have our go bags packed and ready, so we can peace out at a moment’s notice.

A health care abyss: To be covered very soon in a more detailed post! “What the %#@& is going to happen with our health care?!” is the early retirees’ question of the year for 2017, and we’ll soon know more, given how quickly Congress has promised to act on it.

Ski traffic and tall snow banks

We don’t need much money to go skiing (season passes are sooo much cheaper per day than lift tickets), but we do need patience with traffic when it’s snowing.

How Do You Prepare?

Let’s discuss: What’s your crash preparation plan? Any economic events you think we’re under-prepared for? Anyone else believe in the anti-jinx like I do? Or any hyper-rational beings out there want to smack some logical sense into me? Let’s dig into all of it in the comments!

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109 replies »

  1. Funnily enough, I read something on the forums today that made me think we needed to bolster our plans a bit more. And now I have read this, I’m definitely going to do a review. Thanks for the inspiration, as always!

    • You’re most welcome! While you don’t want to get so bogged down in worry and planning that you never pull the plug, there is no downside to thinking through what you’d do in different scenarios. Good luck! :-)

  2. Sounds like a good plan to prepare for the recession. Cutting expenses so you don’t have to sell shares makes a whole lot of sense. Another thing you can recession proof yourself is to move to a lower cost of living country for an extended period of time. Southeast Asia comes in mind. :)

    • While we don’t want to move out of the country while our parents are still with us (they’re all healthy! we want them around for as long as possible!), that option is definitely on our radar if it becomes clear that we don’t have a lot of other choices!

  3. “I call it the anti-jinx, and though I know it’s not really a thing,”

    It IS a real thing. If we are early, the doctor/plane/whatever is late, if we are late, they are early! Is this a coincidence? I think not! LOL

    I have always believed in and practiced “prepare for the worst and pray for the best!”

    Thanks for sharing, lots of valuable information! -Bill

  4. No doubt you guys will be just fine in the event of a market crash. I think a lot of FI’ers have the mindset to handle cutting expenses and doing some side hustles as needed.

    I like the idea of selling bond funds first in a down market – I never really thought about that one!

    — Jim

    • Definitely read Darrow’s article on the CAPE stuff — it’s pretty amazing what a difference it makes to your portfolio depending what assets you sell when!

  5. I think cutting spend s the biggest factor that will help ride out any major downturn. We are planning for a low WR anyway and that should also help us in any market situation.

    We like the CAPE withdrawal strategy and hope there is more to come from Darrow on that subject.

    The biggest item ( by far) on our budget is vacation / travel and if we have to trim that, we will suck that up for a year or two. The lift passes are the very last thing to go!! If we get to that place, cue REM…..” it’s the end of the world as know it”….:-)

    • Thank goodness we’ll both be able to keep those ski passes unless things really hit the fan. Phew! ;-) Re: Darrow, Mr. ONL was really hoping he’d be at FinCon last year, and he sent me down there with a long list of questions for him which are, alas, still unanswered. ;-) We’ll take all the info we can get from him!

  6. I think people who FIRE have a distinct advantage when markets turn south. They’ve spent many decades of their lives saving money and living a frugal, yet fulfilling, life. They know how to save and how to be flexible, and these skills will come in handy when we aren’t making money hand over fist in the market.

    For us, nothing much will change. We are already living as frugally as we can, but if there is anything that we can change to spend even less money, we will make those changes. We have 3.5 years of cash-on-hand that we can use to ride out anything extreme. We also have the ability to move around the country, so we might spend more time in less expensive areas when markets are significantly down.

    And yeah, side hustles or odd jobs aren’t out of the question either if it truly gets bad enough. But hey, it happens. Markets cycle. Flexibility is the key to seeing it through, and ultimately, we’ll all be stronger on the other side.

    • I know you are planning to do some hustle stuff regardless of the financial conditions, so I think having that opportunity flourishing in good times will make it more likely to be there in the bad times. And being able to move will certainly be a big advantage for you guys — heck, you can go spend your whole winter out on the BLM land near Yuma and pay next to nothing! (Kidding, not kidding.) ;-)

  7. Flexibility is another form of indirect income. It will be a great learning opportunity to see how the ERE movement manages future storms!
    Median CAPE and other market-timing withdrawal strategies remind of “5 Mistakes..” by Mallouk. It’s nice added perspective for these types of decisions.

    • I love that way of putting it: “Flexibility is another form of indirect income.” I feel like we just put more money in the bank, just reading that line! ;-) And I definitely don’t group us in the ERE bucket… we spend and plan to spend way too much to consider ourselves part of that club! ;-)

  8. Ya know……. maybe I should work out an actual plan like this. Of course, I am nowhere near ready to quit my job, so I should be just fine in the event a recession occurs. It’s hard to imagine business getting much worse for my industry. Thankfully I moved to a basically guaranteed position with this new job so I’m not really worried about getting laid off. The worst hit would probably be to my rental plans.

    • Wouldn’t be the worst idea. ;-) You’re obviously good in terms of a cushion to insulate you from the recession, even if you lost your job. Then you’d still possibly get some kind of severance, and you could collect unemployment, and your basic expenses are low. And assuming your job was solid, then a crash means stocks are on sale, and maybe your rental property could be had for a lot less. Yay for you! :-)

  9. How does that saying go? Hope for the best, prepare for the worst, and take whatever comes? I’m pretty sure that was on a poster in my 8th grade math room and I stared at it before every test ;)

    Sounds like you have a solid plan. I’m not sure anyone could ask for anything better. As someone who is likely working for the long haul–or at least the next decade–I’m trying to not worry about the next crash. Being able to take the long view in this case helps take the pressure off.

    • Your 8th grade math room had a wise poster! ;-) And in your case, the crash will be nothing but opportunity for you! Think about how many more shares you’ll be able to buy! And look at that math on how quickly recoveries typically come! Oh, the upside! :-)

  10. This is an extremely good point. The market will fluctuate over time, so it’s good to be prepared for both the good and bad times. It’s a lot easier for us young’ns to be prepared after seeing the consequences of the Great Recession. Never believe that things will always be economically fantastic.

    These are great plans. I do like that “go back to work full-time” isn’t the first option. I’m a bit of a weenie so I would be slightly tempted to go back to full-time work for the security. But that’s how we sell our freedom, huh?

    • I feel thankful all the time that we aren’t five years older, or I feel quite certain we would have been a lot harder hit by the 2008 financial crisis! Instead — lucky us — we got to learn the lessons and benefit from that knowledge. Such a gift! And on work, it’s not that we wouldn’t consider going back to work if we felt we had to, but more that we believe it’s not realistic to easily pick up a full-time job after an extended resume gap when lots of other people are looking for work. We think a lot of bloggers who casually say “Well you can always go back to work!” are being a bit naive, and it’s a mistake to rely on that alone as a backup plan. So it’s in our list of possible backup plans, but we don’t want to bank on that! ;-)

  11. From everything I have read on your site you two are very resourceful and if it came down to it you could pick up enough cash to ride out a significant prolonged downturn especially if you have 2 years of cash reserves to figure it out.

    Our focus for the next few years will be passive income generation on top of our normal investment streams. That should help ride out most of the market downturns.

    Having frugal habits puts us in a great position already, I couldn’t imagine trying to figure everything out in a short time window.

    • Thanks for that nice compliment — and I hope you’re right! But we saw enough smart, hardworking people struggle for years after 2008 to know that it’s not always in our control, no matter how awesome we might happen to be. ;-) Haha. So that’s why we have multiple layers of backup plans in there, so we aren’t reliant on other people giving us money when things are economically crappy. I think it’s smart that you’re working passive income streams — combined with your frugal habits, you should be in good shape!

  12. Thanks so much for sharing the CAPE median strategy article. We are not close enough to retirement to have thought so in-depth about this issue, but I know we would tighten the belt, side hustle, and eat tax penalties for early withdrawal if absolutely necessary. It’s hard to imagine, with all your planning, that you’d be under-prepared for anything short of a second Great Depression (and even then you have a plan!). But it is realistic to plan for the inevitable dip or crash in the market, for sure.

    • Definitely dig into Darrow’s writing as you guys get closer — but you don’t need to worry about that now. :-) I am always puzzled by people who don’t seem to worry too much about crashes and bear markets, 1. because I think about that stuff all the time, and 2. because How do they sleep at night?!?!?! I just can’t help myself from being prepared for as many scenarios as possible, but I know not everyone is wired that way. ;-)

  13. We pulled everything extra beyond our pension (which was not much) out of the stock market during a high point a few years ago. Returns are a lot lower but its as near to 100% safe as possible and now that we are actually retired I can’t tolerate much risk psychologically. The Greek government simply reaching in and stealing 10% off every bank savings account and negative interest rates in Europe have kind freaked us out even on “safe” savings though. So we have tried to insulate ourselves by being as independent from the larger society as possible. My grandmother told me what got her through the depression as a young widow with four children, was her herd of milk cows and her ability to sell/barter cream as well as to grow her own food. Now I have no intention of ever buying a dozen milk cows, but the fact that my home supports a nice sized garden and I live out in the country with enough land to run a few beef cattle if I need to and that I am surrounded by self sufficient people who will have plenty of “barterables” is a big comfort. We also have our small house set up so we can switch to heating with wood in half an hour if we need to. After we finish the renovations we currently need such as proper windows, we intend to add lot more solar and maybe wind power as well so if electricity goes sky high as it has in Ontario (as high as $600-$1200/month for some homes) due to the “green” insanity our society is currently fooling itself with, and the imminent idiotic 4% carbon tax (on top of the 14-18% sales tax on everything we already pay) on everything that Canada is currently talking about initiating, being able to be as independent as possible of “the grid” at need is a very good idea. The most important thing is no debt. Debt is the killer. Debt puts you into a position of being in the power of someone else and that can be used against you. I am feeling a lot better about life now that the green insanity seems to be beginning to pass and our recent local government election means we have moved back from socialism, ever higher taxes, and more toward free market economy.

    • It’s great that you’re in a position to be able to support yourselves to a large extent where you are now, and that you learned that lesson from your grandmother of finding a way to get by and barter. We’ve found, living in a more rural area, people here are more wired to think about bartering, and that’s something we’d definitely turn to if we had to!

  14. I shutter to commit this to the written word, but here it is: we are kicking around reverse mortgaging the house. There, I said it. No payments (ever), a giant chunk of cash to invest should we choose to do so (or we don’t have to take a dime), and a large enough safety net to stop paying medical insurance premiums and just negotiate the (much) lower cash price for medical services. I recently sat behind a cash paying patient at the lab. My bill (insured) was $189; his bill for the same routine test, with the pay at time of service discount, $35! I don’t know what the next administration has planned for health coverage, but hands down I’ll be in the most expensive risk group and I’m tired of spending 25% of our income on health related expenses. Not sure whether we’ll pull the trigger, lots of moving parts, but we’re paying over $1500 per month just in medical insurance premiums before we get one dime of treatment. There has to be a better way.

    • I don’t think you should be embarrassed about considering a reverse mortgage! They make sense for a lot of people. And I’ve read enough about your medical bills and health insurance costs to agree with you — they ARE unsustainable! (But I’ve also heard the opposite of what you heard in the lab, where I paid $100 for something, and an uninsured person paid $1000.)

  15. I think about the possibilities of a crash or correction all the time too. It will happen, so I try to prepare for it.

    We keep (in my mind) a ridiculous amount of cash handy and are prepared to cut costs significantly. We can also move overseas if things get really bad here.

    Like you guys, I don’t believe in selling assets when times are bad. I think instead of playing a defensive strategy, we should plan for an offensive strategy — buying assets when the market is down.

    • If you don’t mind sharing, how much cash is a ridiculous amount? (Asking in terms of years of spending, not dollars… unless you want to share both.) ;-) And we’d LOVE if we were in a position to buy assets when the markets are down — we’ve heard from a few early retired folks that not being able to buy stocks when they go on sale is one of the hardest adjustments to retired life!

  16. It does feel like we’re overdue for some kind of crash. Like the rest of the FIRE community, it’ll be nice to “stock” up (haha) on stocks on sale, but generally day to day living will have to change a little bit.

    Sounds like you guys have the right ideas on some of the steps you’d take. Along with that, we always keep a deep pantry that we could probably live off for several months and the other big thing is we have our mortgage paid 4 months in advance. Those give us a lot of peace of mind.

    • We used to root for a market crash or at least correction while we were deep in accumulation mode, but now that we’re so close to retirement, we’ve changed our tune, and we just want steadiness and predictability! Haha… I’m sure we’ll never get that. ;-) The pantry stockpile makes great sense… we have that to some extent to weather natural disasters. And how do you even pay your mortgage that far in advance? Do you just hold onto the money but set it aside in advance, or do you actually get your lender to accept it that far out??

  17. It looks like you have a good contingency plan. I’m nervous about a crash too. It might be okay in 2017, but it’s coming very soon. We’re pretty flexible so I’m sure we’ll come out okay. We just need to hold on through the bear market for a few years. Selling bond in a down market is a good idea. We plan to do that too.
    Our contingency plan is to work more. If that isn’t enough, then we’ll need to cut back drastically by relocating or something like that. I’m not looking forward to a crash..

    • I had been saying that we were definitely facing a crash, but if I’ve learned anything, it’s that we don’t know anything about market timing! And neither does anyone! Haha. So we’re just staying the course, and we’ll adapt as we need to, but it definitely helps us sleep at night knowing that we have backup plans. It’s good that you guys could move somewhere cheaper if you have to — certainly your properties in Portland could be liquidated to free up cash. Though I’m sure you’d prefer not to move!

  18. I like your approach of cutting expenses up to the same amount of market correction/crash. We already eat rice and beans (with avocado) pretty often because we LOVE IT! So that would be an easy adjustment if we had to do it. Or not much of an adjustment, I guess. Hahaha.
    Great post! You certainly have nothing to worry about in a crash scenario after early retirement. You got it covered.

  19. Some great thoughts here, and I do need to figure out how to adjust my investments to make them a bit more resilient to a bear market. I’m still 25 years from being able to touch my 403b, and I don’t have much in the way of a taxable account (yet!) so maybe it’s not too much of a concern (yet!).

    • Even if you’re many years out, there’s no downside to thinking this stuff through, and making sure your plan is well diversified from the early days! We tend to fall into the Jim Collins “Simple Path to Wealth” camp on diversification, and don’t think you need a million different investments — you just need to pick the right funds. He says all you need is the Vanguard Total Stock Market Index Fund and the Vg Total Bond Market Index Fund, and you’re automatically invested globally, in real estate, etc. We have a few more funds than that, but not many!

  20. Our plan for a downturn is to keep our spending and savings flexible year to year. First, we have a three-year cash reserve. That was our goal when I retired last year. Second, a lot of our spending is discretionary – so we can just adjust our spending down if we need to. Third, we finished 2016 way I had of our plan, so I have mentally put that money into a reserve. It represents almost 2 more years of spending. Hopefully in 2017 will go well and we will be off to a good start with our early retirement.

    • So great that you finished 2016 so ahead of your plan! You’re not the first early retiree I’ve heard say they couldn’t spend their full budget. I’m somehow feeling like that won’t be a problem for us… but then we’ve never met retired us, so who knows! ;-)

  21. Great post as usual! You two have thought this through far more thoroughly than most and should be proud of yourselves. You obviously already know about Darrow Kirkpatrick’s superb “Can I Retire Yet?” blog site and book, and as it happens his current post and next one address one of the ways of dealing with these scenarios – namely diversifying into alternative assets, as you two have already done.

    On the equity side I think the bottom line is to really understand that while you MUST be in stocks in order to earn a return you can live on, you also truly have to plan for and be able to weather a 50% decline in equities that could go on for three years or more. That is why folks of the caliber of Darrow and Bill Bernstein (see “Deep Risk”) emphasize having 3-7 years in cash and tend to end up with equities at not much more than 50% of the total allocation.

    At the risk of getting too political I also think that for U.S. investors the advent of Trump and all three branches of governement being controlled by one party injects a huge added dose of uncertainty into the markets – and having no idea what is going to happen with access to health care and insurance is just the beginning. It seems to me the only refuge from an investment standpoint is to be truly globally diversified on the equity side (which makes even more sense given current CAPE valuations of U.S. vs. international and EM stocks), take a serious look at including some hedged international bonds (even conservative Vanguard is now at 40% international in stocks and 30% in bonds for all of their target retirement income funds) and have a decent chunk of your net worth outside of the markets altogether (in a privately held business, rental properties, perhaps some physical gold bullion, etc) if possible.

    I will be interested in seeing your post on health care and insurance. My crystal ball says it’s going to take 2-4 years for this to play out, and that the backlash from boomers, AARP and others against changes to Medicare, Medicaid and S.S. will stop Ryan and other thieves of his persuasion dead in their tracks. Old people vote – and with demographics being what they are the tsuanmi of boomer retirees with a stake in these issues is just beginning.

    • We love Darrow’s writing, and have been influenced by a lot of it! I don’t see us ever going to 50% bonds just because we want to get better returns, but we achieve the hedge in other ways, like through our rental property and the income from that that will increase in a few years. On health care, my total guess prediction is that they don’t end up having the political will to significantly alter Medicare (though if they do, they will at least be smart and grandfather in folks who are already over 55 so that they don’t get the backlash, and changes will only affect folks farther from traditional retirement age). And on the ACA, I do think changes will filter in over 2-4 years in terms of actual implementation, but we’ll get some clearer indication in just a few months of which proposal(s) they’re leaning toward, and whether we can expect some form of age-based tax credit, a return to the wild west, a system of Medicaid block grants (probably a given) with states kicking in more of the funds, etc. We shall see!

  22. I agree w/ preparation warding off bad juju. Bringing a code cart to a patient’s room seems to guarantee that the patient will be fine.
    I don’t actually believe this, but it can’t hurt to be prepared, right?
    Or maybe it’s just that being prepared makes situations more manageable and less traumatic, so they don’t seem so bad. Being unprepared makes everything seem a hundred times worse.

    • Wow, what a great example! I wouldn’t have expected that, but as an ardent believer in the anti-jinx, I definitely believe that it has health care applications! ;-) I think you’re right that the preparation mentally prepares us, so that when bad things do happen, they’re far less traumatic.

  23. When you retire do you plan to roll over your 401k investments to an IRA? My plan right now is to roll over most of my 401k to an Traditional IRA and then begin a Roth conversion ladder so that more of that money is available should I need it. Doing the conversions when I’m not generating a lot of earned income could also minimize/avoid a lot of taxes.

    Of course, you have to wait 5 years to have free access to the Roth principal but that is better than leaving it all in a 401k and waiting until you are 59 1/2.

  24. I think the thing that gives me the most peace of mind is geographical arbitrage. Having already lived (not just visited) in 3 countries, I know that I can do it. There are so many places in the world where I could live very comfortably on much less money and having that up my sleeve to fall back on is, well, nice.

    • Absolutely! We’ve both traveled internationally a bit, but mostly to the expensive countries, not the places where our dollars will stretch farther — but that’s about to change! All of our near term post-retirement trips are going to be to lower cost parts of the world, and then we hope to ID a few places we could retreat to if need be!

  25. As another former Boy Scout count me as another person firmly in the be prepared house. I’m still working with no plans to stop any time soon. That being said I’m working hard to diversify our income sources especially in light of my wife recently leaving the workforce. New Side Hustles, new types of investments, pushing to increase my golden parachute with work through negotiation, etc. Its inevitable a crash will happen. The question is when. It could be tomorrow, it could be ten years from now.

    • I love what you’re doing in diversifying your income, so keep at it! It’s hard to put a price tag on peace of mind, but I think you’re giving yourselves the gift of great peace of mind by working all the different angles at once. :-)

  26. Call me cavalier, but I’m just not remotely worried about this whatsoever. Part of this is age and the associated remaining human capital….which you guys probably have quite a bit of left too if you want to tap it.

    I don’t consider the Trinity Study to be a “best guess”. If anything, feel like it includes some pretty horrific worst case scenarios. I feel like you’d need some sort of global calamity to duplicate something like the Great Depression which is a period of time that the 4% rule has included. if you toss aside periods of times like the Great Depression, the SWR jumps up closer to 5% or even 6%.

    Because I live in real life and not some sort of theoretical economic academia, I would absolutely have the desire (greed?) to be extra entrepreneurial in a major crash scenario because of the “once in a life time opportunity” to buy at artificially low prices. If it happens in 2017, my cash and bond cushion will take care of the safety factor, but I would definitely be kicking myself for not working and throwing more at the portfolio.

    But after that….it’s all math and the combination of investment income and whatever I need to supplement it. I feel like i’m more likely to hustle hard entrepreneurially or get another normal job to speed up time to full FI, but I definitely have the financial security to slow down if I feel so inclined.

    But I feel like flexibility is also huge. If I am early retired and a crash hits, I’ll travel less. I’ll cook more of my own meals. I’ll potentially move abroad for the short term. I’ll do whatever I need to do….just like working people do in financial catastrophes. I feel like anyone who has the discipline to retire super early probably has a lot of options in their back pocket.

    Now, if I was trying to live on $10k/year and retired on a 4% SWR, I feel like that would be a psychological difficulty because there’s probably no fat to temporarily trim out of my budget. But my intention is not to retire on my bare minimum. =)

    • I completely admire that you are not a worrier on this stuff, because worrying never did anybody any good. But do look at the data on the 2008 crash — a huge number of people were out of work for YEARS, and I think it is cavalier to assume that any one of us will magically be the unique unicorn who hustles our way to entrepreneurial success at a time when no one wants to spend any money. Several of our very smart, talented, hard-working, hustling friends really struggled in 2008, 2009, 2010 and beyond, and we took that lesson to heart. That’s why we’d rather have built-in contingencies rather than plans that require other people to give us money at exactly the moment when they’re least likely to. But as always, it’s all about developing a plan that speaks to your own comfort level, so who cares what I say. ;-)

      • I’m sure I would worry quite a bit more about SWR if I was intending on retiring forever with zero intentions of producing any sort of income whatsoever in addition to my portfolio. I’ve worried enough in my life about many a thing and the worrying never prevented a bad thing from happening nor caused a good thing to happen in my experience. :-D My latest fad/idea is actually to consider using reverse psychology with the SWR. If I want to buy a condo for $50k, that capital of $50k is only going to produce a reliable SWR of $167/mo – and if the SWR is less tha n4, it’s even worse. So that starts to sound not so bad and like a pretty good trade. Super duper simplified, but that’s my crazy brain for you. =)

  27. Image the worst thing(s) that could happen, plan to be flexible, and enjoy the moment.

    Looks like there are lots of snowflakes to play with currently. Enjoy!

    • This winter is shaping up to look pretty epic… but we’re stuck inside working. Waaaaahhhhh! ;-) At least it’s the last winter we’ll be spending indoors!

  28. A good point you have made here is that your FI number isn’t based on you guys living off the bare minimum you can survive on. It is padded. I think this is a major consideration for a lot of folks when they calculate FI. Don’t do it based on the bare minimum. Do it based on a realistic number on your authentic lifestyle…not the uber frugal one you are living to reach FI. I am not saying everyone does this – but I have seen quite a few year end reviews that have proven at least a few do.

    Someone recently asked about the FI number and how you choose it – if people still go by the 4% rule. There is so much that can’t be factored in (crashes and medical are huge ones) that I believe inflating your number for the “anti-jinx” is key to success! I have 3 FI numbers – one for my uber frugal life, one for a more realistic lifestyle, and another for the life I would like to live and also be able to give back worry free. That is the one I aim for – the other are benchmarks to say where I am at. It’s all a game in the end… but regardless, it sounds like you guys are set up to win!

    • That’s so smart to have three tiers of ER budget! If you can believe it, we have five budget scenarios, and our savings targets are all built around the highest one, which gives me HUGE peace of mind. Knowing that we can always shave a few grand here and there is what lets me sleep at night. I know that everyone needs to build a plan to their own comfort level, but I’m with you… if your whole plan is built on the most frugal scenario, what’s your fall-back plan?!?!?!?! I would not be okay retiring with that thin of a margin of success!

  29. You know, I almost wish the bear market would just arrive already so we can see what she looks like while we’re still earning a solid paycheck. Let’s go ahead and watch our net worth drop, find out (in hindsight) what the bottom will be, and ride the wave back up before calling it quits.

    One last buying opportunity and less to fret about as we retire early in the subsequent bull market.


    • Sometimes I wish for that, too… but now that we’re so close, I’m less capricious about wishing for that just given that we now want steadiness and predictability! (Hahaha — I can dream, right?) But if 2017 wants to hand us, say, a four-month correction, we’ll totally take that! ;-)

  30. I was thinking of an annuity being part of that plan, but they scare me with all the complexity and fine-print. Plus if you have cash now it is kind of the same unless you are looking for something really long-term.

    I can tell from your blogging skills that you could hustle as a freelance writer and make a couple of thousand dollars a month. It doesn’t have to have anything to do with your current day job or career (whatever that may be).

    Other than that, I would suggest diversifying globally to avoid a huge US crash. That would impact your foreign shares, but maybe less so. REITs could drop too, but they might drop in some recessions (or it might take time for the recession to filter into real estate).

    Overall it sounds like you have a solid plan of about a dozen great steps. I don’t know if it’s worth looking for a 13th.

    Our plan is fairly equally distributed along: military pension, blog hustling/dog sitting, rental income, equities, ability of wife to be a pharmacists at a retail pharmacy. I think if all that goes down, the world is in big, big trouble.

    • I could still definitely see annuities being part of the mix when we reach “traditional retirement,” but they’re not something we’re interested in right now, mostly just because we don’t have time or interest to do our homework on them! ;-) From what we do know, there’s not a huge benefit buying them really far in advance, so it’s something we can take advantage of in, say, our 60s. But that’s a long time from now!

      Freelancing is definitely something we’d consider, and we *will* be doing more with this blog generally once we have more time on our hands (can’t wait to share more about that!). And on investments, we are in total market funds and international funds, so have exposure abroad. But despite all the steps, we’ll probably ALWAYS be looking for that 13th step. ;-) Your plan sounds great — lots of different income sources in there, which should hedge your bets nicely!

  31. I think you’ve probably covered all eventualities but one thing some of us FI-seekers are doing is going down the dividend growth investor path so hopefully nearly all our stocks would keep paying higher dividends regardless of what happens. Maybe that would work well, depends how the businesses do I suppose.


    • I think dividend investing makes tons of sense for lots of investors, just not for us. We figured out that, in our case, we’d have to save up almost twice as much to net the level of dividends equal to what we’ll achieve by selling taxable shares, namely because we got such a big headstart on our tax-deferred retirement accounts, which can’t be structured as dividend investments. Plus, we just aren’t interested in picking stocks and rebalancing, because we’re lazy like that. Haha. But I’m super glad that the approach is working well for you!

    • You’ll never go wrong increasing savings. :-) And we sure HOPE it’s a good plan, though knowing us, I’m sure we’ll keep adding contingencies as we go. ;-)

  32. Always best to hope for the best and prepare for the worst! Your anti-jinx idea is right-on. We have discussions about this type of thing all the time…What if X, Y, or Z happens? Certainly market crashes are part of our concerns, as well as when (not if) our parents will need to live with us, the possibility of serious illness for one of us, health insurance policy changes, changes within our fields of work (currently education), etc… We just keep returning to the idea of prepping as best we can. Upping our savings and investments can only help us, whether the markets improve or not. You guys have a ton of contingency plans, so I’d say you’re pretty set!

    • That’s totally our approach — we HOPE for the best but plan for the worst, with a healthy dose of the anti-jinx. ;-) You raise a whole bunch of important additional issues, like health care concerns, eldercare issues, etc., and that’s a whole other thing that we’re thinking about a lot, too. Have you bought long-term care insurance? We’ve thought about it tons but haven’t pulled the trigger — curious if you have thoughts on it one way or the other!

  33. lots of good comments by others. Guessing on what the market will do and when it will do it is a game that most people are simply terrible at. Some get lucky, but most just miss out on gains. Your moving flexibility is a huge plus in my opinion. You mention the downsizing, RV living, renting out rooms, but don’t mention the overseas option. Living some months in a place like Thailand could be a lot of fun and affordable. Although, i’m not sure they have any skiing in Thailand.

    • Oh, amen to that! We are terrible at guessing about the markets, and no longer even pretend to try. And we have thought about moving abroad, but probably wouldn’t put that near the top of the list in the near term, while our parents are still around…. though certainly a trip of a few months would be fine. The tough thing would be even making arbitrage work in a recession, because to get the benefit, we’d have to at least rent out our house, and who knows if anyone would be wanting to visit a ski town if the economy was in the doldrums?

  34. Refinance would probably be hard if you both are unemployed. Maybe worth it to open a HELOC just in case but never use it?

    Not really familiar with the CAPE strategy, but if rate hikes (which increase bond yields but temporarily decrease the value of bond funds) coincide with or help to cause a major market correction, both bond fund and stock values may be depressed at the same time.

    No matter what, though, I think you guys have set yourself up for a solid retirement. You have a buffer and, worst comes to worst, maybe you have to go back to work for a couple more years. At least you have enough to make it through the tough times.

    • Your point about rate hikes and yields is a good one, and for sure we’ll have to just assess things at the time when we’re selling… so hard to know what the future will bring, especially when we have an incoming president who wants to reconstitute the Fed and meddle more with monetary policy. And it’s a good point about the refi, though we’ve talked with two lenders who both said that since we’d have the assets to pay off the mortgage overnight and have a long-term renter more than covering the mortgage, we’d have no trouble with the refi… but we also remember what it was like getting a mortgage in 2009 and know that they could really tighten the requirements if the economy goes south. So who knows… probably good we have multiple contingencies on that list, though fingers crossed we don’t HAVE to use them!

  35. If things were truly terrible in the next two years (I’m not remotely approaching FIRE), I would move into my brother’s basement again. It was cold and uncomfortable and his neighbors did not like that I am a lesbian, but I could survive there.

    I think my proposed version of personal FIRE should keep me “safe-ish” because it involves me staying on at my business but reducing my workload to how much I like to work in a week. Continuing on would allow me to write off many things on my taxes and also keep contributing to my IRA.

    • It’s great you have some level of contingency plan like that, even if it’s not your first choice or ideal. We’re lucky to have several relatives we could move in with if we had to, though of course we hope — like I’m sure you do — that it never comes to that! And I think you’re smart to keep one foot in the business world when you reach FI — that will give you so much extra security and peace of mind!

      • And I love my business. I wish I was doing it FT now. It is intellectually stimulating and helps the broader LGBT community. I think it would take many years to get over how cool it is.

  36. Our liquid savings has always been based on the OhShit level of the 2008 recession. I was out of work for a year myself, and at the same time and at the other end of the spectrum, my retired friends shared the hits they were taking to their portfolio and what that meant for their retired lives. It was a very special education.

    I haven’t rewritten our plan in anticipation of a crash yet, though, let’s be honest I’m always anticipating one and maybe that has been the greatest AntiJinx of all?!?

    I’m working on earthquake preparedness right now since whatever happens while we’re employed and not in a recession we can weather, but being caught without adequate emergency supplies after a major earthquake would make our money meaningless. You can’t purify water with a $100 bill! (I looked it up. You can’t.)

    I’m in a constant state of preparing for the worst in a way I was definitely not geared up for 8 years ago and not all of that was due to naïveté!

    • “A very special education.” A perfect way to put the 2008 crisis. Many of us were scarred in lots of different ways — I KNOW seeing so many people lose their homes is entirely why I wanted to pay off the mortgage so fast. (So I guess, thank you, 2008?) ;-)

      On the earthquake front, you don’t have to do a ton to prepare — just make sure you have food and water stored somewhere along with a backpack with basic survival stuff you could grab. Bonus points if you scan all your important legal and financial docs online somewhere secure and put some cash in that backpack. But I bet you could get yourself fully prepared in a few hours with only a few purchases necessary. (I’m kind of obsessed with natural disaster preparedness, and it’s one of those things where you can go totally overboard, but that’s just a waste of money and brain space!)

  37. I just recently realized that we need to build up our cash cushion for the first couple of years of FI. I have been concentrating so much on the investment side of things that I momentarily forgot the basic rule of keeping the first few years worth of expenses completely out of the market and in cash. Yeah, it won’t earn much but at least it will be safe. (You have already thought of this).

    One thing about your contingent plan of taking out a mortgage if needed, this probably won’t work if you don’t have jobs. Even if you have assets to back it most banks want to see actual income. Just something to keep in mind.

    • You definitely DO want to build up that cash cushion, but there’s no reason to do that well in advance, because you’re dooming that money to earn essentially no interest for you for potentially many years. So our approach is to build up the cash cushion as almost the very last thing. And it’s a good point about the mortgage and employment — we’ve heard from at least one lender that we’d still quality based on assets, but who knows! We hope to never need to do that anyway!

  38. I am an optimist, but I also need to know what could go wrong and have a plan. It makes me feel warm inside, just knowing there is a plan. I think that is a good optimist, otherwise you are just burying your head in the sand.
    Thank you

    • That feeling of self-reliance will serve you well! I’m a big fan of cultivating that self-reliant feeling while also making sure we’re in a good position to ride things out. :-)

  39. You’ve really thought through this.

    We already took a step last year in September by increasing our bonds from 20% to 30% of our portfolio. During a crash or severe correction, we’d sell some of the bonds and buy more stocks and stock index funds.

    • That makes sense! Just make sure you’ve thought through capital gains scenarios and you’re comfortable with the tax implications before you sell your bonds. ;-)