Family of Four Taking Flight to Financial Independence

Did Your Investment Account Catch A Virus This Week?

What do you do when you’ve been planning for early retirement (or traditional retirement) and everything is going along great ... until it isn't?  

Your investments are doing great... you’re getting stuff wrapped up at your job, and your life overall is slowing down because in the ER process you have also decided to downsize / minimize your life.  Then the bottom falls out of the stock market, and it has one of the worst (if not the worst) weeks in its history.  

To top it off, there is a decent chance that your investments could continue to fall over the coming days / weeks.  Now you start running calculations in your head.  What if the market drops another 10% before it bounces back?  Anything seems possible at this point.  What if instead of dropping another 10% the market drops another 20% or 30%?  When does it end?

This all seems so crazy when just a week ago you were enjoying all time highs and your investments were actually ahead of schedule.  You knew that there would be some pull back eventually because your rate of return was greater than the historic 7% inflation adjusted rate of return that the market produces (and that you base all of your investment calculations on).  But you never thought such a drastic and historic downturn would happen so quickly! 

Let’s come up with an example.  Your (hypothetical) planned retirement date is 3/15/2020.  We will also assume that your goal is to have $1,000,000 ($900,000 is investments and $100,000 is cash).  Now let’s assume that last week just happened where the market went from all time highs to dropping over 12% ... and that the market goes on to lose another 20% (hypothetical) (for a total of 32%) before it stabilizes and starts an upwards march again.  Assuming things play out this way, your account has gone from over $1,000,000 to around $610,000 (900,000 * .32 (estimated decrease for this example)) within a month or so.  That means that your spending power has gone from $36,000 per year ($900,000 * .04) to $24,400 per year ($610,000 * .04).  

So what do you do?  Do you go on and retire and base your withdrawal strategy on the current account value of $610,000?  Or do you decide to put off retirement and continue working until the market recovers and your account gets back closer to where it should be?  Honestly, neither sounds all that appealing. 

This is a choice that we are currently facing and decisions need to be made.  But I would like to present a different way to look at this.   To do this, let’s go over some facts.  Based on history, the stock market WILL produce a rate of return of around 7% (after adjusting down 3% for inflation).  We also know that when the account was up over $1,000,000 the rate of return was over 7% (and so slightly inflated).  Lastly, we know that over the last month the account has dropped over 30(just a hypothetical estimate for this example) and now has a ROR (rate of return) below 7%.  

This is a perfect example of why it is important to plan your retirement goals around a realistic ROR, and if you invest similar to us (using VTSAX Total Stock Market Index Fund) you can’t get more realistic than a 7% inflation adjusted ROR.  This way, no matter what happens in the stock market leading up to your retirement date (and this is for traditional retirees as well as FIRE individuals) you are going to base your withdrawals on an account value that has been calculated using a 7% ROR.  So in the example above, it’s not accurate to use the $610,000 because the ROR is below the historic 7% return.  That said, it works both ways.  Say that you retire when the market is at all time highs, and you end up with more than you planned.  You still need to base your withdrawals on the value that uses the 7% ROR because it will eventually regress to the mean (again, assuming you invest similar to us).  

What are we doing?

First of all, we aren’t panicking.  We were actually pretty excited to pick up some shares of VTSAX last Friday while they were on sale.  If the market continues to crater and doesn’t recover by our target retirement date of 7/31/2020 we will more than likely continue with our plan to move to Spain.  However, we will absolutely implement our safety margins of tapping our cash cushion to lower our withdrawals to 3% or less.  We will also take part-time income a little more seriously in year 1.  We may have to postpone a fancy Paris trip and turn it into some more camping / hiking / beach bumming around Spain (however will we manage?!).  In other words, we will implement the greatest safety margin of all which is to remain flexible.  

While it certainly isn’t pleasant to see investment accounts tank by over 12% in a week, it’s not the end of the world.  And remember, you only lose money if you panic and sell (DON’T)

So what do you think?  What was your reaction to the market this past week?  What is your strategy?


What If Your Life Was Off The (Traditional American) Beaten Path?

 A non-traditional approach to education this day through a Girl Scout opportunity outside of the classroom.

We’ve touched on this / these subjects before ... and in fact our whole blog really is about living life in a non-traditional way.

But as we approach early retirement, I’ve been thinking about it more.  Why not take a different path?

Work until retirement age.  Why not retire early?!

Buy a home ... stay put for 30+ years.  Why not rent?  Travel?  Not be tied down to one location?

Work hard to buy lots of nice things ... !  Nice things can be great and all ... but what if we focused on less material things and more on experiences?

Have a family ... find a great public (and for some private) school system (in fact buy the house near that school / school system).  Why not think outside of the traditional educational approach?

Save up money and vacation days ... take vacations when the children are not in school!  What if we weren’t tied down to a calendar?  Travel whenever you want?  After all, isn’t exploring the world one of the best ways to learn (hands-on!)?

On the one hand I’ve been sitting with some of these ideas for years now ... and within the past year or so in social media groups with like-minded people (lurking and reading about their adventures) so the non-traditional approach almost seems not so out of the box to me.  On the other hand, the traditional approach is what we know so some of that is taking some getting use to.

What if we ... retired early?  Were not tied down to a home?  Had more experiences than things?  Had a more non-traditional approach to education?  Had more flexibility when it comes to travel (or had a life of travel)?  Is a different way of life necessarily a wrong way?

Given that our kids are right in the middle of childhood (9 and 7 years) I’ve thought a lot recently about how these (non-traditional) decisions may affect them now, in the (near) future, and in the more further off future (young adults / college age).  Pushing them (and all of us) out of our comfort zone I think can be a life-long positive experience for all of us.  Why not experience life a different way from a different perspective and culture?

But also I think a big part of childhood for many is “school” so that has been on my mind too (“School” now and in the future).  Even though at this point we plan to continue a more traditional approach to school (we plan to put them in school in Spain to immerse them in the culture and language), I am working to change my perspective on education and tear down those 4 walls of a school.

One thing I do like about the school we plan to put them into in Spain is they will go to school from 9 am - 2 pm (with an optional lunch at 2:00 pm).  This is a much shorter day than we are use to (8 am -  3:15 pm for them now although since I am a teacher it is often much longer).  Although I’ve always felt educational activities and experiences can happen anywhere ... and I try to supplement with my kids (science, history, the arts), I am often unable to do this during the school year because school takes up so much of our time and energy (we are often there 7 amish to maybe 4 pmish many days!).  So I love the idea that they will have a shorter school day.

And at this point we still plan to take a World Schooling approach after maybe 2 years of school in Spain.  But time will tell ....

But what if their educational experience (either when they are in “school” or not) ... involved more (in no particular order):

-Play?  (What about learning from local Spanish kids outside of school.... and other expat kids from around the world?)
-Activity? / Athletics?  (What if “activity” was more than PE every other day ... and recess for 30 min or less a day ... what if we were able to learn about and play sports in a different culture?)
-Nature?  (Need I say more here ... we all benefit from nature!!)
-The Arts?  (Making art in museums?  Learning Flamenco in Spain?)
-Science and History?  (Time to do science at home or outside of home?  Visiting historic sites and supplementing the classroom or books?)
-Hands-On Experiences?  (Learning about money and finances by helping buy groceries at a local market?)
-Real World Experiences?  (I love our “Field Trips” in the summer .... museums, parks, new neighborhoods / local eating ... what if our life wasn’t limited to one Field Trip a year in the school year ... and just when we had time?)
-Travel?  (How about learning about Morocco in Morocco?)
-Learning Experiences on the Internet?  (Outschool anyone?  Maybe the kids can pick up a few French classes online?)
-Less worksheets?  Less or no Standardized Tests?  (Do I even need to elaborate here?)
-Life-Long Skills?  (Cooking anyone?)

I’m in no way knocking their current and past teachers.  In fact ... if anything, I wouldn’t be sitting here today preparing for a move to Spain (our kids have benefited greatly from the Dual Language program in our public school) if it wasn’t for them.  I also don’t think our kids would be as prepared for more independent learning if it wasn’t for the teachers, and I am talking about their pre-school teachers all the way to their current teachers.  But now that we have that educational foundation ... why not begin to take a more non-traditional approach?

There are some of my thoughts on the non-traditional approach to life.  What do you think?  If you could FIRE or when you FIRE, could you or would you take a leap outside of your comfort zone?  What do you think about the non-traditional approach?  What path might you take?


How Much Cash Is Under Your Mattress?

I read an article recently that stated, “69% of Americans have less than $1000 in their savings accounts.”  What a scary figure!  That basically means that roughly 70% of the people in this country are living pay check to pay check.  What’s even more frustrating is that (some of) the same people are probably driving around in new cars, wearing fancy shoes, and grabbing a cup of fancy coffee every day as well.  It’s enough to drive me crazy!

The article got me thinking though.  What is the “right” amount of money to keep laying around in savings accounts? 
One thing that I can’t stand is idle cash.  I like to have as much of our hard earned money as possible working in the stock market.  That said, bills still need to be paid and unexpected expenses tend to pop up so there is a need to have some cash in a regular bank account.  The question is... how much?
The answer to this question is going to be different for everyone.  What I’d really like to gauge from this post is the amount that you (the readers) need to have on hand to be comfortable. 
I also think that the amount should be different for working years versus retired years, so I will break that down as well. 
How much do we currently keep liquid?

We like to keep enough to cover our fixed monthly expenses which is about $3,200.  Then I like to have another $2,000 for vacations and unplanned expenses.  For our family I would say a good round number of $5,000 is what we keep liquid from month to month. 
What about emergencies?

In the case of an emergency, where we need a large amount of money, we would simply use our credit cards. This would buy us time between the time we charge the card and the time the bill is due, to pull the necessary funds from our taxable Vanguard account in order to pay off the credit card bill.  Note, we have been living by this philosophy for over 2 years now, and I have not had to implement this yet.
What about in retirement?

The above numbers show how we handle cash during our working years.  However, I anticipate this strategy to change once we reach financial independence. During our FIRE (financial independence retire early) years we will have a cash stash as part of our safety margins.  Being overly conservative when it comes to money, our plan is to have 3 - 4 years worth of living expenses in cash.  The reason being is that most recessions last between 2 - 4 years, so this money would be used if / when the next one comes along so we aren’t touching our investments in a down market.  We may also be working part-time so there may be no need to touch the cash stash, but it will still be nice to have.  Like we discussed in our Year 1 Withdrawal Strategywe will have around $100,000 in cash when we enter ER (early retirement).  $22,500 of which will be earmarked for emergencies

So that’s it!  We keep about $5,000 laying around during our working years and plan to keep about $100,000 during our retired years. 
How much is in your bank account?  Will that amount change when you retire?