Family of Four Taking Flight to Financial Independence

How To Survive The Next Financial Apocalypse

Retiring early sounds nice and all, but what are you going to do when the stock market crashes again?

Calmly riding out the next financial storm (Lego Art in Houston).

This is by far the most commonly asked question in regards to early retirement, and rightfully so, because the stock market is going to crash again.  If you’re in your 30’s / early 40's like us, you will probably witness at least 3 - 4 more major stock market collapses in your life.  

What will we do when the inevitable happens?  Simple.  We’ll turn to our safety margins to ride out the storm.  

What are safety margins?

Safety margins are ways that you can protect investments during economic downturns.  Living off of the 4% philosophy of withdrawals is great and extremely safe on its own.  But when the market does tank, rather than continue to withdrawal down your investments, it’s good to be able to let them sit while you tap into your safety margins.

Safety Margin I: Cash

The first safety margin everyone should have in place is cash.  Cash is king, and when the market tanks, it is your best friend.  A good practice is to have 3 - 5 years of spending set aside in cash.  This will provide you with enough of a cushion to ride out any economic downturn that we have experienced in the history of the stock market to date.  

Wait!!  We assume that a typical early retiree lives on around $40k per year.  Are you telling me that I need $120,000 - $200,000 extra cash for when the market tanks?  No, not really.  Rather than worry about covering 100% of your expenses (in this example 4% or $40,000 per year), all you need to do is have enough to cover 1% of your expenses.  Thus you drop your withdrawal rate from a safe 4% to a bulletproof 3%.  Using our example of someone living off of $40,000 (4% of $1,000,000) this means that for this safety margin to be effective you only need a cash cushion of $30,000 - $50,000 (3 - 5 years worth).   Not too shabby.

Let us take 2008 as an example.  As bad as 2008 was (the market dropped about 40%), in 2009 the market was back up over 26% and has been up every year since.  So rather than pulling the 4% from your investments in 2008, you could have pulled maybe 3% from investments and 1% from your cash cushion and been just fine!  That should get you excited.

Safety Margin II: Be Flexible

Being flexible, should probably be number one on this list because it is absolutely key to having a successful retirement.  There are numerous ways to be flexible in early retirement.  It could be anything from reducing your grocery budget to deciding to take a cheaper vacation.  Here’s one example.  Let’s say you’re retired and enjoying the good life, and the bottom falls out of the stock market.  You’re a pro and so you don’t panic.  You adjust your withdrawals down to about 3% and tap some of your cash cushion.  Next you decide maybe it’s not the best year to take that big vacation to Disney World (or destination of your choice), so maybe you decide on a staycation and just do fun things around your own city for a couple of weeks.  Either way you have remained flexible and adjusted your lifestyle (temporarily) to help weather the storm.  Mickey Mouse will be there next year (I promise!).

Safety Margin III: Part Time Work / Side Hustle

Wait, WHAT?  Work??  I thought this was (early) retirement?!  You don’t work in retirement! 

Alright, settle down, and let’s consider some facts.  If you are an early retiree, you are probably still young, educated, and healthy.  Just because you’re “retired” doesn’t mean you are never again allowed or able to make any more money.  How silly is that? 

This is one of the most debated topics when talking about FIRE (financial independence retire early).  Being FIRE does not mean you are not allowed to work.  Being FIRE does mean that work is no longer mandatory.  You can instead pursue what interests you, and do it on your own time.  

Additionally, keep in mind, you no longer need $100k per year to get by.  Rather, $5k - $10k per year would be more than enough as a safety margin.  For example, let’s go back to our family living off of $40,000 per year at a 4% withdrawal rate.  Bringing in $5k just lowered your withdrawal rate from 4% to 3.5% or from $40,000 to $35,000.  That’s huge!

Safety Margin IV: Geographic Arbitrage

If you’re like us and part of your plan for early retirement involves a lot of travel, then geographic arbitrage is a very powerful safety margin.  When things get bad, instead of panicking you could just go to Croatia.  Or maybe Thailand is more your speed.  I don’t know about you, but spending time in either of those places while living off of considerably less money while you ride out the storm sounds like a win win to me!

The ride isn’t always going to be smooth.  There are going to be plenty of twists and turns along the way, but remain confident that your investments will last and continue to grow.  After all, up to this point you have been disciplined enough to clean up your budget, pay down all of your debt, invest, and reach FI (financial independence) much earlier than most people.  Do you really think that when you get to retirement that you are all of the sudden going to start making poor decisions with your money?  No!  You have a solid plan.  All you have to do is implement it, and sit back and enjoy the flight.

Are you ready to take flight with us?  Are you ready for the next financial apocalypse?


1 comment

  1. Erik - Came across your blog just recently. I know this is an older post, but I love the idea of your safety margin/cash cushion only being 3-5 years of 1% of your spending. I've always struggled with the question of how much cash is too much before it starts a drag on your portfolio. Looking forward to reading more!