The Stock Market Was Down This Week. Did We Panic?!?

Did you notice?  The market has been down quite a bit over the last week (or so) which has caused a lot of rumblings in the media and in the FIRE (financial independence retire early) community.  It was approaching correction status as of the close on 10/11/2018 which is when it goes down by at least 10% from its highest point (note, it is healthy for the markets to have corrections).  

NYC's Financial District

When this occurs you can be guaranteed of two things:

• The media is going to hype it up!

• People are going to panic!

We want to calm your fears and share how we handle a week such as this one.  Overall a week like this is pretty meaningless.  But it is also a good time to run through some “what if” scenarios in your head just to make sure you aren’t buying all of the media hype (and that you are buying in the market (as you always should be)).  

What If We Were Retired This Week and Living Off Of Investments?

If we were already retired and living off our investments and this week happened, (hint, it will happen again and eventually be much worse than it is now) we wouldn’t need to change a thing.  To understand why, you have to understand our withdrawal strategy (let’s run through a hypothetical situation).  

Example Scenario: Let’s say we retired in January of 2018.  We have $1,000,000 in investments, and we plan to live off of $40,000 per year (or 4% of our investments).  In January we would have withdrawn $3,333, and every other month of 2018 we would have withdrawn the same amount (unless of course we found we didn’t need this much, or we had some side hustle income coming in (we will)).  

$3,333 * 12 = $40,000

But What If The Market Is Down in 2018?

If the market ends up being down in 2018, we would still continue to pull the same $3,333 every month.  Our withdrawals for 2018 are based on how the market performed in 2017 (we can’t predict the future!).  Since the market was up over 20% in 2017, we know we can confidently pull the 4% from our investments for all of 2018.

That’s why this past week would have no impact on us.  We aren’t worried in the least bit.  In fact, we are excited because we plan to buy more shares of VTSAX on Monday (who doesn't like buying things on a discount!).

Now, if the market is down overall in 2018, then our withdrawals starting in 2019 would be impacted.  Let’s run another hypothetical based on a down market in 2018.  

Hypothetically speaking, if the market was down let’s say 10% overall for 2018, then we most certainly would not withdraw the entire 4% from our investments.  We would take 1% from our cash cushion which would be $833 per month, and 3% from our investments which would be $2,500 per month.  Our lifestyle won’t be impacted since we are still living off of our planned $3,333 per month.  We are just applying some safety margins when needed (in this case lowering our 4% withdrawal rate to a 3% withdrawal for 2019).  

We could also choose to pick up some part-time work / side hustle to lower our withdrawal rate even more, or practice some geographic arbitrage by living in a cheaper part of the world (Puerto Rico anyone?) during down years.

(Hint, you will make money in ER (early retirement).  You may not know how, but it would be almost impossible not to earn another dollar for the rest of your life).  

The Market This Week

Don’t believe the hype that you hear in the media, and definitely don’t panic!  Keep an eye on things from a distance while you enjoy your FI (financial independence) (or work towards FI) and, implement your safety margins as needed.  

So what do you think?  Were you worried this week?  Does this make you feel any better?

-Erik