It’s been six months since the stock market touched a bottom in the coronavirus crash. It recovered nicely and fast. When the 2008 financial crisis started, I followed a path of overbalancing. After the stock market dropped 20%, I increased my allocation to stocks by five percentage points, and I increased it again by another five percentage points for each additional 10% drop. Whether the moves were right or wrong in theory, they were successful in the end. I was able to buy more stocks at low prices. Even at the bottom of the market in March 2020, the prices were still so much higher than the prices I paid in 2008 and 2009.
I didn’t overbalance again in March 2020. It wasn’t because I thought the market would never recover this time around. Overbalancing would’ve worked equally well in 2020, perhaps even better than in 2008. I didn’t do it because I’m different than I was in 2008.
I had a good-paying job in 2008. Although some people lost their jobs in the great recession, the industry I was in wasn’t hit hard. The company I worked for had a layoff, which affected 5% of the employees. The laid-off employees were able to find other jobs in short order. My salary was more than enough to cover our expenses. In other words, I had a positive cash flow outside my portfolio. My portfolio was also smaller back then. Although the percentage loss in 2008-2009 was larger than in March 2020, my loss-to-income ratio was much lower last time. Because I wasn’t relying on my investment portfolio and I could make up the loss relatively quickly with my income, I had no problem being greedy when others were fearful.
I don’t have that luxury anymore in 2020. While I still have some income from my blog and my advisor search and screening service, my income is far less than my previous salary. It doesn’t cover our expenses. While our withdrawal rate is still low, it feels a lot different than having a positive cashflow outside your portfolio and covering all your expenses with it.
Having a positive cash flow outside the portfolio is an open secret in the Financial Independence Retire Early (FIRE) circles. Despite all the headlines talking about saving 25x or 30x of annual expenses, it’s more for confidence than actually using the savings to cover expenses post-FIRE. The smart FIRE leaders don’t rely on their investment portfolio for their day-to-day spending. In theory, they can cover their expenses by withdrawing from their investment portfolio, but in reality, they don’t. They cover their expenses by their current income while leaving their portfolio untouched. Those who questioned whether FIRE will survive when the stock market crashed in March simply didn’t know how the game is played. The 4% rule doesn’t matter when you don’t withdraw at all.
This isn’t to argue whether the FIRE leaders really retired or not. It’s a lesson on how to insulate yourself from bear markets. If you have a positive cash flow outside your portfolio, you don’t worry much about bear markets. So how do you keep a positive cash flow after FIRE? Multiple ways.
Spouse’s Employment
Some couples keep one person working after FIRE. The working spouse’s employment covers the expenses and provides health insurance. Government statistics show that among working couples, 1/3 of them only have one spouse employed. When my wife quit her job in 2015, I was still working. If a bear market came but I kept my job, we wouldn’t have to worry.
Pension
Some had a pension when they retired. Doug Nordman at The Military Guide had it from the military. Fritz at The Retirement Manifesto had it from a private employer. Some employers also provide health insurance to retirees receiving a pension. Even if the pension doesn’t cover all the expenses, it still provides a nice cushion. Living lean in a bear market is also an option.
Part-Time Job
Some keep their job and only drop down to part-time. The part-time job can provide income and health insurance. Bianca planned to do that in her flight attendant job (This flight attendant has enough money saved to retire at 44, but she wants to keep working, MarketWatch).
Rental Properties
Living on income from rental properties is another popular option. Chad Carson has a book and a course teaching people how to retire early on rental properties.
Self-Employment
The most famous early retiree Mr Money Mustache arguably never withdrew from his investment portfolio after he retired at 30. He used self-employment income, first from fixing and flipping houses, then from blogging. Leif at Physician On FIRE just posted his 2019 tax return. He had a negative withdrawal rate because his self-employment income covered his expenses. He didn’t worry when the value of his investment portfolio dropped by $1 million in March. That’s the power of having a positive cash flow outside the portfolio.
If you only have a job, you’re vulnerable to recessions and unemployment, as many have experienced in the COVID-19 pandemic. If you only have an investment portfolio, you’re vulnerable to prolonged bear markets. When you have both an investment portfolio and a positive cash flow outside the portfolio, you’re financially more secure. That’s the smart way to do FIRE.
***
[Update] Long-time blogger J.D. Roth wrote this note when he shared this post on Apex Money:
As a FIRE insider, I can say that this is generally 100% true. Except for me and Doug Nordman, most FIRE folks support themselves with actual income.
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always_gone says
I chuckle when I read that some of these fire bloggers are retired . . . but their spouse works. Really? Well then my wife retired at 25 when we had kids, haha.
Harry Sit says
But she didn’t have an investment portfolio covering a large multiple of your expenses. Some of the retired FIRE bloggers have both employment income from their spouse and an investment portfolio.
Lacy says
Check out a blog called Financial Samurai. He started writing about FIRE in 2009 and neither he nor his wife has worked for years, but for some reason, it doesn’t seem like he gets much credit in the FIRE circles.
He had a very pragmatic approach and touches upon bath the hard numbers and the emotional aspects of FIRE.
He posts his passive income numbers for all to see. Do you mind posting yours?
Not a FinSam Fan says
Lacy,
Financial Samurai has attacked various members of the personal finance community, included respected people to stigmatize mental illness that they shared and in retaliation after one woman shared on FB that she wasn’t a big fan of him. Not only this, he writes inflammatory articles for CNBC for the clicks (in one, he claimed that he was a struggling tennis coach in San Fran, in another, he says $400,000 is not enough to be considered wealthy).
I hope this gives you more information into why he doesn’t get much credit. I hope he gets less.
Doug Nordman says
“Sam” has attacked more people than that.
Other bloggers have reported similar anecdotes from former FSamurai readers. He’s taken a dark turn.
FinancialDave says
Yes, I chuckle too with how different people define retirement, which I believe is whatever you want to make of it.
What I don’t chuckle about is when people like Leif make comments that suggest they got $12,000 in a Roth with a backdoor technique where they paid no tax.
That is actually quite ridiculous because of course, they paid tax on that money they earned – in this case 28.25% Federal and State tax on the $16,725 that they had to earn to put $12,000 into the Roth. Since they were most likely maxing out every other tax-advantaged account that they could the taxes paid probably don’t matter all that much. Just remember when they or their heirs spend that Roth money in tax brackets less than 28.25% it will be less efficient than spending that money from a tax-deferred account. In other words you would have less spendable income.
Physician on FIRE says
I think you misunderstood what I was trying to say, Dave.
I stated that it was a conversion of a post-tax, non-deductible IRA contribution. In other words, the tax had already been paid.
The way it’s reported on line 4a the 1040 makes it look like an IRA withdrawal, which it’s really not.
The only portion of the $12,002 that was taxed a second time was the $2 that the accounts gained, as reported on line 4b.
The other point that’s important to understand is that the backdoor Roth is not done in lieu of tax-deferred investments. It replaces a portion of your investments that would otherwise be directed towards your taxable brokerage account. So you’re avoiding the tax drag on the money that goes into the Roth IRA instead. It’s not a huge benefit, but the tax savings can add up over the years and decades
Best,
-Leif / PoF
Chris Mamula says
This is spot on Harry. It’s simple risk management that if you have multiple, non- or low correlated streams of income, you are more secure.
In my case my wife works (part-time) and I make a little money blogging/writing. If all of that income went away we would have decades of spending from a portfolio. Conversely if our portfolio suffered a severe drawdown, we have ongoing income. Even if the worst case scenario that looked possible in March/April materialized, we have several years in safe investments and have been maintaining/developing skills that are easier to ramp up than starting from scratch.
This common FIRE approach is quite different than your typical family with a stay at home parent. It is also different than traditional definition of retirement where you live solely off of investments and completely stop earning all income, which is riskier.
It couldn’t be any more different than the standard American lifestyle where the average savings rate hovers around 5% and many people spend more than they make. The recent WSJ article featuring the attorney decades out of school still drowning in student loans, car payments, consumer spending, and mortgage debt highlights this.
Donna says
Chris, your wife works, provides healthcare, and you make money selling yourself as an early retiree?
I don’t get it. How do you have other people and Harry fooled?
Harry Sit says
Donna – “Early retiree” or some other label doesn’t change the substance. You can call it something else, say “changed career.” Either way, Chris and his wife have employment income and health insurance. This allows them to keep their portfolio growing and not worry in bear markets. If the job goes away, they aren’t thrown into a scramble like other single-income households. They can start withdrawing from their portfolio. Having both a portfolio and a positive cash flow outside the portfolio makes it more robust. That’s more important than whether it’s called “retired” or not.
TJ says
Yep, and there’s a lot of murkiness with blogger succession, for example, we have no idea if Chris bought out Darrow and is now making hand over fist off of that
investment. A new name just suddenly started writing on Darrow’s blog one day. And it was never expplained. Can’t be a coincidence.
The reality is that a lot of these early retirement bloggers don’t really walk the walk of actually retiring early – they are building businesses where they are the product. Which is totally cool. It’s just sad that people think they can follow that ideology, but omit the very important part where they need to bridge the gap by producing income from entrepreneurship.
If you stop calling it retirement, the branding stops appealing to all the worker bees who loathe their jobs and want a way out. These people would be better off trying to find a job they do like vs. going into extreme saving mode at a job they hate, quitting, and hoping it will all last before they inevitably need to work again or become an entrepreneur.
Joel says
Great post acknowledging the reality for most FIRE people. It’s worth noting that in many of the “success” stories for 4% rule historically, a person would have seen a $1mm portfolio drop to $200-500k for years before recovering. Hard to imagine a person that would just ignore that kind of drawdown on faith.
For cash flow, I see a good bit of “eating the dividends” (at least in taxable).
Option writing is another interesting income stream that can be largely independent of market movements (typically even becomes more profitable right after fast downturns). Not without its own risks, of course.
FinancialDave says
Leif,
No problem I didn’t misunderstand what you said and I said what you said just in a different way – that there really was no other good place to put it.
However, it doesn’t negate understanding when is the best place to spend it to get the most use out of the money you earned and that is at a marginal rate over 28%.
Many think once you get money into a Roth it is just tax-free for life, spend as you want, but that negates the real value of the Roth account and is just a way to run out of money sooner as I have written a number of articles explaining:
https://seekingalpha.com/article/4182914-risk-of-roth-ira-revolution-part-ii
By the way I did like your tax return (I did taxes for 7 years) and the fact that you at least try to minimize the dividends and capital gains in your taxable account. However, on the other side not too happy with anyone with large tax losses, it usually means something went wrong, but hopefully experience was gained in the process.
Dave
Physician on FIRE says
The decision between Roth and traditional contributions in nuanced and based on many factors. That is a well-written articles.
But deciding between the backdoor Roth and no backdoor Roth ($12,000 in taxable rather than Roth), it’s difficult to make a winner out of taxable. If you can do enough tax loss harvesting to overcome the tax drag, and you never incur capital gains (you keep taxable income in the 0% LCCG bracket, donate the shares, or die and pass them along to heirs with a stepped-up basis), taxable can be as good or better than Roth as I’ve described here:
https://www.physicianonfire.com/taxable-account-roth/
Nothing went off the rails with the harvested losses. I booked another $170k in paper losses this March, swapping funds for similar funds, remaining invested, and benefitting from the rebound.
Cheers!
-PoF
Doug @ The-Military-Guide says
Thanks for the mention, Harry!
I’ve heard many times “Must be nice to have a pension.” It is. However the real value of a pension is similar to an annuity, and ideally some annuitized income would be part of every FI portfolio as longevity insurance.
Most Americans can either use Social Security for their annuitized income or… buy a SPIA.
In our case, we’re still spending our investment portfolio at the 4% Safe Withdrawal Rate (above & beyond my pension). After 18 years (and roughly three recessions) it’s still grown far faster than the withdrawals.
Harry Sit says
Hi Doug! Great to see your retirement is going well after all these years. You’re absolutely right in that people without a pension can create it themselves by buying an SPIA. I checked quotes for a 40-year-old couple on a 50% joint-life annuity with 2% fixed inflation adjustments. The payout is 2.4%. If they use half of their portfolio to buy this SPIA, in order to spend 4% of their total portfolio value, they’d have to spend 5.6% of their remaining investments. That’s way too high. So most people choose to roll the dice without the SPIA. Then they won’t have the same confidence a pension or SPIA creates in bear markets.
Jim says
So the open secret in early “retirement” blogging is that most either still work, rely on the income of working spouse, or don’t consider managing rental properties to be work.
I think I’ll shoot for my retirement to involve actually, ya know, not working.
Harry Sit says
That also works. Just be prepared for some uneasiness in bear markets when you don’t have income outside the portfolio to cover your expenses. On the other hand, people are usually more productive in their field of training. Someone said on the MMM Forum, “I thought I’d be happy to [retire early] and make ~10k/yr blogging, but I think I’ll make 200k for another year and skip the 20 years of blogging :).”
Tom says
I agree. You are retired when you no longer work. It is pretty simple.
For the author to say well you might run into some expenses in a bear market has no meaning.
If you retire by choice you already have factored that in. If your spouse is still working then you can be retired but as a couple you clearly are not.
A lot of people seem to have a need to pretend they are retired young for some reason. It is what it is.
FinancialDave says
@Doug,
On this comment:
“we’re still spending our investment portfolio at the 4% Safe Withdrawal Rate”
Does that mean that after 18 years of withdrawals your withdrawal dollars are now almost double what they started at? If so that is amazing. What is your asset allocation?
Doug Nordman says
It’s swung between 2.3x-2.5x in 2020. This is what the successful side of the 4% Safe Withdrawal Rate looks like with a very aggressive asset allocation and very low expense ratios.
I just turned age 60, and for the last 18+ years we’ve stayed invested in >95% equities. Up through 2016 we split that among a dividend index ETF, a small-cap value index ETF, an international index ETF, and Berkshire Hathaway. Today that >95% equities AA is split between a total stock market index (70%) and Berkshire (30%).
As you might imagine, it’s very volatile. However I’m only two years away from starting Social Security, although I expect to delay that until age 70. Volatility is largely irrelevant to our portfolio growth, and now that we’re in our third recession we’re finally getting a handle on ignoring short-term volatility and still sleeping well at night.
Our non-discretionary expenses are very low and our philanthropy is up sharply. I’ve written more about it at The-Military-Guide blog post titled “Hey, Nords: How’s Your Net Worth?!?”
FinancialDave says
@Doug,
“It’s swung between 2.3x-2.5x in 2020. ”
I’m confused by what you are saying here, unless you are saying you aren’t really using the standard 4% rule as defined by Bengen in which you do one calculation the first year and adjust the withdrawals up every year thereafter by the amount of inflation.
It sounds like you might be saying you are using a Safe Withdrawal Rate that just withdraws 4% from the balance each year. A pretty big difference between the two.
Doug Nordman says
My apologies, I misunderstood your question and thought you were asking about the current size of the portfolio from which we’re withdrawing our dollars.
I hadn’t paid attention to the numbers in that way. Instead we’ve simply started at 4% in June 2002 and raised the withdrawal amount each year by inflation… as Bengen says.
I looked up the total amount of inflation between 2002-2020 and it’s 1.45x. That makes sense to me because the cost of living adjustment on my military pension (the same as the Social Security COLA) during that time has risen by about 40%. And when I compared our Quicken data from 2002 to our PersonalCapital data in 2020 it’s 1.45x.
In summary, our portfolio withdrawals over the last 18 years have risen by about 45% while our portfolio size has grown by 130%-150%.
FinancialDave says
@Doug,
That’s amazing. Keep it up.
Dave
Bill in NC says
I highly endorse a spouse continuing to work. 🙂
To be fair, she didn’t work while raising the kids…went back to teaching at our kids’ private school when they hit junior high, which then cut our tuition cost in half.
As a teacher she has nearly 3 months every summer for us to travel, so she’s in no hurry to quit…could easily teach another 20 years.
TechGuy says
Harry:
I appreciate this article. Yes, this has been an “open” secret for a long time whether readers picked up on that fact or not. I am retired. I don’t want another job. I had one of those for 40 years. I don’t want to spend my retirement time managing properties or desperately seeking eyeballs for my writing. I don’t want to go to FinCon and compete with other financial bloggers over who has the most clicks. I am retired. My time is my most valuable asset. I cherish each day and heartily enjoy this time in my life. I live off the stored energy of my portfolio. That is why I worked and lived below my means for 40 years and invested the difference. If I was going to worry about continuing to work during my “retirement” I would have just blown all my income like all of my peers. I do, however, greatly appreciate the fact that there are a very few bloggers out on the web like you that share useful information about finance. I especially enjoy your tax savvy. Thanks.
Russell says
I align myself and my position in life with your post TechGuy. The FIRE fascination seems to be for those approaching retirement. A goal. A standard. For we who are retired, who like TechGuy worked, saved some along the way, and made compromises for years to enjoy the remaining years. I get it. That was also my path. The FIRE fascination seems mostly to be an ego attraction. If that’s one’s goal. Then just do it without all the hoopla. And who really cares unless you are the one retiring. There are many here much wiser about investing than my novice self. And I question the wisdom of some who seem to wear the FIRE concept like an identity badge.
Mighty Investor says
I wrote about this exact situation a few years ago. https://mightyinvestor.com/do-as-they-do-not-as-they-say/
I do this myself as well: I am slightly cash flow positive in retirement and haven’t had to sell down equities.
I think the lesson is that relying exclusively on capital appreciation and then withdrawals for a very long retirement is psychologically challenging–unless you have a portfolio deep into seven figures or higher.