This budget goes to 11

You may have noticed that I no longer share detailed monthly spending reports. They were super boring and nobody read them. Instead, I’ve shared our annual spending and explored costs on some of our big trips (e.g. 4 months in Europe.)

Upon reading our annual spending reports, readers sometimes come to interesting conclusions:

“OMG you spend so much more now you are going to run out of money!”

“This isn’t sustainable. You can only spend this much because you have blog income!”

“You had a kid. Have fun back at work.”

Or my most recent favorite (paraphrasing):

“This is disheartening. Your plan isn’t working. I think I’ll work longer.”

So… here are some words about that.

Upward Spending Trajectory

We have had an upward spending trajectory since we started traveling. In other words, we spend more and more every year. Here is a pretty picture.

Data: 2013, 2014, 2015, 2016, 2017

BOOM, to the moon! It’s still too early to say what the 2018 total will be as I haven’t been closing tracking our expenditures. Come back and find out in a few months :)

Some of the increase is because we had a kid (IVF costs $$$), part is because we like living large, and a bit more is because we started living large in Europe vs Central America (both are great!)

It would be perfectly reasonable for people to ask, “What is going on here?”

So let me answer that question. In detail. But just for fun, for the naysayers… what if this was all planned? :-o
(Alternative theory: after 20 years of meticulously managing our spending and investments, we simply forgot how to do money.)

4% Rule

One of the things (nearly?) every aspiring early retiree looks at when planning their big escape is the 4% Rule.

In short, it says you can spend 4% of your starting investment value every year, increasing for inflation, and the odds are good your money will outlive you. There are tools to help you model this. cFIREsim is a great one. Portfolio Charts is another. I like the Personal Capital retirement planner too.

Some people swear by the 4% rule. Others (over)analyze it to death. I say it’s a great reference point, unless you expect the future to be worse than the worst periods in economic history. Which… I don’t.

“Whoa whoa whoa, hold the phone! Your spending has gone up a whole lot faster than the inflation rate that the 4% rule allows!”

Indeed it has. Purchasing power has been reduced by 8.6% over the past ~6 years. Our 2017 expenses were 240% higher than in 2013. No comparison.

But what if you didn’t spend 4% in your first year? Or your second. Or ever.

Could you then spend a bit more later? (Spoiler Alert: in some cases you could have even spent more than 9.5%.)

The 1st 10 Years

A little bit of analysis of the data used to formulate the 4% rule is a nice way to spend an evening or two.

One takeaway:

…the wealth remaining 10 years after retirement, combined with the cumulative inflation during those 10 years, can explain 80 percent of the variation in a retiree’s maximum sustainable withdrawal rate after 30 years – Wade Pfau

I struggle to think of how we could have greater wealth remaining after 10 years of retirement, but spending less might help.

We could do this by spending time in lower cost of living countries, places like Mexico and Guatemala vs France, Norway, or Japan.

I dunno.

Another way is to retire into the early phases of a sustained bull market (one of my life’s greatest achievements. Highly recommended.)

Oh wait, we did both of these things!

Retire, and Retire Again

Personal finance is personal. What works for one person might cause insomnia and hypertension in another.

So let me pose a hypothetical for everyone to decide for themselves.

You, age 30, net worth $1 million. You decide to retire early and spend less than $40k/year. Life is good.

At age 40 your portfolio has grown to $2 million, despite your spending. Inflation adjusted withdrawals say you can spend $54k (assumed 3% annual inflation.)

A friend, also age 40, retires on your 10 year retirement anniversary, net worth $2 million. The 4% rule says they can spend $80k.

Why the difference? Same day. Same age. Same net worth. It’s a paradox!

So what do you do?

Do you:
a) spend up to $54k
b) “Retire again” and spend up to $80k

There is no right answer, and I choose B. I mean, we thought it would be great to visit Europe once every 4 or 5 years, but now we can visit every year? Cool, thanks.

In doing so, we reset our risk to the same level as a new early retiree (i.e. minimal.) The downside? This restarts the 10 year clock mentioned above.

Answers “in Detail”

So what is going on with our spending?

We chose to ease into retirement by spending much less than we were able (much less than 4%.) This was partially due to personal money baggage, but was also intended to allow the portfolio to continue to grow.

Which it did. Despite our prolific expenditures, our net worth has increased by more than $1 million. Even greater on a tax adjusted basis.

As our portfolio has grown, we’ve allowed our spending to grow.

However, we have yet to spend 4% of our portfolio value in any year. Our average spending (~$64k/year) could almost be sustained on dividends and interest alone.

We could literally return to the US, buy a house, buy a couple cars, enroll Jr in a good school in a good neighborhood, eat out several times per week, and still have more money than when we “retired.” (Compound interest is one helluva drug.)

So no, we aren’t going to run out of money. Yes, this is sustainable. Yes, we planned for kids and kid expenses (hell, we paid to have one.) No, we won’t be going back to work.

Now, the blog…

If you see Jeff Bezos pick up a $100 bill off the street, do you run around proclaiming that is a fraud and he is only rich because he found $100? I mean, it sounds like fun, but probably not.

This blog is our $100 bill. Without it, our net worth would have only grown by $1 million rather than more than $1 million. It could make cash flow management mildly easier, except I just funnel most of it into tax advantaged accounts.

What if the portfolio didn’t grow? What if we retired into a stagnant market? What if the market collapsed?

Simple. 80% of our budget is discretionary – We wouldn’t have increased our spending. Radical idea, I know.

Final Thoughts

I appreciate all of the concern about our financial well being. Thanks.

For anybody who might think a similar approach would work for them, this is a summary of what we did:

  • work as long as you need to in order to build a portfolio which supports your desired lifestyle. Or even a little longer.
  • stop working
  • spend less than you are able so the portfolio can continue to grow (all detailed in my original expose on the 4% rule.)
  • earn a little extra $ if you feel like it
  • increase spending with portfolio growth as you wish
  • enjoy life
  • bask in the warm rays of Internet fury

Have a great day, and good luck!