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.
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 Amazon.com 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!
xoxo
Jeremy
I think you are wise to enjoy the growth of your portfolio and spend a bit more. Your timing was perfect to surf the bull market wave.
But the important fact for me is that 80% of your budget is discretionary and you would be willing to adjust it if things go wrong. This is the biggest lesson for me: enjoy it while it’s good, don´t forget to adjust if it’s bad
Your blog income doesn’t seem to have that much of an impact in your financial independence but it is a great achievement though!
This is largely the premise of my analysis on the worst time to retire.
If a big headwind appears we’ll spend more holiday time in lower COL countries. We’ve seen 95% of Europe now but have yet to spend much time in South America. The Argentine Peso has dropped 50% against the dollar in the last year…
I’ve heard great things about Argentina :)
Great post, as always simple and clear.
Right on.
Can’t we just be happy for your financial success? #don’tworrybehappy
In exploring the comments you do touch upon some interesting questions about the vagaries of inflation, the 4% rule and sequence of return risk in retirement but if people want to discuss those topics they should do so rather than launch directionless criticism. As they say ‘haters gonna hate’.
Enjoy the sun.
HH
PS Wear sunscreen!
Yessir, those are all really interesting topics and important things to think about before cutting the paycheck umbilical cord.
Got the SPF50 on over here
On the one hand it’s your life so no judging from my side. On the other resetting the four percent clock each year would make me personally nervous due to sequence of return risk. Ie failure of the four percent rule is extremely low and yes your retirement is fungible with those that retire this year. But the small percentage of 4percent rules that fail are because the first ten years are the worst. After ten years your withdrawal rate would be low enough that failure would be near impossible. Id prefer that. It’s hard psychologically to live on less then years before.
No worries, Option A is a great choice as well. We are still spending less than 4% so nbd.
>It’s hard psychologically to live on less then years before.
This I can’t relate to. The odds are pretty high that this year we will spend less than last year. Life is equally good or better. Next year will likely cost even less. Good times.
A few others have pointed this out, but the majority of the expenses that GCC has discussed are discretionary. So the fear behind resetting the retirement each year to a new 4% (and assuming it is all spent that year) is offset by the ability to drop expenses by 50-75% in a bad year. Now you have reset retirement, but are using the 1-2% rule. Protection from failure achieved :-)
Thank you, articles such as this allow a perspective that increase my comfort going into a draw down phase. 30 years of maxing out investments with a 40-55% savings rate over the decades is a very hard habit to break or even slow down from. case in point, if I take liberty and speculate the word choice in this article after a 20% market correction and ask, “would the theme change along with the numbers?”
A 20% market correction I probably wouldn’t do anything. A 50% correction and I would sell our bonds and buy more stock.
Rick James!
Great post Jeremy. Enjoy your great life. You built it and fully deserved it. Hope I can follow your path someday!
Dangerous to make assumptions around here :-). So let me wander into a concept.. My guess is that the blog was always meant to have income. But I further expect that you probably underestimated its potential as do many who probably read the blog. Add video channel and you are doing 500K/yr now the question would be is that coming out of retirement or just having fun talking about how you live and getting paid for it? I see blog/channel income surpassing investment income very soon. I am an accountant by training so my thoughts and perspective are not totally baseless. There are those out there doing minimalism channels that are killing it.
$500k?!?! hot damn that would be nice. Now how can I get 10x more income?
This blog initially started as a way for friends and family to follow along on our travels. We got some press and some accidental income. The past 2 years income has been more intentional.
I can’t see why you wouldn’t. My bet is you are not doing YT yet and when/if you do your exposure would go up just from the mere search factor your vids would get on YT. More folks would find you on YT and then head over to the blog and then the machine would churn higher. So yeah why not 500K. Grant Cardone is always talking 10X everything so yeah you are on track you have already laid the foundation years and structure in. GCC merch to come? :-) GCC courses on how to do what you do or at least a method to do so? Shit if you 5X it, it will still up your travel game and not change a single thing about your freedom to do what you want when you want.
One more comment on this.. :-) If you think about what you said above.. that you accidentally fell into revenue what would happen if you put your mind to it? I guess it would be a job and if doing some sort of nomad digital work is work well then you got me. If you just enjoy informing and don’t mind putting it down to digital form well then you are off to the 10X races.
Next up you’ll have folks lecturing you on how you need to save all this money for JR to go to Univ. These are the same folks who don’t realize that Univ is a debt trap whose ROI is probably negative at this point. F’ing worse gamers are earning 58K a yr not to mention what the good one’s make. My wife and I are at odds about this all the time. She did not go to Univ and I did and I have 4 teenagers who want to do what they want. Their mother wants to have them grow up to be lawyers and doctors so they can be slaves t the system. I want them to just grow up and be happy. I win.
Is it possible for a doctor or lawyer to be free and happy? #deepthoughts
You seem to be a numbers person and so am I so I would say yes doctors and lawyers can be happy. But there does exist a good chance that the world my teenagers would enter into would not be as nice and happy as the old days of law and medicine. The amount of doctors that I know that smoke, drink and do other drugs is beyond that of any other group of persons I know so the absolute answer to the question is yes these ppl can be happy. But not a single child I have has ever mentioned a desire to be a doctor or a lawyer. Does that factor into happy? Probably.
MD here. No, not these days.
I’ve noticed that people who “value education” are often not that educated themselves. The rest of us just educate ourselves and our families.
Possible, sure. Difficult, yeah.
First generation lawyer here and I can tell you law is a big field and there can’t be very many big generalizations made. But, for me, it has been a job where I’ve seen society without the veneer of civility. It’s everyone’s problems to be solved and often those problems involve anger, frustration, violence, substance abuse, racism, major physical and emotional injuries, etcetera.
I’ve made my money, but it ain’t all its cracked up to be. Stick with happy over irrational desire to be a “doctor or lawyer.”
:)
Sounds like working retail :)
*When* I have time to browse your blog, I check your other articles.
Yep, I agree that if people discover this report, there were negative connotations. The feelings of a few people who followed you early will not feel exactly the same seeing this spending trajectory. But at least you’ll get bucks for the clicks :-). Negative info/emotions drive more traffic, no?
I, OTOH, have practical questions. It’s not worth hating you or others who’re doing very well … I will gain nothing for doing this…I’d say it would be actually detrimental… So…
When did you both retire? In 2013? At what ages if you don’t mind this question….
A hypothetical question for today…
Say you move your retirement date to today. Also, move the starting portfolio value of when you retired to today (not too many people have saved more than $1M but aspire to retire early). BUT you ER and live in the USA, as opposed to retiring in Asia, how would/should the spending budget change? A wild card is one’s health and healthcare insurance in the USA.
Besides being a great bull for all these years, what AA and tilting have you kept all this time? Do you think it had a great impact vs. if you’ve set your AA conservatively?
How have you been managing your cash flow? Has it changed over the years?
You mentioned that you put your blog’s income to deferred retirement accounts. What accounts do you pull your money from if none of the blog income is used for today’s living expenses? Do you follow a bucket system? If so, how much of cash do you keep in your checking account on the constant basis?
Did you roll 401k’s to your individual IRA’s? If so, have you both kept building Roth IRA ladders or is it not really worth it from the tax perspective and based on your AGI?
Enough of questions…. BTW, do you have one child only? Do you expect to have another one or is one is just enough?
I’ve answered all of these questions.
There are loads of early retirees living in the US. See Root of Good for one
Well since I’m here anyway…
S and M: We’re in the US and are doing very well. I retired in 2013 and the portfolio has nearly doubled since then. I’ve been following GCC since then and we are basically doing what he’s doing – ramping up spending as we get richer. Increases are all in the discretionary spending category. In fact our baseline expenses have gone DOWN since we have more time and energy to focus on keeping those low.
Health care has been surprisingly easy. ACA helps a ton in that regard. Guaranteed coverage. No worries re: pre-existing conditions. Since we are “low income” on paper, our premiums have been $125/month or less every year with low deductibles. Going forward, access to health care is a concern but not one I lose sleep over. I could always get a McJob or a “McJob” if I had to and get access to health insurance that way. Or move to a sensible country. :)
Just 20 hrs/week at Starbucks and you can get health coverage. Plus paid socializing.
I actually wouldn’t mind doing something like that. In terms of job satisfaction, my time working at Jersey Mike’s making subs was one of the more interesting jobs I’ve had. Cook stuff, make people smile.
Haha, that’s a good one. You only drop one name, but you’re saying there are loads of them. I’d like to read about them. But yeah, i’d like to read about one that only use their saved stash for their living expenses, not making bucks while preaching the world to FIRE for the clicks. What happened to volunteering?
Charitable thoughts seem inversely proportional to sense of entitlement on the part of the questioner…
You could read this.
We’re in the same boat as you but perhaps a few years behind you in terms of ramping up spending. We did the big multi-month “once in a lfietime” Europe trip last summer (and will probably do something like that every few years :) ). Higher than average spending but it’s okay – the portfolio can easily support it.
We’re still “stuck” spending only $40,000 per year even as the portfolio is on the verge of $2 million and the blog/side hustle income is creeping up close to $40,000. We keep trying to spend more money but it’s not easy! I’ll have to go to Iceland and Scandinavia at some point to help with with my “problem”. But is it weird that I really just want to go to France, Spain, Portugal, and the rest of central and eastern Europe first (regardless of cost)? I also really really like bumming around Mexico (but maybe staying in high rise luxury condos with a hot tub more often :) ).
I figure if the market tanks and our portfolio gets cut in half a la 2007-09, then we’ll just go back to our regular old ~$35k/yr spending that we started with. Wait out the recession and then ramp spending back up. When most of your expenses are discretionary, it’s easy to cut back when times are tough.
I think the best way to do Norway and Sweden is camping. Get out there and enjoy some nature! Airbnb prices are not too bad either, and you can eat at home.
France, Spain, Portugal, and Italy are still my favs. We could live in Spain. Winnie wouldn’t mind living in Paris.
Iceland is definitely worth a visit.
I’m sure we could do Scandinavia on a budget. Airbnbs not right in the middle of the city plus finding a good deal on a rental car. Seems like much of the sightseeing that we would enjoy is free. The great outdoors and meandering around cities. :)
We hope to move to our hometown in the northwest of Spain in the future. I think it’s a great place to enjoy FI, not a good place to achieve it though… that’s why we are between London and the US at the moment 🙂
Justin – don’t forget the UK when you’re planning your trips to Europe. I spent 5 weeks there in my 9 week trip and I LOVED it. Do you know you can even see the actual apple tree that Newton saw the apple fall from and the concept of gravity dawned on him?? (Or as I prefer to say : that’s when he invented gravity.) That’s only one tiny thing in a million things you can find. The British don’t seem to throw things out or redevelop, so all that history is there to be seen. :)
Definitely not forgetting UK! Would love to visit there someday as well. The food seems kind of bland but the scenery, architecture and history make up for it.
The UK has lots of great food. Thank you immigration!
No, the food is AWESOME. Amazing Indian food and delicious and unhealthy treats like Scotch eggs. But eating out isn’t cheap.
The Indian food is where I would be :) But it feels weird to leave the US just for that. Plenty of awesome Indian places right around here (or, rather near the University and IT employment centers).
Yes, you are probably killing it Indian food-wise in the research triangle. Just saying you won’t starve in the UK.
Totally agree! It’s like the doner kebab in Germany (and Spain for that matter). Ubiquitous, cheap, and good.
“Bask in the warm rays of Internet fury” – LOL!
So happy that you are doing so well, and that you continue to blog.
Woohoo! Finally, a FIRE blogger who spent more than we do. I’ve been feeling a bit guilty about spending more than Justin. They’re living it up and spending so little.
Our portfolio doubled since I retired in 2012. We didn’t increase our spending intentionally, though. The COL just kept going up. Our kid is getting older and my mom is living with us now. Also, we went to Iceland this summer. That’s an ridiculously expensive country to visit. Anyway, I’ll try to reduce our spending next year to prepare for my wife’s early retirement.
Iceland seemed expensive at the time, but in retrospect, it wasn’t that much more expensive than other pre-kids vacations. Things like cruises (especially to Alaska), Disney, and kids have turned out to be far more expensive vacations.
Your 4% Rule post was the first time I’d ever heard of the concept. From memory, I think it was the first time I’d ever heard of FIRE. I asked you in the comments if ‘Financial Independence/Retire Early’ was what it meant. (if it wasn’t that post it was another of yours as I rummaged around your blog getting excited by the prospect.)
Your line: “bask in the warm rays of Internet fury” is the best thing I’ve read today.
(Though, it’s 6AM in Australia and I’ve just finished my cup of coffee. Still, it made me laugh.)
So this is a really interesting concept!! I’ve pondered it on occasion. So I understand that the first 5 is important then apparently 10 is a big deal. What about accidental income or working for fun? What if you just can’t or don’t(out of fear or being conservative) spend 4%. How do you know when it’s ok to spend more? Let’s assume no extra income.
I really don’t want to way underspend as much as I don’t want to run out of money. I don’t want my kids to inherit too much.
We hope to set up a donor advised fund someday so that could help. What do you think of DAF?
Can you do a math heavy post with lots of graphs? 🙂
Great post!!!!
I did a mathy post awhile back that you might like. The Go Curry Cracker Endowment Fund.
Life is too short to not enjoy some luxury that you can afford and worked hard for. Let the haters hate. They probably drop by during their lunch hour of their stressful work day, feeling jealous and all, all while giving you free page views while you relax and earn traffic income haha
Haters gonna hate GCC, and on the internet hate is fuel. Enjoy the extra gas.
We’ve done something pretty similar to you guys — way underspending our income in the beginning. It’s worked out well, but we’re a few years behind you guys.
Over time, I’m sure we’ll ramp up our spending a bit, but while we’ve got kids in the house I want to give them a lifestyle where they don’t live like overspending dumb*sses.
Hedonic adaptation starts when they are young. Humbleness and self control are be good qualities to teach kids. Whatever that number is that gives my kids a decent (but not poor) lifestyle is probably what we’ll spend.
I would say travel and splurge a bit while the kid/s are not yet in full time primary school … you can camp out more in one location later …as long as your numbers add up and the family likes it etc
Yeah, we’ve been speeding around the planet the last few years with the idea that we would be slowing down around age 5
I was just about to throw Root of Good under the scrutiny bus because his wealth has roughly kept pace with yours, but he hasn’t turned up his spending (yet). Glad to hear from both you guys on this topic. Thanks as always for your honesty.
I’ve been at FI for a few months. But I am putting in another year or two to satisfy my need for (appearance of) security. Meanwhile, my weekly work hours have dropped precipitously from ~35 to ~20. I come has remained consistent. Thanks, Tim Ferris. At this point, there’s very little feeling of work oppression.
Thanks Jeremy for a great year of blogging. It’s nice to see someone still posting substance this far out of FIRE. I just have one question: why did you start using periods after paragraphs?!
terminal punctuation is optional
some people get really freaked out when it isn’t there, even though the double line space is obvious
I worked a few years too long too. It definitely provides a buffer. Sounds like you have created a sweet situation for yourself. Nice!
It’s your money, you made it, you are making more, and you can spend it however you darn well please, in my opinion – haters gonna hate! I still find your blog (and your chill) incredibly inspirational, as I have for years. Have fun on all your travels! I like the Dave Chapelle reference you snuck in there, btw. ;)
uh oh, I don’t know which part is a Chapelle reference…
It makes me so sad seeing the negativity.
With money, people will always be so judgmental and nervous. You’ve done so well laying out your beautiful lifestyle for all of us to see.
I agree with you with the retirement reset. Why not enjoy yourself and have some flexibility if stocks go in the other direction?
My plan has been to work a little extra and continue wealth building through early retirement. People get so obsessed with being the earliest, the lowest spending, etc. live your life the way you want to, don’t hurt people along the way!
Thanks for the continued inspiration :)
80% of hateful comments probably come from 1% of people. The US could definitely benefit from more mental health support.
Retirement isn’t a competition. There are no bonus points for anything other than arriving happy at the finish line in 60 years or so.
GCC this post is on point! I always wondered about the exact situation that you outlined in regards to someone 10 years in to retirement and only “being able” to spend $54k opposed to someone who is newly retired with the same net worth and able to spend $80k. I’ve never come across a blog post that touches on this so thanks for writing about it. Your perspective on this stuff is so refreshing to read. Keep doin what you do!
HI GCC, I’ve been following you several years now. And while I bemoan your new ads it also got me to install an ad blocker which has improved my web experience way more than just on your site. +1 to life satisfaction.
In any case I wanted to say I really enjoy your writing style and your “take it or leave it” attitude. I often feel like some others in the personal finance world are a bit too paternal “do what I did and prosper”. You are humble enough to recognize you had some good luck, but also smart enough to know you put in the hard work of building a nest egg. And now you just tell people how you did it and what worked for you. It’s great, refreshing, and really fun to read. Keep up the good work.
Perfect
Freakin love this blog. Im trying so hard not skip to when you guys had the baby since thats where we are in our lives. Keep the good stuff coming
Interesting article from GoCurryCracker. I get his logic about “retiring again” if a bull market doubled your net worth a few years into FIRE. But maybe a middle ground is to go with a 3% SWR of your new balance? It’s still a substantial jump, but takes that sequence of return risk to near 0%.
4% is already near zero. But it’s a menu… you pick 3%, somebody else picks 2%, another chooses 4%. Bon appetit!
For some reason I have never thought about the SWR off the original balance but always viewed it through the lens of 4% of current balance. Is there a spreadsheet or a visual of how you get to 54K based on inflation? Just want to make sure I properly prepare in case I don’t reset. Thanks!
All of the Trinity study stuff is based on 4% of the original balance. In other words, constant cost of living / quality of life.
40k * (1+3%)^10 = $54k
Financial Independece just means your expenses do not exceed your income from your investments. I would say your blog is an investment at this point. You worked hard to both save and build a blog, so enjoy what you sowed.
Thank you for the article
The expenditure rate of acceleration looks unsustainable relative to the net worth rate acceleration rate.
Fortunately we won’t double housing costs next year and we can’t really eat any more
I struggle with the 4% vs. “reretire” calculation too. My personal response had been Variable Percentage Withdrawal methodology. We might have to take less in a down market, but we should never run out of money either. If VPW results in less to spend today we can work more. Later as we get closer to traditional retirement ages we will have Social Security plus a bit of old school pension would sub for the work😀.
We would take less in a down market also
I like the way you think re spending and am def envious of your position. If it improves quality of life, and it fits within your overall plan, go for it. Even better when everyone thinks your crazy – probably just means you’re on the right track. I would like to see the 80/20 pareto breakdown that you use as well. Does it still hold true even when your spending increases so quickly?