Well, whattaya know… 7 years ago today-ish I walked out of my office building for the last time.

A lot has happened since that day. We traveled full-time for a couple of years before becoming parents and traveling parents… Jr has now been to 40+ countries. We started a couple of blogs, Winnie wrote a book, and we had maybe 5 minutes of fame when our story was shared throughout the media. We lived large, practiced intentional lifestyle inflation, and grew as people and as a family.

Thankfully, throughout all of this, our investment portfolio has also continued to grow. This is largely due to an extended bull market in US stocks, but also in small part due to blog and book income. (More is more.)

It’s been a good ride.

But… what if things didn’t go so well? What if the stock market crashed and the economy tanked? What if our hobbies never made a dime? What if it all went to hell?

What if it all went to hell?

No matter at what age, this is a good question for everyone to ask themselves before taking the retirement plunge. If we were unfortunate enough to retire in 1929 or 1965 or 2000, periods with strong economic headwinds… what would that look like?

Since retiring, even after withdrawing all of our living expenses, our portfolio has grown by about 50% adjusted for inflation (inflation over the 7 years is about 11%.) Had we started our retirement at a different time, but with the same inflation-adjusted withdrawals (spending the same amount), things would not look as rosy.

Using a 90% US stock / 10% US bond allocation (similar to our portfolio) with our actual spending, normalized to a $1 million portfolio, 7 years into retirement our portfolio value would be:

Start 2013: $1,540,000 (up 55% – better than our actual portfolio, International equities have reduced our actual portfolio growth)
Start 1965: $842,000 (down 16%)
Start 1929: $723,000 (down 25%)
Start 2000: $655,000 (down 35%)

Assuming no adjustments to spending (continuing to spend at today’s level going forward) and no Social Security or other income, we would be destined for failure, running out of funds in another 13 years or so. This chart makes that point clear.

Also shown in this chart:
1) how blog income has impacted our portfolio (starting to be significant)
2) impact if we didn’t spend less than 4% (relatively minor impact)

What’s a guy to do? I mean, besides not increasing spending through a falling portfolio.

Think (and Act) Different

Awhile back I shared how we have increased our spending as our portfolio has grown.

I think it interesting to consider how we might have behaved in a worse economic environment. It’s a good stoic practice.

The 1929 retirement cohort seems the most terrifying to me, as the stock market dropped about 75% over the first 4 years. (Over the same time, deflation dropped the price of everything by ~25%.) With a stock market plunge of this order, it doesn’t matter if you started spending 2% or 4%, you were still down over half after 4 years.

I can’t imagine that we would enjoy that experience, but let’s see how it may have impacted our early retirement. The following estimates are based on keeping a constant quality of life, just in a different location –> we spent $2k/month in Mexico/Thailand, $4k/month in Taiwan, $8k/month in Europe/Japan.

Year 1, 2013 / 1929, Actual spending = $38,966 (See the full 2013 annual report.)
Stock market declines ~13% from 24.86 to 21.71. Portfolio yield on original value: 3.4%
$1 million –> $900k

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What we did:
– Winnie and I spent ~8 months traveling all over Mexico, 2 months in Guatemala, and 2 months in the US.
– We studied Spanish, ate insane amounts of good food, pickled our livers, and shed 16 years’ worth of work-related emotional baggage.

What we would do differently:
– Nothing. It was perfect.

Year 2, 2014 / 1930, Actual spending = $59,086 (See the full 2014 annual report.)
Stock market declines ~26% from 21.71 to 15.98. Portfolio yield on original value: 4.1%
$1 million –> $700k

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What we did:
– Spent some time in Mexico and Cuba.
– Settled into Taiwan to do IVF / make a baby.
– Post-pregnancy we moved into a more expensive apartment, bought a couch, a flute, and 2 iPhones.
– I biked around the island and studied Chinese.

What we would do differently:
– Much the same, but wouldn’t have moved into the new apartment. I probably would have skipped the iPhone “upgrade.”
Reduced spending = $57,886 (<$2k savings)

Year 3, 2015 / 1931, Actual spending = $56,900 (See the full 2015 annual report.)
Stock market declines ~48% from 15.98 to 8.3. Portfolio yield on original value: 4.7%
$1 million –> $450k

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What we did:
– Jr was born in April.
– We visited Japan in September and settled into Chiang Mai, Thailand in November. (Our apartment cost $375/month.)
– I attended a Chautauqua in October.

What we would do differently:
– OMG, I’m an unemployed deadbeat father and our portfolio has dropped by more than half! Shit! Time to panic!
– At least investment income exceeds our cost of living, and some of our recent expenses are 1-time events (IVF, childbirth.)
– Geographic arbitrage is already underway with the move to Thailand… let’s see how this plays out.
– We probably would have skipped the Japan trip and gone directly to Thailand.
Reduced spending = $53,300 (~$4k savings)

Year 4, 2016 / 1932, Actual spending = $72,002 (See the full 2016 annual report.)
Stock market declines another 15% from 8.3 to 7.09. Portfolio yield on original value: 4.8%
$1 million –> $460k

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What we did:
– Traveled extensively. 1 month each in Thailand, Malaysia (& Singapore), Taiwan, 4 months in Western Europe (10 countries), 1 month in the US, back to Taiwan.
– Our Singapore hotel was the most expensive I’ve ever paid for (Marina Bay Sands with a rooftop pool.)

What we would have done differently:
– Instead of going to Europe we would have stayed in SE Asia or flown to Mexico / South America.
– Interestingly enough, we had originally reserved the same house we rented in San Miguel de Allende, Mexico for 6 months, but it fell through at the last minute and we decided to go to Europe instead.
Reduced spending = $42,402 ($30k savings, investment income still exceeds expenses)

Year 5, 2017 / 1933, Actual spending = $93,648 (See the full 2017 annual report.)
Stock market rose ~50% from 7.09 to 10.54. Portfolio yield on original value: 3.1%
$1 million –> $725k

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What we did:
– 4 months in Europe (12 countries?), 1 month in the US, Alaska cruise, 6 weeks in Japan, back to Taiwan.
– Signed an 18-month lease on a 3 bedroom apartment in Taipei, doubling our rent.
– At his request, Jr starts full-time Montessori preschool at $1,000/month.
– I bought a sweet road bike.

What we would have done differently:
– Lots of things. Investment income dropped ~50% this year due to massive dividend cuts.
– Instead of moving around Europe and Japan, we likely would do SE Asia or South America, whichever we didn’t do the previous year. And traveled more slowly; speed = cost.
– Even though an Alaska cruise was Grandma’s dream vacation (our treat), I’m sure she would have been just as happy if we visited at her home for a couple of weeks.
– Assuming we settled back into Taiwan, we would have focused on the Xindian area (south Taipei) vs central Taipei. Several friends live there, and housing and schooling cost half as much. Honestly, we probably should have started there anyway, but now we are accustomed to life in the city center.
– I would have been happy with a much cheaper bike.
Reduced spending: $51,898 ($42k savings.)

Year 6, 2018 / 1934, Actual spending = ~$120,000
Stock market was down ~12% from 10.54 to 9.26. Portfolio yield on original value: 2.7%
$1 million –> $635k

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What we did:
– Tried to have another baby (IVF.)
– When it didn’t work we went to Europe (9 countries) and the US (first time paying for housing in 2 places at once.)
– Spent Chinese New Year at beach resort in Vietnam.
– We stopped tracking every penny we spent. This easily increases our food spending by 10%+.

What we would have done differently:
– The main reason we came back to Taiwan at the end of the previous year was to try for another baby. Perhaps a cold thought, but if we weren’t experiencing irrational exuberance we probably wouldn’t have tried for #2.
– wouldn’t have purchased the ultra-lux handbag
– In all likelihood, we would have settled comfortably back into Mexico.
Reduced spending: $47,200 ($42k savings.)

Year 7, 2019 / 1935, Actual spending (estimated) = $100,000
Stock market rose ~50% from 9.26 to 13.76. Portfolio yield on original value: 2.7%
$1 million –> $875k

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What we did:
– Hanging out in Taiwan, lots of biking, W is painting, Jr is in school, Chinese New Year in Thailand, summer in Vietnam and Bali

What we would have done differently:
– Same, but in Mexico with summer/holidays in coastal Columbia, Caribbean, etc…
Reduced spending: $48,700 ($46k savings)

Year 8, 2020 / 1936, Actual spending (projected) = $100,000
Stock market rose ~28%. Portfolio value is now greater than starting value!
$1 million –> $1.075 million!

Assuming we started spending an inflation-adjusted 4% of the original starting value from this point forward, after 30 years we would still have more money than when we started, albeit with continued large fluctuations.

Self Reflection

So… this roller coaster would have kinda sucked. (Albeit not too different from the worst time to retire ever.)

The good news is dividend and interest income exceeded expenses during each of these 7 years. Even so, it would have been emotionally challenging to stay the course with a substantial portfolio decline. As a new father, I probably would have looked at employment options (assuming there were jobs available.)

The bad news is there was very little we could do about it… a 75% stock market decline isn’t something that is overcome via reduced spending. Geographic arbitrage did help with the recovery, however. The conscious decision to spend well under 4% during the early years to reduce sequence of return risk is a good one.

Did we just get lucky, then?

Not really. The disaster scenario is rare.

The data for portfolio value after 7 years for every possible start date is interesting.
The 2013 retirement cohort is slightly above average but within 0.5 standard deviations.

Starting point: $1 million 90/10 portfolio with 4% withdrawal rate
Average after 7 years: $1.3 million
Median: $1.2 million
Portfolio has grown: 65% of cases
Portfolio has grown 50%+: 29% of cases

Summary

The doomsday scenario of portfolio collapse is scary, but rare and recoverable. Continuing to intentionally LBYM (live beneath your means) in the early years of retirement is a good tool to reduce the risk.

We were fortunate to see our portfolio grow in the first 7 years of retirement. This is the historical average.

Were the circumstances different, we would have made significantly different choices in terms of travel destinations, housing, eating habits, and even family size. Instead of increasing our expenditures with a growing portfolio, we would have limited spending to within 4% of the original portfolio value… life would still be great, just a little different. The portfolio would eventually recover, and then some. It looks like the 4% rule is quite robust.

Maybe tomorrow the stock market and global economy will collapse. If so, we know what to do.

What would you do if it all went to hell?