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“My FIRE dreams have been destroyed!” lamented an email I received recently. “I was all set to retire this year, but then the stock market started dropping and now I don’t know what to do!”
If this story sounds familiar, you’re not alone.
To many people (including yours truly) looking forward to the long-promised “Roaring 20’s” that surely awaited us after the misery of the pandemic, 2022 has been quite a stinker of a year. War, runaway inflation, and a stock market crash that has surprised everybody by its speed and ferocity. Stop this decade, I want to get off!
Hmm, that sounds a lot dirtier when I say it out loud.
Ahem. ANYHOO. The point is, we all know that stock market drops are a normal part of the investing experience, but if it happens right when you’re about to hand in your notice, it feels like you’re about to cross the finish line and then BOOM, they move it another 100m away from you. Super frustrating.
So what advice do we have for our readers who planned to retire right at a big scary market downturn? Well, here we go…
Yield Shield & Cash Cushion
We have friends who, after watching our admittedly awesome lives, thought “Hey! I want a piece of that!” and decided to go after FIRE. A common mistake, however, is that they hyper-focus on their FI target number for their portfolio, and forget about the Yield Shield and Cash Cushion stuff.
I get that it’s really tempting to pull the trigger the second you cross over that FI threshold, and you might be able to get away with a “pure” retirement target of 25x your annual spending if you retire during a bull market. But as we all know, nobody can predict what kind of stock market you get the year you retire.
We’re probably one of the most conservative, pessimistic voices in the FIRE space, mostly because FIRECracker’s has a limitless imagination for things that can go wrong, but boy are we glad we put all those extra backup plans in place when 2020 rolled around.
The pandemic (and my dad’s cancer diagnosis) royally messed up our retirement plans in February 2020 when we were forced to return back home. In one fell swoop, the entire travel industry shut down, robbing us of using travel to control our expenses. Then the stock market started falling, eventually losing nearly a third of its value, so everything in our portfolio was sitting at a big, scary loss.
The Yield Shield & the Cash Cushion was what ended up saving our butts. Because we had arranged our portfolio to pay us a yield in the form of dividends and interest that, when combined with our cash cushion, was sufficient to cover out living expenses, we were able to sit confidently on the sidelines as everyone panic-sold. Not only that, when the stock market eventually rebounded, our portfolio ended up even higher than when we started.
Remember, the full definition of the 4% rule states that you can retire with a 95% chance of not outliving your money. That means there’s still a small (5%) chance that your retirement may fail. The Yield Shield and the Cash Cushion is how you take that 95% odds of success and turn it into 100%. You can’t fail if you never sell at a loss.
And while building an additional Cash Cushion does require you to work a bit longer than the pure 4% rule would suggest, it really shouldn’t take that much longer. When we retired, our $1,000,000 Yield Shield portfolio was yielding about 3.5%, or $35k. Because our living expenses was $40k, it only takes $5k to cover the gap between our income and our expenses for a year, so building a 3 year Cash Cushion only cost $15k, which for us meant working and saving for another few months after we hit FI.
Was working that extra few months worth it for the peace of mind that we wouldn’t be forced to beg for our jobs back by bad luck or timing? Absolutely, and that’s we continue to recommend that strategy to everyone pursuing FIRE.
Geographic Arbitrage
Fortunately, with the pandemic mostly behind us, travel has resumed to most of the world, and with it all those delicious, delicious geographic arbitrage opportunities have returned.
Remember, just because you work in a high cost-of-living city like Los Angeles or London, that doesn’t mean you have to retire there. Moving to a lower cost city can drastically cut your costs and make your retirement safer. And if you really want to go nuts, going fully nomadic means you can take advantage of living in lower-cost countries as well.
I get that going fully nomadic isn’t for everyone, but if you can, it’s awesome. When we were living in SE Asia, our cost of living dropped so dramatically that it fell below the yield on our portfolio, so we were actually cash-flow positive during our time there. That’s right, our portfolio was actually paying us to travel.
A close friend and fellow Chautauquan is doing this right now, and she’s telling us that it’s every bit as magical as when we did it. She lived and worked in Toronto, just like us, and just like us thought that life was expensive because Toronto is so pricey. But when she pulled the plug and started travelling, her costs dropped so much that even though her portfolio value got hammered by the bear market, she didn’t even break a sweat. Last I heard, she was travelling in Montenegro, and her rent dropped from $1500 all the way down to just $400 a month!
Ah, geographic arbitrage. It fixes so many things.
Partial FIRE
And finally, for those of you who maybe don’t hate their jobs as intensely as FIRECracker did when she handed in her notice, partial FIRE may be a good option.
Labour markets remain tight and many companies are scared of people leaving and not being able to find a replacement. That gives you an opportunity to negotiate yourself into a part-time or fully remote position.
Obviously, not every job or industry is open to this. Tech jobs, for example, would normally be very compatible with this, but that sector is going through a rough patch right now as companies realized they hired too quickly during the pandemic. But on the other hand, sectors that normally don’t do this, like in the medical field, are both much more open to remote work after the pandemic.
Stepping back your hours, going to part-time, or making your job fully remote can be a nice intermediate step between the 9-to-5 and full retirement. You can start travelling, you get to keep earning money while waiting for your portfolio to recover, and if you later find out you miss working for whatever reason it’s trivially easy to go back to it since you never really left to begin with.
Asking your boss to go to part-time might seem scary, but in my experience if you’re good at your job and you have a good relationship with your boss, they tend to want to keep you around in some capacity rather than lose you completely.
Conclusion
The economy is in a very weird state right now. On one hand, you have jobs being created left and right, while at the same time the stock market remains in deeply negative territory YTD. As a result, it might seem like a bad time to quit your job.
But as I’ve said before, if you have the time, the money, and most importantly the health to retire, travel, and generally live your life the way you want, you should do it because you don’t know when one of those three things might go away.
That being said, by making a few tweaks to your investments and your early retirement plans like I’ve just mentioned, you can still make your early retirement dreams come true even in such uncertain economy times.
What about you? Has the stock market volatility derailed your early retirement plans? Let’s hear it in the comments below!
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One thing I missed when planning to fire was that I cannot get dividends from my retirement accounts until a certain age, so the only way I can create a Yield Shield is through my brokerage account which has the LEAST amount of money as I am 55 and most is in my retirement accounts. SO ANYHOO, even tho we saved a cash cushion, it will not go as far without a good Yield shield. 😩
You’re 55 years old now ? If you’re in the US and you have a 401K with your current employer, you can quit that job and begin making withdrawals without penalty… it’s IRS rule 55. The catch is that you must leave that 401K with the employer (i.e. you can’t roll it over to an IRA). It’s worth looking into.
Thank you. I was not aware of this rule. I guess I can’t take withdrawals from my 401k if I lost my job (which I did) when I was 50.
You may want to look into a 72t Distribution – it’s a weird loophole in the tax law that lets you take distributions from your 401k or IRA before you are 59 1/2 without paying the 10% penalty – it’s not a perfect Yield Shield but it might help. Here’s a link: https://www.investopedia.com/terms/r/rule72t.asp#:~:text=What%20Is%20Rule%2072(t,by%20the%20Internal%20Revenue%20Service.
Rule of 72t you can money out of retirement accounts with no penalties
Thank you for another great blog. Part of my portfolio was built using the stocks you recommend in your free course. I do not have to draw from it yet. Should I switch to the yield shield strategy now or leave it as is?
Your advice is appreciated.
Agreed. I definitely believe that the key to staying out of the work force is 1) vary large cash cushion, and 2) sufficient cash flow (i.e. Yield Shield). The 4%/25x rule, although critical, is a little lower on the priority list.
It is NOT the global economic market that I am most concerned of…, my family and I can handle this with no sweat thanks to you, your blog, your book and the entire FIRE community.
It is actually the Canadian Housing Market that is derailing the plans… and the only remaining item on our docket list anchoring us down!
ImmigrantOnFIRE
Not really. We have plenty of cushions so we don’t have to sell our stock. Our net worth dropped quite a bit, but we can wait it out. The stock market will come back.
We just came back from Thailand. The inflation is high there too, but it is still way cheaper than in the US.
That’s a good way to beat inflation : spend as little as possible. An inflation rate applied to a smaller base will always result in a low final amount. Congrats ! 🙂
I’m sorry about your dad’s cancer diagnosis. Hang in there.
Enjoyed the read. Thank you. I’m currently saving a cash bucket up for FIRE.
Curious what are your thoughts about using HYLD and HDIV as possible regular additions to the yield shield at 12 and 9 % yields
“When we retired, our $1,000,000 Yield Shield portfolio was yielding about 3.5%, or $35k”
This is very puzzling. I think you really need to explain this more.
I assume your money is in index funds such as, for example, VTI and BND. But the dividend yields for those funds are much lower than 3.5%. More like sub-2% to low 2%-ish range.
So how are you generating $35K exactly?
Are you not invested in index funds? Are you saying VTI/BND are not the best index funds to invest in, contrary to what you said in your investment series?
“When we retired”
This was back in 2016. Yield were higher back then, particularly on stocks. Bonds seems to have surpassed 3% again today.
“Bonds seems to have surpassed 3% again today.”
Where are you getting that number?
BND is the fund they recommended in the investment series … the dividend yield is 2.2%-ish currently.
I look at the US treasury yield curve, which gives the total return on US government bonds based on current market price for those bonds.
https://www.nytimes.com/section/markets-overview
I don’t know how the BND yield is calculated, but my guess is that it is simply a calculation based on past distributions, which is irrelevant, and not a forward looking number.
Another possibility is that it could be a calculation based on the coupon rates. But in that case it would not take into account possble gains or losses on the face value of those bonds. Which is also not ideal, because many bonds are now trading below par value because of the recent increase in interest rates.
That’s why I think it’s better to look at the yield curve for expected return for bonds.
Must also consider Yield to Maturity:
Yield to maturity 3.4% 3.4%
Average coupon 2.6% 2.6%
i.e. Average bond value is below face value.
https://investor.vanguard.com/investment-products/etfs/profile/bnd#price
Yes. That would be the appropriate rate to use (yield to maturity). I didn’t knew this calculation was available.
My approximation assumed 100% of the bonds were invested in US government bonds, which is absolutely not the case for this fund …
Thank you Dave B.
Then how about the tax on that 34K? No way you can correlate dividend yield to the amount actually received after tax
34K$ is about 17K$ per person … You don’t pay that much taxes on 17K$ income, ie. almost nothing.
I vaguely remember they had other stuff as part of the mix such as REITS and I think they had some kind of preferred shares etc or something like that … as part of their bond component etc
They were invested in PDC which as of today yields 3.75%. I don’t know if they still hold it right now. From what I understand – you temporarily put your portfolio in a high yield fund 3 % until you reach a point when your portfolio has grown enough that you withdrawal rate is less than 4%.
https://www.millennial-revolution.com/invest/our-2021-portfolio/
Volatility has been insane in the last few years. I will definitely build a better cash cushion. This will make my portfolio more stable.
In the end, although this year is very challenging, total returns have been extremely good when we look back over the last 5 years. It is very normal that we also have bad years. It will make it easier to get better return in the future and it will force people to review overly ambitious expectations.
Most people tend to look backward when it comes to investment return. But the most important in finance is to always look forward. And in this regards, things look much better today than they were a year ago (August 2021).
Long term bonds yield around 3% (vs 1.25% last year). And stocks are also cheaper, with the S&P500 yielding around 4.5% vs 3.75% last year (PE of 21 vs 26 last year).
Markets could still continue to fall, particularly if interest rates continue to rise. But in the end, this will only mean better returns for the future.
The biggest unknown for now is inflation. I hope it will stabilize eventually. This is not good for anyone.
Anyway, hang on there until markets calm down again, and enjoy your retirement as much as you can !
For those who are in the US, I-Bonds are yielding a 9.62% annual yield adjusted to the inflation rate. Sure, you can’t buy them in the tax-deferred account and it’s not as tax-favorable as qualified dividends, but it’s almost risk-free unless the US government goes into default. I am not saying that it can NEVER happen…just can’t entertain the possibility of the US government defaulting.
Treat it like a 12-15 months CDs. Only wish that I discovered it sooner. There are ways to invest more than the $10k annual limit. I am still learning about TIPS, but it’s a bit more complicated.
Agree with you, they look great. But again, what will their future return be ? 9.62% is the return you can have this year. But if the return fall to 2-3% in the coming years, then it’s not as great as it looks at first sigth.
I’m not very familiar with these products. But I think they are worth considering in a diversified portfolio.
One other problem, I struggle to find something similar in Canada. They look to be restrained only to US citizens.
Anyway, thanks for the suggestion !
Yes, it’s part of a diversified portfolio. Since Bonds and Stocks Funds/ETFs all seem to be in lockstep this year, having an investment that does not lose money is comforting.
I-Bonds are for those in the US to consider. If the return falls to 2-3%, that means the inflation has fallen as well. The purpose of the bond is to hedge against inflation without losing money. One could consider redeeming the bonds after 12-15 months if other investments offer better returns.
Seeing other comments about the fear of losing hard-earned money and keeping it in cash prompted me to make the suggestion. It is not bad for new investors who can add to a diversified portfolio outside of the retirement account.
So many other options than an overly simplistic “Yes I can/No I can’t retire”.
https://wealthandrisk.nz/4-percent-rule-mind-killer/
https://www.moneyflamingo.com/
An interesting read, thank you for the links Suzanne. When I was researching 8 yrs ago on how much I needed to save to retire, the 4% rule came up. It was a beginning, a number to aim for. And the same questions asked on the above article is what led me to this site and insurance against the failure of a portfolio is having a cash cushion and a Yield Shield. And now 8 years later, there are so many different kinds of FIRE- Barista, Partial, Flamingo, Coast etc, You are correct, so many options and they all work.
That guy Sonnie Bailey is such a stupid fellow. He doesn’t offer a single alternative, only kills the 4% rule without providing any alternative. Devious
You didn’t read the article did you Rick.
Again an excellent and timely post. I was due to retire this year but have changed to partial fire instead due to Covid and the weird market. Currently, I am working 6 months, travelling 6months and building a bigger cash cushion. Just did a long road trip from end to end of NZ. Also using geo arbitrage, spending more time in low cost countries like Thailand, Fiji, India, etc for the next 2 years. My portfolio has maintained a 2-2.5% yield over the last 5 yrs even though the total value dropped during the last couple of years which covers my yearly spend. Dividend NZ ETF returns have stayed consistently high which have kept my yield consistent. I do not own bonds currently but may shift before full FIRE.
The shit hit the fan… however, the timing of it all worked out pretty well for us. The pandemic caused us to postpone our early retirement and nomadic lifestyle for a bit. As we continued to work through that down market, we kept shoving a high percentage of our income into the market. As a result, we retired last year with a considerably larger portfolio than we would have otherwise. The sale of our home provided a large cash cushion that we decided to maintain as I didn’t feel all warm and fuzzy about the immediate future of the markets and bonds. This decision, although originally made to help us sleep at night, turned out to be a sound strategy in reality. As a result, we haven’t touched our principal throughout this current down market. Geographic arbitrage via Mexico and, now, Southeast Asia has enabled us to live a full and interesting life for the past year and a quarter with no compromises. Our total cost of living last year, including primary health insurance coverage was $26,200. This is well below our already artificially low budget. I offer all this as a real world example that the strategies you mention can and do work well. Financial independence, as usual, is the key here. It enables you to easily pivot and take advantage of opportunities that would have been difficult otherwise. As you point out, you have options… work a little longer, work part time, harness the power of geographic arbitrage, set up a portfolio with an asset allocation that provides a cushion and reduces anxiety. Then, carry on. As always, it’s great to occasionally have access reassuring posts like this. Thanks.
As an American expatriate in Taiwan, I have a fairly low cost of living, or as I’ve heard it called, a low “monthly nut” (British English?). My rent is reasonable, my medical care is amazingly low and world class, and the rest is awesome! I have a Crystal Ball question: I intend to retire about 2 year from now with 2 pensions–my US Social Security and my Taiwanese equivalent. The Taiwanese pension will cover a fraction of my Monthly Nut (maybe 1/7th or 1/8th), but the US pension should cover the rest and then some.
Now the Crystal Ball part of my question: my stock-based investments (IRA & something I did at work)–will those recover enough to let me enjoy some wine, women and song on top of my Monthly Nut? What sayeth the soothsayers here?
Dan V
Taipei
Like women is a product like wine… Man these brits
Yep, many people who discovered FIRE and since the movement took off in the last decade haven’t really experienced a true bear market, it’s been on a long run. Shouldn’t “derail” your retirement because of that awesome yield shield and cash cushion.
In any case, indexes are still up over 2020 levels, and sure you may down this year, however anyone who thinks the market always goes up isn’t ready for investing.
The bright side, you could always unretire! We need more people in the workforce than ever. You can’t get to that travel bucket list if there’s no pilot to fly the place 😉
Amazing post. People in the FIRE community hate dividends and taxable income but they really shouldn’t. Nor they should only invest in tax-deferred accounts. But tell this to them and they will freak out.
I’m investing mostly in taxable accounts, using the brilliant concept of the yield shield and I’ll quit with piece of mind.
Stop right now with the 3 st*pid dogmatic things I hate the most in the FIRE community:
-put everything in tax-deferred accounts
-dividend is for suckers (buybacks actually are really the nasty part)
-100% in stocks until you FIRE
Who would’ve thought: when shit hits the fan, we can’t fly out to Thailand
The down market hasn’t changed our plans. My employer’s desire to keep me longer has delayed things a bit but I’m fine with that. Still planning RE for not later than end of the year and have the cash cushion ready. We got rid of debt except the house a long time ago and expenses are low but will go lower once we spend some time in cheaper places. Not worried at all and excited for the next adventure.
The market is down only 15% or so this year. It’s really not that bad and expect it can be much worse normally
not that bad? I bailed when it hit 23% later in June. Market is a crazy game. Stay in cash and stay working
I’m sorry to hear about your paper loss becoming a real loss.
Are you saying you were -23% ytd as at June 23, 2022? What did you invest in to be down that much? On June 23, I was at -11.69%. I also had a dividend yield just north of 3.40%. As MR pointed out, I set aside the equivalent of a 2-3 year cash cushion so I don’t need to consider selling anything during a downturn like what we’re currently experiencing.
It’s unfortunate to hear you going to cash. You invested above your risk tolerance, choked and now you’ll sit in cash indefinitely wasting good years unnecessarily in the labour market. That’s sad.
If you think this is a major stock crash, then it probably means you’ve only been investing during the last decade. This should be seen as pretty normal market movement
Being investing since last year. Terrible decision. Lost a year of income to the market. I’m not willing to insist in my mistake so cash it is and working is not that bad. I like it and at least I know the money at the end of the month is certain, unlike investing.
Just remember that cash has it’s major risk too and is not as safe as you may think: Inflation. While your dollar figure balance may stay the same by avoiding market volatility, the amount of things that balance can buy gets reduced every year. I would reconsider changing your equity proportion but not leaving the market altogether.
I can totally understand the pain of losing hard earned money. Generally speaking, investment is for the long-term. If you are years away from retirement, don’t even look at what the market does.
As others have commented, with the inflation, cash is losing it’s value.
If you are in the US, you may want to check out I-Bonds as part of a diversified portfolio. The annualized interest rate is 9.62% through October 2022 for the first 6 months. It will adjust according to inflation every 6 months. You can’t lose money unless the US government defaults, but you have to hold it for at least 12 months. If inflation goes to zero, then you can redeem after 12 months with no penalty if you wait 3 more months. Treat it like CDs. No fees, but you can only purchase with after-tax dollars. You can read more about it and purchase directly through the Treasury.
Harry Sit has very easy to follow instructions and other related articles on how to buy more than the annual limit if you are interested.
https://thefinancebuff.com/how-to-buy-i-bonds.html
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ifaq.htm
When’s a good timefrime to deploy the yield shield? Like, 12 months out from your planned retirement date, or would it be more?
Jesus, today another blood bath. Stock market made me postpone any FIRE plans indefinitely. 4% rule doesn’t make me sleep well at night, specially with this reckless president spending our guts out…
Stay calm and invest on.
The simple answer is that if today’s market conditions are causing you trouble you really could not afford to FIRE.
I disagree. I could still afford to FIRE, but the current market conditions and inflation have just taken a big bite off of my safety margin. I think staying employed is the wisest option right now.
Absolutely wrong Chili. Charles is right. It doesn’t mean you can’t afford, it means psychologically is more difficult. For some it’s black and white always…incredible
That’s what people that can’t afford it say.
I thought I would FIRE this year but the stock market downturn combined with high inflation have put some delay on it. One more year? Fck me.
The pandemic speeded up saving for us, and instead of the regular travel and experiences, we just worked, worked, worked.
We hit FI in August 2021. In October 2021, we took a year off. Some months were spent visiting family in another country. The remaining months were spent recuperating from the family visit, which was not easy for us due to numerous reasons.
Our portfolio remained at almost exactly the same value despite market downturns, war, inflation, etc. Our investments are divided across 3 currencies, and even though one currency was doing badly, the others flourished. We also have less than 10% of our net worth in the market, the remaining is property and CDs in another country.
Although all the upheaval did not impact us at all, we are thinking about whether it will always be the case that a downturn in one currency will always be a upturn in another, resulting in no net loss.
We are now back to work as per plan – the two learnings we have from our break for a year is cash flow and a solid plan as to what activities we do after retirement. We did feel a bit lost towards the end of the one year, so we need a solid plan as to how our days look like after retirement.