Early retirement isn’t all sunshine and rainbows, especially when you have to deal with what I like to call “The 4 Horsemen of Early Retirement.” Specifically, running out money, losing your identity, losing your friends, and dealing with inflation.
Because we’ve lived through multiple market downturns in the past 8 years of retirement and built a solid recession-proof portfolio, I wasn’t afraid of the first horsemen. And we managed to slay the 2nd and 3rd, by building whole new author identities, and an amazing community through Chautauqua and the digital nomads.
But this past year, the 4th horsemen reared its ugly head. This past year, something happened that I wasn’t expecting. Specifically: Inflation.
In times of inflation, employees can ask for raises to offset it and nomads can use geographic arbitrage.
But what if you’re forced to spend time in expensive countries, taking care of aging parents or for other family reasons? Will you now be forced to crawl back to the boss you gave the finger to on your way out nearly 10 years ago and beg for your job back? And how exactly are you going to do that now that your resumé gap is wider than the grand canyon and the Amazon combined?
Outside of 2008-style stock market crashes, the number one financial fear that retirees have is how to survive periods of high inflation. And given that inflation in the US and Canada clocked in at a whopping 9% and 7%, respectively, for 2022, this does not bode well for FIRE people.
So, how did we fare this year? Did our costs shoot to the moon? Is it time to dust off our resumés and go back to work?
Well, according to the 4% rule, we’re supposed to be able to safely withdraw 4% of our starting amount each year, adjusted for inflation, and have a 95% success rate of never running out of money. And since this rule takes into account inflation, we’re also supposed to be able to raise our yearly withdrawal by 2%.
Given that we’ve been retired for the past 8 years, adjusting for 2% inflation each year and 7% in 2022, we should be able to safely withdraw…
Up until now, we’ve been spending the following yearly amounts for the 2 of us…
|Year||Spending (CAD)||Spending (USD)|
So, how much did we end up spending in 2022, the year with the highest inflation since we retired in 2015?
In 2022, we ended up spending…
$42,916 CAD or $31, 618 USD!
Here’s a monthly breakdown of our costs:
Here’s how our costs averaged out per month, broken down into categories.
|Category||Cost (CAD)||Cost (USD)|
|Rent (utilities and parking included)||$1,500.00||$1,102.94|
|Cell Data + Internet||$55.87||$41.08|
|Other (person items/gifts/donations)||$297.07||$218.43|
*Note: Airbnb costs are for places we travelled to that didn’t have a Home Exchange available.
If we graph our annual expenses for the past 8 years with the 4% withdrawal rate adjusted for inflation each year, this is what we get:
This shows that we’ve been consistently spending below the 4% withdrawal rate every single year, even after adjusting for inflation. And this year, even with 7% national inflation in Canada, we’re $6248 under how much we’re supposed to withdraw. There are three reasons for this:
- We locked in a pandemic rent rate of $1500/month in a building built before 2018, with rent control. The landlord is legally not allowed to raise rent by more than 2.5% in 2023.
- We used Home Exchange when travelling, which saved us (mostly) from paying double rent. We still had to pay some Airbnb travel expenses for places that didn’t have Home Exchange but it was far less than what people pay to go on vacation.
- We’re retired, which means we eliminated “paying to work” expenses like commuting, eating out every day to save time, expensive after work hours gym memberships, decompression costs, professional clothing. Etc.
And what’s even more interesting is that going forward, now that we’ve optimized our portfolio even more to give us a 30%+ raise in yield, we can now spend up to $60,000/year!
Here’s a look at how our yield increased overtime, overlaid with our yearly expenses…
|Year||Spending (CAD)||Portfolio Yield|
Technically, we reached Dividend FIRE in 2020, but that’s only because our expenses plummeted (as did everyone else’s) from not being able to go out due to lockdowns. That was a weird year, so we wanted to wait until a more “normal” year to be able to see if this phenomenon stuck around.
Now that the pandemic is behind us, this year’s expenses is a more realistic spending level going forward and it’s still below our ever-increasing yield. So, this point, we are happy to declare ourselves comfortably Dividend FIRE’d!
Portfolio B Expenses
Long time readers know that in order to keep our retirement experience pure, we live off of Portfolio A, which is the original $1 million portfolio we retired on, while segregating all the income we made post retirement into portfolio B. That way any bonus money we spend that is outside of living expenses like business expenses, donations, paying for dinners/entertainment/etc for friends and family, and courses or tools for self-development and education, can be recorded as optional, luxury costs.
We do this mainly for the benefit of you, the readers, because as long as our base costs remain within the 4% rule of our original portfolio, that means that FIRE works even if you don’t end up making money on a post-retirement side hustle like we have.
Here’s how much we spent on Portfolio B this year:
Most of this spending was on friends, family, and donations, followed by educational spending on the Travel Summit, and the business expense of upgrading our phone to take better pictures for this blog.
What’s interesting is that even if you add up our base expenses of $42,916 and extraneous frivolous spending from Portfolio B, you get $42,916 + $4,649 = $47,565, which is still below the inflation adjusted safe withdrawal amount of $49, 163, and close to our 2022 dividend yield of $46,985.
Is it Time to Increase Our Spending?
In 2023, with the recent changes to our portfolio, our yield is projected to jump to $60,000 a year. Which means, at our current base spend of $42,916, we are $17,084 under our new yield. And even with a “base + frivolous annual spend” of $47,565 that includes Portfolio B spending, we will still be $12,435/year under the yield. So, potentially we can increase our expenses by $1036 – $1553/month this year and still have a 100% success rate of never depleting our portfolio.
Don’t worry, I’m not just going to go out and start buying Louis Vuitton bags. Status-driven things, to me, are a complete waste of money. Plus, I enjoy optimizing way too much.
I thought about spending it on experiences—like elevating my travel experience. But since I went to the travel conference and learned how to travel hack business class flights for free (or nearly free), I don’t need to spend money on that either. And Home Exchange is working out just fine for travel accommodations (in fact, the places we’ve stayed in are way better than Airbnb!).
So, I’ll mostly likely just spend that money on friends/family/donations, given that spending on others increases your happiness.
What would you spend an extra $1036/month on? Let’s hear it in the comments below!
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