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- How The Hell Are We Going To Pay For All This Stimulus? - July 13, 2020
A few days ago, FIRECracker and I emerged from our AirBnb blinking in the sunlight after having been holed up in our rooms writing for 5 days straight. The two of us no doubt must have looked like zombies, stumbling down the sidewalk in our unwashed MadFientist t-shirts. As we sat down at a nearby cafe for a much-needed coffee, FIRECracker turned to me and asked “Hey, did we just un-retire?”
It’s a legitimate question.
When we started this weird little blog of ours, never in a million years did we think it would turn into anything big, and the idea that it could one day lead to an actual second career as writers was ludicrous. But 2 years later, here we are. Our blog has been viewed 3.3 Million times since inception, and we are currently writing a book with Penguin, the biggest publisher in the world. Writing 2 articles a week, plus an entire non-fiction book has basically turned back into a full-time job, though one where our “office” can be a cafe in Poland or a beach in Portugal.
Based on that sentence alone, the Internet Retirement Police (IRP) would accuse us of becoming un-retired, and promptly call for us to be tarred, feathered, and ousted from the FI community.
For the record, no I don’t believe we’ve un-retired. The key difference in being retired from a normal working stiff is that the normal working stiff has to work for the money. We choose to work because we love it. FIRECracker has been dreaming of being a professional writer since she was a child, so when Penguin pings you out of the blue and asks if you want to do a book together, you just don’t turn down an opportunity like that.
But what’s always intrigued me is why the IRP is so eager to label FI bloggers who earn unexpected income “fake” or “un-retired.” Here’s my theory.
I think the IRP isn’t going around calling people out just because they want to defend their interpretation of the word “retirement.” I think they call people out because they’re afraid it corrupts the experiment.
Let me explain.
Many of you, I’m sure, come to this blog every day for our financial advice plus the dick jokes. And that’s great. But I’m also sure many of you come to this blog to track our progress in early retirement and see if we fail, run out of money, and are forced back to work with our tail between our legs.
That’s totally fine too, by the way. Some of you are using us as crash test dummies, because you have similar numbers and want to see if we make it. In other words, us gallivanting around the world is an experiment to you. Will we actually manage to stay retired, or will we run into a problem we weren’t expecting out on the road that will force us back down to earth?
So when someone makes money after retirement, it screws up the experiment. Yes this person has been happily travelling the world, but is it because they were actually able to live off their portfolio in retirement? Or is it because they made that unexpected income and that’s the reason why the numbers have worked out?
In other words, is starting a successful FI blog required to retire?
And that’s actually a legitimate question.
So here’s how we plan to address this issue.
A Tale of Two Portfolios
Prior to retirement, we structured our money like this:
Our portfolio (worth $1M at the time) would churn out money every year either as part of the Yield Shield or from harvested capital gains. Every January, that cash would be withdrawn to our savings account and be used to pay for our Current Year Expenses. An excess reserve fund in the form of the Cash Cushion also exists to protect against Sequence of Return Risks.
Now, we have money coming in from external sources due to our post-retirement entrepreneurial activities. So the big question is: What should we do with this money? If we allow it to flow directly into our savings account, that would reduce the withdrawal pressure on our portfolio every January, which is great for us but not great for you. We will succeed in our retirement, but it won’t be clear whether it was because we managed our portfolio properly or because we made all this extra money.
So here’s what we’ve done. Any money that we earn post-retirement will be segregated into a separate, distinct portfolio. The original retirement portfolio will be known as Portfolio A, and the investment portfolio formed from our post-retirement income will be known as Portfolio B.
Portfolio A‘s role will continue to be funding our living expenses. So:
All those day-to-day costs will only be funded from Portfolio A. This will preserve the original structure we retired with, and keep our retirement experiment “clean.”
Portfolio B will NOT be permitted to fund our living expenses, nor will we inflate our lifestyle assuming that Portfolio B can cover any shortfall if we run into trouble. Portfolio B will only be permitted to fund the following:
- Business expenses. Hosting costs, head shots for our book jacket, etc.
- Business re-investment. If we choose to, say, hire a web designer to remodel this site, that cost will come out of Portfolio B.
- Self-Improvement. If we decide to take completely optional classes to expand our minds and upgrade our skill set, that cost will come out of Portfolio B. After spending this year in Europe and last year in Central/South America, FIRECracker’s been interested in learning Spanish. I may take a film class so I can produce more videos of FIRECracker yelling at old people.
- Gifts for family/friends and donations
- One-Off Ridiculous Luxurious Expenditures. Any idiotic one-off luxury purchases that aren’t part of our normal living expenses. If we do make one of these, we will disclose them on this blog so as to open ourselves up to the ridicule we rightfully deserve.
That last one has actually been an interesting one to contemplate. FIRECracker and I have been trying to come up with a Ridiculous Luxury Expenditure that we’d both want and so far haven’t been able to. Buy a Tesla? What’s the point when we’re nomadic? Take a cruise? We’re already travelling full-time! Do more shrooms? OK that one does have some appeal, but a packet of shrooms in the Netherlands costs 10 Euros. It’s not exactly going to break the bank.
Time For Transparency
Anyway, enough about shrooms. Let’s talk numbers.
I don’t do net worth updates nearly as often as some other bloggers because a) who cares and b) I don’t wanna. But now might be a good time to put some numbers to those coloured boxes.
Current Amount: $1,160,000
Portfolio A is our original retirement portfolio which, when we left, contained $1,000,000 in 2015. As our impeccable timing would have it, this coincided with the Saudi-led oil price war that would see a barrel of crude crash from over $100 to less than $40. Canada’s stock market was devastated, Russia entered into a recession, and Venezuela turned from a happy South American socialist paradise into a Mad Max-ian dystopia.
So in our first year, our portfolio was actually negative. But because we had the Cash Cushion, we used one year of its 3 year reserve to pay for our living expenses. The next year, the market rebounded, allowing us to resume our normal withdrawal schedule, and the year after that it went up even more, allowing us to do a normal withdrawal AND replenish our 3 year cash cushion.
Current Amount: $39,000
Our savings accounts store both our Current Year Expense fund as well as our Cash Cushion fund. Right now, we’re looking at a balance of $39,000. And since my portfolio’s Yield Shield is currently generating $35,000, my 3-year Cash Cushion fund is sitting fully funded at ($40,000 – $35,000) x 3 = $15,000.
That leaves $24,000 in my Current Year Expense fund. And since we’re just about to enter June, that means I’m expecting this fund to last 7 more months. With a $40,000 annual budget, that would mean I need this fund to be $40,000 x (7/12) = $23,333. So we’re good to go here.
Current Amount: $84,000
Yeah, I know, $84 grand earned post-retirement! Where did that come from? Well, in short:
- Our Investment Workshop portfolios
- Earnings from one-time freelance coding work
- This blog. From advertising and affiliate links, last year we earned roughly $1100 a month, though that amount can spike or collapse wildly based on the whims of Google Adsense’s mysterious CPM algorithms. We’ve recently switched over to a new ad network so hopefully that’ll stabilize going forward.
- Book royalties from our children’s book.
- Our book advances (fiction and non-fiction). Book advances get paid in thirds. A third on signing, a third on completion and acceptance of the manuscript, and a third on publication.
How’s Our Retirement Doing?
I’ve got to admit, structuring our accounts this way actually makes it a lot easier to see how our retirement has panned out so far. By separating out our pre-retirement money versus our post-retirement money, we can see how successfully we’ve navigated the financial pitfalls of retiring early (right into a nasty market correction, I might add!)
Conclusion #1: Our original $40,000 retirement budget has not increased with inflation. Every year, we’re supposed to add inflation onto this original amount, but a combination of FIRECracker’s judicious budgeting and geographic arbitrage has caused inflation to seemingly skip us completely. In fact, we’ve come in or under $40,000 for total spending in the first 2 years of retirement, and we’re projecting to come in under $40,000 for this year as well.
Conclusion #2: Our portfolio growth has lowered our required Withdrawal Rate. $40,000 / $1,160,000 = 3.4%! Plugging those numbers into FIRECalc reveals a 100% success rate. So by using our Cash Cushion and Geographic Arbitrage to control living expenses, it looks like we’ve successfully exited the Sequence-of-Return-Risk danger zone unscathed. Knowing this, our next moves will be to lower our Yield Shield and return back to a more traditional indexing portfolio, as well as decrease our Cash Cushion since we no longer need it. Stay tuned to this blog as we will announce these moves as they happen.
Conclusion #3: We can afford to take an inflation adjustment. With a new portfolio size of $1,160,000, we can increase our baseline spending to $41,000 (a 2.5% increase) and still have a 100% success rate. Though considering our current spending projections see us coming in below $40,000 even though we’re spending the year in Europe, I don’t see this as necessary.
So there you have it. We’re not un-retiring, we’re taking steps to keep our experiment as “clean” as possible for you readers, and it looks like our retirement has so far been a rousing success!
Questions? Comments? As always, let’s hear it below.
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