Deciding to embark upon retirement in our early 40s can be a scary prospect. As many, many people like to point out, there are numerous risks associated with that decision. The stock market is due for a crash. Our money may have to last 60 years. Economic signs point to a recession. The uncertainty of self-inflicted trade wars, foreign policy, government dysfunction, and [insert current event here] means that the future is bleak. We could be forced to go back to work with a huge resume gap or work a crappy job when we’re old. Quitting in our peak earning years means we’re giving up money and safety when it’s the easiest to amass both. And that’s just the tip of the iceberg.
As of last week, both Katie and I have given notice to our employers of our impending retirement. Now that it’s official, I want to share what that felt like and how we overcame these fears to actually make the leap and quit. Because certainly, all of the above concerns are valid. We’ve had to make peace with these worries as we transition from the safety and stability provided by our regular paychecks to the much more risky prospect of living off of our portfolio. It would be easy to let the fear of an unknown future coerce us into accepting the inertia of life and continue going to work. That’s the known quantity: show up, do your job, get paid, repeat. But we have decided to face those fears head on.
As far as the actual act of quitting our jobs, it was pretty uneventful. Katie has a good relationship with her boss and they have been working together for a long time now. This allowed her to take the easy route. She had mentioned our plan casually years before, but without a timeline. So her official quitting process simply involved putting a date to the already known plan as opposed to dropping shocking news out of the blue. And while her boss was not expecting it to come this soon, it was expected at some point.
When it came time for me to make the big announcement, I was somewhat nervous but nothing too serious. I definitely felt fewer nerves than during my last job interview. And even though I hadn’t prepped my boss the way Katie had, he didn’t seem all that stunned by my news. Of course after 3.5 years he didn’t want to see me leave, but he was happy for me. And we both allowed a generous period between giving our notice and our last day, so I’m sure that helped with receiving a positive reaction.
In the end, I think it wasn’t all that nerve wracking to quit because we had been working up to this for a long time. Serious planning has been underway for nearly 6 years at this point. That allows a lot of time to work through any issues and concerns. In that time, I have turned retirement planning into a major hobby. I constantly read articles and studies from major retirement researchers that run advisory firms or have PhDs or both. There are currently several thousand posts on different forums with my name on them, flushing out the viability of my plans or critiquing the plans of others. I have run historical simulations using countless variations of portfolio balances and asset allocations through all of the retirement calculators. In short, I feel like I have put in enough work and study that I have essentially earned an unofficial degree in retirement planning. And it’s this knowledge that helps provides confidence.
A lot of retirement planning is centered around the binary terms of success and failure. In this context, failure means your portfolio has zero dollars and success is having greater than zero dollars at the end of the prescribed lookback period. The use of these terms is driven by the definitions used in the Trinity Study, which was groundbreaking when it was first introduced 20 years ago. It spawned the oft-cited 4% Rule and still serves as the bedrock of retirement planning today. The Trinity Study was the precursor to all of the excellent retirement calculators that are now available to help today’s aspiring retiree take control of their own retirement planning. I will forever be indebted to the creators, but they didn’t do us any favors when choosing their terminology.
Enter any retirement numbers you choose into the cFIREsim portfolio calculator and it will spit out a specific Success Rate. For example, using the default numbers of a $1MM portfolio, 30 year retirement, and $40k of annual spending, cFIREsim tells me that historically I had a 95.76% Success Rate. That means that 19 times out of 20, my retirement would have been a success and I would not have run out of money. But 1 time out of 20, my retirement would’ve ended with me being broke and penniless, washing down my dinner of canned dog food with a bottle of Mad Dog 20/20 while living in a cardboard box under a bridge.
As you can imagine, it’s this small chance of failure that terrifies most people and coerces them into working well past when the statistical probabilities say they need to. Does that 1 in 20 worry me? Not really, because I don’t believe that it’s possible for failure to actually happen as described. To get to zero, I’d have to be watching my portfolio fall on a downwards trajectory, over a period of decades, and simply keep spending away as if I were oblivious to the declining balance. Owing to the fact that I’m not a complete moron, if my portfolio was on a trajectory towards zero, I would make an adjustment by spending less, earning money, or both.
As such, I view my worst case scenario as nowhere close to zero. Instead, it’s having to get a job that would cover our reduced expenses while maintaining a portfolio balance of several hundred thousand dollars. And judging from the savings statistics of most Americans, having a portfolio of several hundred thousand dollars prior to collecting Social Security would still put us well within the top half of people prepared for retirement (or re-retirement as the case may be). So an early retirement “failure” would still leave us better prepared for our traditional retirement years than the majority of Americans.
This is why I think the common terminology of success or failure does retirement planning a disservice. As retirement researcher extraordinaire Michael Kitces points out in his post Renaming the Outcomes of a Monte Carlo Retirement Projection, instead of seeing successes, we should see excess and instead of seeing failures, we should see adjustments. And it makes a ton of sense, because retirements are not set it and forget it events. Any rational person would make adjustments in either spending, income, or both well before it became a catastrophic scenario punctuated with dog food breath. Failure as defined by running out of money simply does not exist.
Now that we’re on the same page when it comes to these definitions, let’s dig into what I see when plugging our personal numbers into cFIREsim. The markets have gone up a bit since we hit our millionaire status for a second time back at the end of 2018, so we’re a little over that now with our 70/30 stock/bond portfolio. Our planned spending amount is an inflation-adjusted $36k/yr, but we also have some flexibility to cut that spending number down as needed. So I simulated a normal spending plan of $36k/yr and a cut in spending to $30k/yr if our portfolio falls below its starting level. Then I ran the simulations for 20 years, which corresponds to the time period between now and when I will be eligible to collect Social Security at age 62. Katie will qualify the year after that. Even quitting in our early 40s, our estimated SS payments are a combined $24k/yr (in 2019 dollars). Not that we’d want to, but if it came down to it, we could both take SS early to provide a huge boost to our portfolio that would cover over two-thirds of planned spending.
If you’re not familiar with how these retirement simulators work, it’s a true historical backtest. It’s not an average. It uses actual results from history of the stock and bond markets along with the recorded inflation amounts to determine the year by year balances. All numbers are normalized to 2019 dollars, so inflation is already accounted for in any numbers you see. Since I’m testing 20 year periods, it looks at what happened for people retiring with the equivalent amount of money in 1871, with the same withdrawal amount, and calculates how much money they would have at the end of 1890. Then it repeats for 1872-1891, 1873-1892, etc. all the way up through 1999-2018. Here are the results of that backtest.
The data set has 128 distinct 20 year periods. Of those, 101 or 79% finished the 20 year period with at least as much as they started with. The average balance of these 101 results was over 2.25 times greater than the starting amount! So obviously, if things go the way that the vast majority of history has gone, we’ll definitely be able to loosen our belts, increase our spending as we age, and still have plenty of money. But of course, it doesn’t take any courage to retire and have plenty of money.
Let’s examine the other 21% showing the worst cases in the past. The average amount for all of the scenarios that leave us less than we started with would’ve been $788,000. The absolute worst historical case would leave us with a little less than half of our starting amount or a bit over $500,000 at age 62. At that point, we could start receiving our government-sponsored retirement payments as payback for all of our hard work during our careers. And even if the SS eligibility date gets pushed back a bit or the payments get reduced some, $500,000 still provides plenty of flexibility. As such, I find it hard to see much downside in this historical worst case scenario either.
Now of course I’m not naive enough to believe that the future will be exactly like the past. It’s possible that we could encounter stock market underperformance that dwarfs the Great Depression, 1970s stagflation, or the Great Financial Crash. But we also have the ability to spend less money. $30k/yr as a lower bound is an awfully high sum for people wanting to live abroad. I’m pretty sure we could get that down to the $12k-$16k/yr range if we had to. And while that might not be the most glamorous life, it would still involve living in a decent place and eating fresh healthy food. And we’d still have a big pile of money readily available to cover one-off spending items if needed. Of course we could also decide to earn some money to reduce our portfolio draw without reducing our spending or as part of a combined approach. It’s not like our early retirement comes with a solemn pledge to never ever collect any money for work ever again.
As you can see, the odds are definitely in our favor and no matter what happens we’ll have plenty of options. History is littered with multiple stock market crashes and economic recessions represented within the results of our historical backtest. There were plenty of disastrous foreign policy and misguided government policies too. Things do not have to go perfectly for us to be successful. They simply need to go no worse than the absolute worst times of the last 150 years for us to never have to work again. Looking at it from this perspective, it’s clear that there is no reason for us to continue working now. If Lady Luck frowns upon us, causing us to have to work some later, then so be it. But imagining these worst case scenarios proves to me that any additional work would not be based on rational ideas, but rather upon irrational fears. And I refuse to let the fear of dog food keep me chained to my desk any longer.