Esteemed retirement researcher and creator of the 4% Rule, William Bengen has confessed that he is not comfortable at age 70 having 50% invested in stocks in the current market. He has moved 70% of his assets to cash, despite the inflationary headwinds facing cash. This bold and remarkable move could be making many of the FIRE community nervous of pulling the plug on employment too soon. It also raises the concern that if even an expert who knows the math and created the formula is uncomfortable, we should perhaps all be more concerned.
Thankfully, equities don’t have to be the main driver of your retirement portfolio. There are lots of options and some may suit you much better and give you the confidence to quit that job and do what you’ve been hankering to do!
The 4% Rule is actually a rule of thumb, not a hard and fast rule. After reading quite a few articles on the pros and cons of it, I actually think it is quite a good rule. However, you can adjust this rule up and down to better suit your circumstances and temperament. For example, earlier retirees facing longer than a 30-year retirement can adjust the rule down to 3% to give their portfolios a longer life span. Later or unhealthy retirees can adjust up to 5% given they have a shorter runway for spending.
With any retirement there is the risk of running out of money. However, there are also many ways you can mitigate that risk.
Here are 10 factors to consider before you can tell the boss you are off to fly a kite…
1. Do you have a healthcare plan in place that will cover you until 65 (or whenever your country’s free medical coverage kicks in)?
In the US, given the high cost of medical treatment, this can be a major step forward in your decision to retire earlier. Some people even move to countries where they can more easily afford quality health care.
2. Can you get your job back in the first few years of retirement if things don’t work out well?
I always advise my coaching clients to keep future options open and to not burn any bridges as they go out the door. Some fields (i.e., tech) change quickly. So, you may find it hard to return without revamping and refreshing your skills and knowledge. Perhaps you could shift into part-time work at your current job so that you have time to explore other skills and talents while still building your nest egg. If you’ve made yourself a valuable employee, then you may have more negotiating power than you realize.
3. Would you enjoy doing some part-time work?
Can you be a barista, work at a restaurant on busy weekends, garden or do other work that can generate an extra $1,000 a month? Remember, earning even $1,000 a month means you require $300,000 less saved in your retirement portfolio based on the 4% Rule. Some might think it easier to work a few more years. But others might prefer to hang up their corporate hat and do something different and more fun.
4. Can you generate $1,000 to $2,000 a month with a hobby or lifestyle business?
Rather than take a guess, I encourage you to start that side-line business now. Do this while still employed to make sure that you like it and to get all the initial start-up costs (i.e., website design, training, inventory, professional fees) out of the way. Then, you can get a good sense of just how much it costs to run and maintain the business and how much you like marketing and selling your product or service. Twenty-some years later, I am still surprised at how much it costs to run a very simple coaching business!
5. Do you have other income streams?
Instead of depending on the wild ride of the stock market, why not set up alternative income streams? Some good ones for early retirees are those lifestyle businesses mentioned above. But also consider rental or real-estate, royalty, annuity, pension, and social security incomes. Your stock and bond portfolio can be a big piece of the retirement pie or it could be a small slice. Then, when markets rock and roll, you won’t be so worried.
6. Do you own your own home?
If you do, can you get a reverse mortgage or downsize? Or if you have a large family home and are now empty nesters, you could release equity by downsizing to a smaller home. If you want to stay put, can you get a reverse mortgage? Before acting on this, please seek the advice of a fee-only financial advisor, as not all reverse mortgages are good deals.
7. Can you practice a bit of geo-arbitrage and move to a less expensive town?
Expensive cities like New York, London, San Francisco are not the only nice places in the world. Once you quit your job you may be happier living in a more peaceful or scenic area. Alternatively, if you do live in a popular place, could you rent your place out and live more cheaply elsewhere during a bad bear market? Or even permanently to significantly reduce your cost of living. Many early retirees move abroad so that they can have a high-quality life without the high cost of living.
8. Can you rent a room in your house for extra income?
You might have a few spare bedrooms when the kids fly the coop or a handy guest cottage on your property that can provide rental income during tough times or to cover unexpected expenses. We live near the sea and our town is a holiday destination for the English. Since we spend summers in the US visiting family, we have rented out our entire home while away. That rental income was enough to pay the mortgage for the entire year.
9. Is there a good chance you’ll get an inheritance?
Darrow Kirkpatrick, author of Can I Retire Yet?, chooses to use any inherited monies to “…offset the uncertainty of an inheritance against the uncertain need for long-term care.” Depending on your genetics and health, this might be a good solution for you, too. My in-laws wanted to leave us an inheritance. However, in the end, long stays in nursing homes demolished the decent sum they had planned to leave us. For that reason, I wouldn’t count on an inheritance. You never know what health issues will crop up.
10. Are you itching to do something different?
I’ve seen people retire early after a death in the family or after a health scare that makes them realize that they don’t necessarily have all the time in the world. Others want to retire earlier so they can do the travel and outdoor adventures while still fit and able. While good reasons, you could ask for a sabbatical or a leave of absence and take six months to travel. Then, you can have some adventures sooner without waiting until you are ready to retire.
The financial community naturally puts an emphasis on hitting a certain number before you retire. But it might be that you have untapped resources that can enable you to move into retirement, or semi-retirement, much earlier. Get creative and get resourceful. Your glorious life is waiting! And, if you aren’t sure what a wonderful encore career would be for you, we have the tools to help you figure that out, too!