Retiring in the midst of a storm
In November of last year, we reached FIRE, and my husband M retired. Since then, the world has faced a lot of turmoil, and it seems as if everything is crashing down around us.
Today, I’m taking a deep dive to answer the question, did we retire at the worst possible time? In the post, I’ll share:
- A blow-by-blow account of what’s happened since we FIREd.
- How our retirement’s been affected.
- Whether we regret our decision to retire.
In sharing my experience, I hope you’ll take away ideas for managing your own finances. (Or, at the very least, know that you’re not alone in navigating this challenging period.)
A timeline of terrible events
There’s no sugarcoating it—we retired into a perfect storm of terrible events. Here’s a timeline of what’s happened since my husband M retired:
- November 2021: We reached FIRE, and M retired.
- December 2021: Our portfolio hit an all-time high.
- January 2022: The markets faltered, then took a dive.
- February 2022: The war in Ukraine escalated.
- March 2022: The Bank of Canada raised interest rates by 0.25%.
- April 2022: BoC added another 0.5% rate increase.
- May 2022: The markets continue to tumble.
- June 2022: BoC adds another 0.5% rate increase (and there may be more to come).
- Throughout 2021 and 2022: Inflation is higher than it’s been in decades.
But wait, there’s more…
As if all the above wasn’t bad enough, there’s also all of this:
- COVID-19 is still with us.
- Gas prices have skyrocketed.
- Supply chain issues linger.
- A food shortage looms.
- Social unrest abounds.
- Political divides deepen.
- The climate crisis continues to worsen.
The world is, literally and figuratively, on fire. I wish it wasn’t so, but things are looking bad right now. (It’s so bad that the editor of The Georgia Straight interviewed me to ask how the FIRE community was coping.)
How badly are we affected?
Within months of retiring, M and I have been hit with a triple whammy of financial calamities: poor returns, high inflation, and rising interest rates. Given all this bad news, it sure looks like we retired at a terrible time!
But… how badly are we really affected? To answer this question, I’ll go through the factors that could impact the success of our retirement. Then, for each factor, I’ll give my rating for where we stand:
1. Sequence of returns
If you’ve been in the FIRE community for a while, you’ve probably heard of something called sequence of returns risk. The gist of it is this: if you start your withdrawal phase in a declining market, there’s a risk that your nest egg won’t last.
That’s because, when your portfolio is down, you’ll be withdrawing a higher percentage from it. If this continues for too long, you could withdraw too much too early. As a result, your portfolio may be too small to recover—even when the good returns come back.
Conversely, if you start your withdrawals in a rising market, your portfolio growth will likely outpace your spending. In other words, there’s a higher chance that you’ll not only not run out of money, but you’ll also end up with more than you need.
How we’re doing: 6/10
In late December/early January, our portfolio hit its highest point ever. But soon after, it fell by a jaw-dropping six figures!!! 😱 As far as sequence of returns goes, our timing is admittedly not great.
However, we planned for this scenario by saving more than enough. In addition, much of our savings is earmarked for expenses many years in the future. Therefore, even though we’re starting our retirement in a down market, our withdrawal rate will still be far below 4%. (It’ll be closer to 2.5%.)
I also know that we’re invested for the long term, and our investments will eventually bounce back. We’ll stay the course and ride out the storm (while wishing that we had extra money to invest while stocks are on sale)!
2. Withdrawal rate
A 4% withdrawal rate is generally regarded as safe in the FIRE community. However, due to our longer-than-typical retirements, many of us feel safer aiming for 3.25–3.5%. Being the overachiever I am, my goal was to save enough in our nest egg to hit as low of a withdrawal rate as possible.
How we’re doing: 10/10
Even with the markets doing as poorly as they are, we’ll still only withdraw about 2.5% for the year. A withdrawal rate that low is as good as fail-proof, so we’re feeling very secure. Regardless, we’ll still carefully monitor our spending and investments to ensure we stay within a safe zone.
For more on how we’re able to achieve such a low withdrawal rate, scroll down to the “income” and “spending” sections.
Inflation is known as a “retirement killer” for good reason—over time, it can silently erode the spending power of your portfolio. (Think of it like compound interest, but in reverse.) Most of us can weather a period of temporarily increased inflation. But if it drags on for many years, it can most certainly ‘kill’ an otherwise comfortable retirement.
How we’re doing: 10/10 (currently); 5/10 (if inflation continues to rise)
Since 2016, I’ve tracked our personal rate of inflation (PRI) by comparing our total annual spending (without travel) from year to year. Looking back on my records, our PRI has ranged from -4% to -11% per year.
Yes, you read that right—our personal rate of inflation has been negative every year. (Except for 2021, when our PRI was +39%. That’s because we purchased several large, one-off items before M retired. If we subtract those unusual expenses, our PRI for 2021 was -8%.)
So far in 2022, we’ve been able to counteract inflation by DIYing even more, putting off some purchases, and continuing to shop and stock up during sales. My estimate for our 2022 PRI is around 0%.
The optimist in me believes that high inflation will be temporary and relatively short-lived. If it is, we’ll make it through by continuing to be strategic with our spending. But if inflation affects more of our spending categories, remains high for a prolonged period, or increases significantly, we could be in trouble.
Only time will tell which way inflation will go. I’ll continue to track our spending and PRI, so we’ll have plenty of warning to change course if needed.
4. Interest rates
Rising interest rates can significantly impact retirees with debt—including those who’ve leveraged their home equity to invest. (M and I fall into this camp.) So far in 2022, the Bank of Canada has raised its key interest rate by 1.25%… with the possibility of more increases to come. 😣
How we’re doing: 7/10
Note 1: See this post from Ed Rempel for a good primer on the Smith Manoeuvre and the terms discussed in this section.
Note 2: Our leveraged investing strategy works just like the traditional Smith Manoeuvre. But because we started it mortgage-free, we’re not ‘manoeuvring’ anything. Therefore, it’s just leveraged investing.
We’re fortunate that most of our borrowing is in the mortgage portion of our loan (versus the HELOC). Our rate for the mortgage portion is locked in for a five-year term, so we’re mostly sheltered from interest rate increases.
We will, however, feel some pain from the increases as we have a variable rate mortgage. That means every month, when we reborrow the principal to capitalize the interest on our loan, there’s less to withdraw. (That’s because more of our payment is going towards the interest.)
Thankfully, our financial planner is very experienced with leveraged investing. Before setting up our loan, he first ensured that we had multiple contingencies to cover or pay it off. One such contigency was to save enough to make payments on a loan of up to 4.5%.
Our rate is only 1.3%, so we still have quite a bit of room for interest rate increases (and another 3.5 years until our term ends). We’re safe for now, but I’ll keep my fingers crossed that rates don’t increase much more. 🤞
One way to mitigate sequence of returns risk and ensure portfolio longevity is to bring in a bit of income in retirement. Some retirees do this by working a fun part-time job or starting a side hustle. Earning even a small amount (e.g. $10,000 a year) could make a significant difference.
To demonstrate the power of this strategy, here’s an example:
Mandy and Eric retired with a $1,500,000 nest egg. They plan to spend $60,000 per year, which means they’ll be withdrawing 4%. But soon after they retire, their portfolio drops by 15%, bringing it down to $1,275,000.
Their $60,000 annual spend is now 4.7% of their investments. But if they bring in $10,000 in income, that brings their withdrawal rate down to 3.9%. Even better—if they earned $20,000 ($10,000 each) their withdrawal rate would drop to 3.1%!
How we’re doing: 8/10
We’ve been fortunate to have received some income since M retired… but it’s not what you may think! (Don’t worry, Internet Retirement Police—M and I are well and truly retired!)
We do engage in plenty of ‘work.’ But unlike Mandy and Eric in the example above, it’s all unpaid—mostly projects around the house or helping family and friends. So, if we’re not employed, where has our income come from? I’ll share the details below:
- A lump-sum vacation payout when M retired in November.
- 2020 and 2021 ad income that was sitting in my PayPal account. (It was all in USD, so I used Wise to convert and transfer the money to my EQ Bank Savings Plus Account.)
- A large tax refund in April. (Thanks to the interest and fee deductions from our investment loan.)
- A tiny trickle of ad and affiliate income from my blog. (It’s essentially passive at this point—I haven’t had much time to blog this year. 🙁)
- Payments for hosting our new homestay student until June. (Some may argue that this is ‘work.’ But for us, it’s just a fun way to house hack. 🏠)
Luckily for us, this income was all bonus—we neither counted on nor relied on it. We’d saved enough that, even with the market declines, our withdrawals would still be under 4% this year. Still, I’m not complaining! Extra income is always a good thing (especially in retirement). 😉
Note: Our kids also receive the Canada Child Benefit, but we don’t count it as income. That’s because I invest 100% of the CCB payments in their informal trusts.
Spending isn’t the sexiest of FIRE topics. But in my opinion, it should be! After all, spending is the foundation for FI—your FI number and withdrawal rate are both based on how much you spend.
Spending is also one of the most significant factors in determining how long your portfolio will last. If you spend too much, you’ll risk running out of money. If you spend too little, you’ll risk leaving behind too much.
That’s why it’s crucial to continue tracking your spending in retirement. Doing so can give you an early indication that you’re going off track. And, if you are, it’s relatively easy to rein in your spending and get back on track.
How we’re doing: 8/10
I knew that being flexible with our spending would be key in helping us navigate bumpy markets—I just didn’t think we’d need to get flexible as quickly as we have!
Fortunately for M, he was able to squeeze in one big-ticket item before I clamped down—a new glass and aluminum patio awning. (I was hesitant about this purchase, but it’s admittedly been a useful and beautiful addition to our home.)
Once the awning was installed, M agreed to hold off on other large purchases until our investments rebound. Naturally, he’s not thrilled about this, but he understands and is doing his best to be patient!
So far, putting big-ticket purchases on pause is the only change we’ve made to deal with the downturn. We’re otherwise living life and spending as we normally would. That means we’re still going on staycations, eating out, and spending on other discretionary items.
Even with all these extras, our withdrawal rate remains very low, so I don’t see us needing to reduce our spending further. (However, if things get worse, it’s comforting to know that there’s room to trim our spending even more.)
Our overall score: 8.2/10
Since M retired six months ago, we’ve faced some challenging headwinds (with more uncertainty ahead). Considering all that’s happened, most people would say we retired at a terrible time… and they could be right.
Even so, I remain as optimistic and confident as ever. We’re happy and healthy, and thanks to the multiple contingencies we’ve built into our plans, we feel secure and confident with our finances.
In addition, we have a team of professionals overseeing our plans and reviewing our numbers. If we start to veer too far off course, they’ll be our early warning system (along with my diligent monitoring).
So, while the storms rage around us, our careful planning and over saving are sheltering us and providing much peace of mind. I know that we’ll eventually make it through these tumultuous times.
Do we regret retiring when we did?
Now that I’ve shared the ugly truths and all the mitigations we’ve put in place, it’s time to discuss the elephant in the room: do we regret our decision to FIRE when we did?
Both M and I can honestly say, “NO WAY—not for a second!” Early retirement has been amazing, especially for M. (Read my mini update post to learn what he’s been up to since retiring in November.)
I can’t count how many times we’ve been doing regular, everyday things, and M’s stopped to say, “I’m so happy. Being retired is awesome!” Every time he does this, it just reaffirms that we absolutely made the right decision to FIRE.
Sure, it would’ve been better to FIRE in 2009—right when we entered the longest bull market in history. But I obviously can’t magic us back to that time. (And really, what we’re living through now is not so bad and totally survivable.)
So, again, we definitely do not regret FIREing when we did. Now that we (but especially M) have tasted the freedom of FIRE, there’s no going back! If we were to do it all over again, we’d still make the same decision.
Final thoughts—did we retire at the worst possible time?
Things aren’t as bad as they could be, but I’m still not thrilled to be retiring into so much volatility. It’s a little unnerving to be hit all at once with a dropping stock market, high inflation, and rising interest rates!
However, as a longtime member of the FIRE community, I learned to plan for worse situations than this. Thanks to our careful planning, we were very well prepared (both financially and mentally). And so, we’re weathering this storm just fine.
If things continue to go sideways (or get worse), our many contingencies are there to protect us. We continue to sleep well at night… and we’re still very happy that M retired when he did.
So, did we retire at the worst possible time? As bad as things are right now, the answer is still no. Indeed, it wasn’t the ideal time, but it’s not the worst possible time.
However, we can’t predict the future. Only time will tell—there could be worse to come. Whatever the case, we’ll be watching, ready, and prepared. (So long as it’s not a zombie apocalypse… then we’ll all be in trouble. 😱)
Listen to a detailed critique of our plans
Unbeknownst to me, this post became the focus of the July 1, 2022 Stacking Benjamins podcast! (I was so honoured and thrilled to be featured, but also intimidated!!!)
Joe, OG, Paula and Kyle Landis-Marinello went through each point in this post, dissecting our decisions and giving their thoughts on how we did. Eek! 🙈
It was nerve-wracking to hear them critiquing each point, but the discussion was excellent. To find out if our retirement plans survived the panel’s analysis, check out the episode!
As always with Stacking Benjamins, it’s a funny, entertaining listen. (And, though they’ll never admit it, it’s educational too!)
What about you?
How are you feeling during this challenging time? Are the turbulent markets getting you down, or are you happily buying stocks on sale? For those who are already drawing on their investments, are you doing anything differently? Are you worried, or is this no big deal for you?
Leave a comment below to share your thoughts, encouragement, or advice—I would love to hear from you!
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