On an old blog that I’ve shut down, a reader named JD left a comment on my when can I retire post that I thought was interesting and worth revisiting. Ideas like the 4% rule assume that we commit to a particular strategy, slavishly follow it, and never deviate or make any course corrections. It would be impossible to model all the possible things people might do in the future, which is why these models are necessarily a simplification. In one of his posts about the 4% rule, Mr. Money Mustache iterates some of the ways that you could increase your income or decrease your expenses which aren’t accounted for in the Trinity survey that is the basis of the 4% rules, namely that it assumes you:
- never earn any more money through part-time work or self-employment projects
- never collect a single dollar from social security or any other pension plan
- never adjust spending to account for economic reality like a huge recession
- never substitute goods to compensate for inflation or price fluctuation (vacation in a closer place one year during an oil price spike, or switch to almond milk in the event of a dairy milk embargo).
- never collect any inheritance from the passing of parents or other family members
- never do what most old people tend to do according to studies – spend less as they age
He offers these as a rebuttal for the countless reasons people object to the 4% rule and claim it will never work. His position is that the 4% rule is actually quite conservative, and for people willing to make adjustments they could easily be spending 5% of their portfolio – which according to the Trinity survey would DRASTICALLY increase your chances of failure (running out of money).
Employment as Insurance
One of the big “safety nets” for people who retire early is that they always have the option to re-enter the workforce. Say you retire at 40, crazy young, and immediately hit a bear market (a stock market where prices are dropping). Stock prices dropping is the worst possible situation for a retiree and your withdrawals are depleting your portfolio further. After a year or so of retirement, it seems like this is a long-term situation and the market isn’t going to correct and start going up again. What to do?
Simple. Go back to work! Dropping stock prices are terrible for retirees, but it’s amazing for people accumulating assets. Live off of your work income, add anything extra to your portfolio, and HOPE that the bear market continues! When the market recovers – or you’ve increased your portfolio size enough that you’re comfortable to be living off of it again, retire once more.
Employment to Allow Earlier “Retirement”
Another way you can use work to modify this strategy is that, instead of retiring completely, you switch from full-time work to part-time work. To model this, subtract your part-time income from your expenses, then apply the 4% rule to this decreased amount. Keep in mind that, should you eventually decide to retire completely and no longer work part-time you’ll need to increase your portfolio to cover the additional expenses. You could do this by:
- working part-time to the traditional retirement age, 65
- add a savings component to your expenses to have you on track to retire from your part time work at a set date
- build up your portfolio before you switch to part-time work, such that it will eventually grow to replace your part-time income
Please comment if any of the above are unclear and I will detail more fully what I mean by them.
But What About the Damage to My Career!
Some might worry that they couldn’t walk back onto a job like they had when they retired. This may be true. It’s also true that when you were working you had a massive savings rate, which was what let you accumulate a portfolio you could retire off of! If you earn enough to live off of (or maybe a little extra) and give your portfolio time to recover, that’s all we’re looking for – you don’t have to replace your prime earning years’ income.
In fact, this is probably an opportunity to try some sort of work you think you’d find interesting instead of “building a career” since you’re just doing it for the money until you can retire again. I’ve thought that I’d enjoy working as a barista or making pizzas. I assume those are both jobs I could find my way into easily enough. I could also train to become a tax preparer quite easily, and if I was doing that for a couple of months around tax time each year I suspect it would bring in any needed extra money.
This Is What Failure Of The 4% Rule Would Look Like
You have to go back to work for a year or two. <sarcasm>Big whoop!</sarcasm>
What are your thoughts on re-entering the workforce after early retirement? A failure of the plan or cheap insurance?