Last time, we looked at the fear of outliving your money in early retirement. This is a real danger if you quit working in your 30s, 40s, or even 50s. You will spend much more time in retirement and that will greatly increase the risk of outliving your money. We put some safeguards into place so we’d get an early warning if our finances start to go south. Here they are.
- Track our monthly expense to make sure it’s not increasing too much over time. We should be cash flow positive every year until we’re 60.
- Track our FFR* and keep it at an acceptable level with the goal of over 25 when we’re 60.
- Rebalance at least once a year to keep our asset allocation on target.
*Financial Freedom Ratio = investible asset/annual expense.
Now, the FFR can dip pretty easily if we have a big stock market crash. Our net worth would drop quite a bit if the market drops 50% and that will wreak havoc on our FFR. Also, our expense has already been creeping up over the last few years and it will continue to do so. So what do we do if our finances head south?
Let’s take a look at our monthly expense first because that’s a long term issue if it keeps increasing.
|Expense||2012||2014 so far|
- Housing – about 5% increase due to property tax and HOA.
- Cash and groceries – about the same for now. I spend less cash now that I’m not working anymore, but the grocery price definitely went up over the last couple of years. They cancel each other out for now.
- Transportation – I drive a little less now, but not by much because I was taking public transportation to work pretty often.
- Pet – We went from 3 cats to 1 so this should go down next year.
- Kid – RB40 Jr. is going to preschool now and that’s the added cost.
- Bills – about the same.
- Medical – nominal increase.
- Misc – We’re starting to travel again so that’s the big increase from 2012.
I think we’ll be able to bring the average down to about $4,500/month by the end of the year. We’re done with our big vacation for this year.
So in just 2 years, our expenses increased almost 30% (from $3,500 to $4,500/month.) However, our online income also grew at a good clip and we have still been able to keep our month cash flow positive. This level of spending is very comfortable for us and I don’t think we’ll increase much over the next few years. Let’s work on some backup plans with the 2014 expense in mind.
Original Backup plan
We lived without spending my paycheck (invested them) for over a year before I pulled the plug on my comatose career. The test run was good because it showed Mrs. RB40 that quitting my job was feasible. We also had a backup plan in case she got tired of working or lost her job.
Basically, we’d need to cut our expense drastically. Our biggest monthly expense is housing and we can reduce it by moving into our rental home. Of course, now that our rental home is being sold, we don’t have that option anymore. We’ll need to revamp our backup plan to account for this.
Revamped Backup Plan
If Mrs. RB40 loses her job AND my online income disappears, we will be in big trouble with our current monthly expense. We won’t have positive cash flow anymore and we’d need to seriously cut expense. Here is my estimate.
|Expense||2014 so far||Target|
- Housing – We can move to a cheaper area and rent a 2 bedroom apartment for under $1,000. We already live in a 1,000 sq ft condo so it’s not a huge change. We love our location though and probably wouldn’t move out to the suburbs unless we really have to.
- Cash and groceries – We can cut cash spending a bit, but groceries probably will stay the same.
- Transportation – I’d have to drive more if we move out to the suburb.
- Kid – We’d probably take RB40 Jr. out of preschool if Mrs. RB40 doesn’t work anymore.
- Bills – Our bills would decrease a bit if we rent instead of own.
- Misc– We can put travel on hold if our finances are in trouble.
At this level of spending, I would be pretty comfortable with our finances. We should have about $1,000 from passive income and we can cover the rest by withdrawing from our saving or retirement accounts. We can also work part time to cover the short fall.
Relocate to a more affordable location
So our backup plan #1 is to move out to Beaverton and rent an apartment there. This is still in the Portland Metro in case Mrs. RB40 needs to stay in the area.
If location doesn’t matter, then we have a lot more options.
- Move to California High Desert area near Mrs. RB40’s parents. The cost of living in this area is still pretty affordable.
- Move to Chiang Mai, Thailand near my parents. The cost of living is very low compare to the US and we can home school Jr. This is probably a temporary solution, though.
- Port St. Lucie,Florida? The weather is warm and housing is 50% more affordable than Portland.
Moving far away is a pretty drastic measure and we will only do that if Mrs. RB40 quits her job AND I lose my online income. If it’s just one of the two disasters, then we can cut expense modestly and take other measures to raise our income.
- Stop contributing to our retirement plans so we’d have more take-home income.
- We can both take up part time work.
- Take on more side hustles.
- Transfer some funds to higher income financial products. Cash to municipal bonds or something else.
Of course, I wouldn’t consider myself retired anymore if I had to get a real job. Oh well, we are doing pretty well for now and I’m thankful for the time away from a corporate job. I’m still working on our passive income and hopefully, I can bring it up to about $2,000/month by 2020. I’m pretty confident we’ll make it to 2020 without hitting any huge disasters. Mrs. RB40’s work is actually very stable, so I don’t foresee her getting fired or anything. In 10 years, she’ll probably be tired of working, but by then our passive income should be at a much better level.
What about you? What would you do if you retired early and your finances started to go south? The good thing about early retirement is that it doesn’t have to be permanent. You can always go back to work in some capacity.