Hello,
I'm brand new to these forums and have just recently started reading Mr. Money Mustache and other related blogs. My wife and I are getting serious about leaving our jobs at the end of 2017 so I've been quietly lurking these forums and reading as much information as I can about early retirement.
I think my question is more of a case study, investing question and general advice all wrapped in one.
Perhaps my questions and/or fears have been addressed in this forum or MMM blog posts so please link me to them if that's the case. There's a lot of content here and I haven't had time to read it all.
Case Study Part:Age: I'm 43 years old, the Mrs is 39, no kids.
Location: New Hampshire
Investments: Total net worth is roughly 950k but should be about 1 million at the end of 2017 (without any market growth) unless there's a market correction then who knows.
Roughly 600k will be in my 401k and 400k in a non-retirement brokerage account. Asset allocation is about 75% stock, 20% bonds, 5% cash.
Debt: 165k mortgage, 4% 30 year fixed, paying $400 more per month to pay down in 15 years. No other debt. We have one credit card and charge as much as we can for the points but pay off in full every month.
Credit score: average of 815 (I don't think this is too relevant but maybe someone will find it useful)
Expenses: I've completed a detailed budget and determined we can live pretty easily on $3300 per month. This includes our mortgage payment. Paying off the mortgage would reduce our expenses to $2500 per month but would take 160k from our brokerage account.
Income during retirement: possible part time work doing something we really enjoy but likely nothing for a year or two. We would prefer not to rely on any part time income as part of our planning but it's certainly an option down the road.
Investing question/fears:1. We're in the 2nd longest bull market in history. We're concerned about retiring into a bear market and withdrawing 4% of our investments at the same time. If you look at hypothetical portfolios of starting withdrawals in an extended bear market vs withdrawals in a bull market, the principal erosion is significant. Here's an example below. Look at page 11 of this .pdf from Fidelity:
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/income-diversification.pdfI know the Fidelity example assumes a 5% withdrawal rate but I think you'd see a similar fate with a 4% withdrawal rate.
I'd like to know what your thoughts are about the importance of sequence of returns. Please help to alleviate our fears of early retirement in a nasty bear market. It's been pretty nice for since early 2009 but we want to be prepared for the worst.
2. If the markets do drop, do I adjust my 4% withdrawal with the market value of my investments? Lets say I take out a monthly withdrawal of $3300 per month which is about 4% annually but our portfolio drops by 5% in a few months down the road. Would I then only withdraw $3166 that month? How do people manage withdrawal rate? We have some wiggle room in the budget but if we see a 20% drop or higher, we couldn't adjust our withdrawals that much. We would be forced to work some kind of job.
3. Finally, I can't access the 401k until age 55 (thats if i leave it in the 401k). We will have to rely on the brokerage account for 12 years. The withdrawal rate on the brokerage account, which has a market value of about 400k, will be 10% annually. So if we take withdrawals going into a longer term bear market, like a 2000-2002 scenario, our 400k may not make it 12 years with a 10% annual withdrawal rate. People who retire in their 30's and 40's, are most of their liquid assets in non-retirement accounts? How do early retirees manage this?
I know this is long winded. I thank you for the time and very much look forward to your answers and advice.
Thanks,
MrBeardedBigBucks