Prague from St. Vitus Cathedral

You may have noticed the progress bars to the right of this article.  In order they show:

• The total amount we could safely withdraw monthly in retirement if we quit today
• The portion of that income coming from rental properties
• The portion of that income coming from retirement accounts

The Trinity Study, or, How I Learned to Stop Worrying and Trust the SWR

In total, we are hoping to have $5000 per month in income in retirement.  This would cover all of our living expenses almost anywhere in the world, and if we’re being perfectly honest, it’s far more than we need for a variety of the places we’re hoping to pass through during early retirement.  As of the writing of this article, we have enough saved to provide $774.33 in income per month indefinitely.

Wait, what’s what?  In perpetuity?  Forever?  Yes!  If you’re not a FIRE (Financial Independence and Retire Early) nerd like I am, you may wonder how I know this.  Back in 1998, three professors at Trinity University performed an interesting experiment which came to be known as the Trinity Study.  The professors looked at the entire history of the US financial market and found that for portfolios composed of 75% stocks and 25% bonds, you could retire at any time in US history, use a Safe Withdrawal Rate (SWR) of 4% of your retirement portfolio each year, adjust it for inflation each subsequent year, and in 95%+ of cases, never run out of money.  In fact, in most cases you would die with vastly more money than you had when you retired.

If this doesn’t make sense, consider this example.  It’s 1929, and the Great Depression is just about to begin.  A worker retires with $80,000 (roughly $1,000,000 in 2015 dollars).  In year one, the worker takes out $3,200 on which to live (equivalent to about $40,000 in 2015).  The market crashes.  All hell breaks loose.  America enters an extended depression, and times are hard to everyone.  Confident that things will get better, the retiree changes nothing.  He adjusts for 3% inflation each year, taking out $3,296 in year two, $3,395 in year three, and so on.  After 40 years, in 1969, our example worker’s portfolio values would have been roughly $158,000, almost twice his initial balance, and he would be pulling out $10,438 per year to cover his living expenses.  Pretty sweet deal, right?

Basically what the Trinity study tells us is that as long as future market performance is no worse than the absolute worst periods in US history, and in some cases, even if it is, a 4% annual, inflation-adjusted withdrawal rate is as close to a guarantee as it gets.  This means that for every $100,000 you have in retirement accounts, you can withdraw $333.33 per month without worrying about running out of money.

In terms of hard numbers, the long-term average return of the US Stock Market is approximately 8%.  This means you can adjust for the long-term inflation average (3-4%), take out your 4%, and still be at break even or better.  Some years you’ll be up, some years you’ll be down, but after smoothing out the volatility of the market, 4% is a number most FIRE nerds feel pretty comfortable with.

For the Doubters

There are a number of places where very conservative planners might feel uncomfortable with the Trinity Study.  First off, it was written in 1998, before the global financial crisis and the dot-com bubble burst.  Well, there’s good news there.  The study was revised in 2009 (in the midst of the meltdown) and even then, the 4% rule was found to hold true.

For the tin-foil-hat brigade, one might also worry that the US market is ripe for a more permanent failure, but to be frank, this kind of worry has always existed and has never proven to be the case.  Even if a truly apocalyptic meltdown happens, we’ll have more to worry about than the continuity of our early retirement:  namely, who will be named the king of the cannibal tribes to which we will all inevitably belong, and who will guide us to the promised land, as it was in the beforetimes, in the long long ago.  If you don’t think I’m treating the possibility of this kind of thing seriously, you are right, but it’s not just because I don’t think it will happen.  It’s because it is outside my ability to control, and I won’t live my life in fear of something that is virtually impossible.  Life is just too short.

Stock Picking is Scary

Stock Picking is scary.  That’s why I don’t do it.  I only buy index funds, which are basically giant bouquets of stocks covering every company in a given market.  Most of my investments are in the Vanguard Total Stock Market Admiral Fund (VTSAX), Vanguard Global Stock Index (VGTSX) and a little bit of the Vanguard Total Bond Market Fund (VBMFX).  This means I am never at risk of losing my entire investment, because the failure of one, or even many, companies can only reduce the price of my investment, not cause it to go to 0.  Barring the complete disappearance of the US financial market, my investment is safe and sound.

Augmenting the Stock Market with Real Estate

I love my index funds, but my experience so far has been that by investing in rental property, I can more quickly reach early retirement.  As a result, I have purchased three rental units in the midwest and south, and anticipate purchasing 12 more properties in the next few years.  Currently, I have to carve out some of my savings for down payments, but by about mid-2017, the rental income from the first seven properties will produce enough to afford a new property annually.  I’ll also continue to purchase one property per year from my income until I hit the magic 15 number.

Though I’ve only been purchasing rental properties for about a year, they already produce more monthly income than my retirement savings.  The rental properties will provide about 60% of our income, or $3000 per month, in early retirement.

Using Mobility to Ride Out the Lean Years

We live in a high cost of living (COL) area.  While our dream is to retire in a variety of drastically less expensive locales, we also want to have the option to come back in the future for a visit or for a long stay.  We are pretty sure that we will be able to live on much, much less than the retirement budget we have set, but having the extra headroom will allow us to alternate between some years in more modest surroundings, like rural France, Spain, or Portugal, and higher cost of living areas like Paris, London, or our own San Francisco Bay Area.

In essence, our willingness to pick up and move as the fancy strikes us can also be a powerful tool to offset fluctuations in the market in early retirement.  In fact, a few years in a slow paced, rural environment sound like exactly what we’re looking for in the first few years of retirement… and if it happens to involve a high speed train ride to a European Capital here and there… well, that’s a sacrifice we’re willing to make!

Flexibility is the Magic Word

Spendthrifts might call me crazy for thinking early retirement is possible, and FIRE people would likely look at our high monthly retirement budget and call us far too conservative.  The truth is that we exist somewhere in between.  We’re prodigious savers who believe in early retirement, but we also want the ability to indulge ourselves a bit too.  Maybe the 4% rule will hold up, maybe it won’t.  The thing is, we can modify variables like budget, location, and lifestyle to adjust to changing conditions.  Fears are the chains that bind us to a lifetime of doing what we don’t want to do.  If you can conquer those fears, the whole world opens up to you.