Will I be comfortable withdrawing from principal in Early Retirement?

Hi RIP friends,

FIRE math is easy, isn’t it?

You work for a decade or two (or half), save a shit-ton of money, at least 50% of you income, accumulate accumulate accumulate, experience the good feeling of watching your bank account go up up up, invest invest invest to make compounding work for you, work more, hustle a bit, see your net worth growing at unprecedented rate, then you reach FI… then you quit… and…

And you start withdrawing from your nest egg. Taking money out. On average still experiencing net worth growth – if you picked a safe enough withdrawal rate and didn’t face a 1929 thing right after retirement – but not as steep as you were used to.

Do you think this is going to be comfortable?

I’m getting used to complain if my Net Worth grew by only 100k in a year: “what a shitty year!”.

Ok, the FIRE movement fixed this bug, repeating again and again and again that you’re not going to stop working, to stop hustling, to stop being a creative person in retirement. Retirement is a misleading word, we don’t want to retire like grandpa did, we want freedom to pursue fulfillment. Sofa FIRE is not good for anyone.

But still, the math we use as “rule of thumb” is a variation of 4% rule. We want to plan for the worst, to be able to anticipate all the curve balls that life will throw at us (bad sequence of returns, never working again, no inheritance, no social security, unexpected huge expense…) to be safe in 99.9% of foreseeable scenarios.

Let’s say I’m going to use the 4% (3.5% in my case) rule literally. I’ll keep shoveling a 5 digits amount of money into my nest egg each month and then calling it done at one point in the near future.

How will I feel about withdrawing from my principal and not contributing to it anymore?

I can’t know it today, but I can imagine.

Let me tell you a story that made me think about this.

At Hooli we travel a lot between offices in all the continents.

I used to travel much more in my early days. In last 6 years I’ve visited New York City (3 times), California (10-12 times, stopped counting), Japan, most of Europe and, sadly, I missed a Sidney trip by few months when I changed team back in 2016.

For each travel A to B we have a transportation budget, accommodation budget, meal and local transportation budget. If you spend less than your budget, you can keep half of the savings as “travel credits” to be used for subsequent trips. With the flight budget you can usually afford one way economy and one way business. If you’re willing to fly with stops or mid week or book months in advance, even business both ways (hard but doable).

I’m a saver.

You tell me I can grow an account then I will. Even if I know I can’t cash it out.

So I’ve been flying economy all the time for years, and accumulated a good amount of travel credits.

I’m in California right now, working but mainly complaining about having to tip everyone. The weather is awesome and sunset over San Francisco financial district from Mission Dolores park is majestic.

RIP, did you fly Economy this time? I remember when you bragged about your frugality and flying business class a couple of years ago

Not exactly. I switched from accumulation to coasting mindset at one point, a couple of years ago. Let’s not accumulate credits anymore, and try to spend all the budget for each trip. Ok, almost all. I need to save at least 10% of the budget every time. That’s how I’m wired.

Ok… good, enjoy life and live travelcheck to travelcheck. But wait, your accumulated credits won’t grow much anymore, but still… what do you plan to do with them? Why don’t you consume them?

That’s exactly the question I asked myself when booking for this flight.

Why not indulge? Naaaa it’s not me.

So I decided to fly one way Business and the other way Economy. Going west takes more time (12 vs 11 hours) and the entire flight happens during the day, while going east – against the sun – is overnight. Plus I’d like to be fresh in US, so let’s buy Business for the Switzerland –> California leg and Economy the other way around to be slightly under cap and save my usual 10%… wait… why is that FIRST CLASS return flight priced same as business??

Temptation…

Holy crap, I’ve never flew First! That would mean spending ~2k CHF above the cap, consuming ~40% of my saved credits, my nest egg! My precious!

It took me a while to click on that offer, but then I did. I booked my return flight in first class. I will fly early next week back to Switzerland “as a boss“.

Problem is that right after the purchase I felt a mix of bad feelings:

First one is guilt. I don’t deserve it. Flying First Class? Who am I, a CEO? I know I saved for it, I flew a dozen times economy and stayed in crappy hotels to save money for the company (and to accumulate credits for me). I know I got an offer to fly first at less than half its usual price, but still it’s hard to accept. I felt guilty. And dirty. And wrong.

That got amplified when I talked to my manager.

He said: “It’s ok, you’re using your credits. It’s fine. Enjoy!“.

But then I asked: “I know you’re also flying to US in few weeks… did you get some awesome deals too? 😉

No, but that’s ok. I’m flying Economy both ways this time.

Holy crap, my manager is flying couch both ways while my Business flight will be the uncomfortable one?? No no no it’s wroooong! impostor syndrome is skyrocketing!

Then fear arrived. I’m consuming an accumulated resource. A resource it took years to ‘stash away got almost halved on a whim. What if I run out of credits? Why does it feel so bad to see a number, that used to grow, going down?

That bad feeling lasted for a week after the booking. At least I saved some credits from the hotel budget. I’m staying in a relatively cheap place in San Francisco.

[Note: 220 USD/Night, under cap but “cheap my ass”. San Francisco is untouchable, that’s why Financial Samurai is not trolling when he says you need 300k per year to be middle class here.]

Then another layer of fear: what if I like it? Am I getting used to luxury? How will I feel about flying economy from now on? Will I hedonistically adapt to it? Luxury is weakness, I truly believe it is. So why did I book such an expensive flight? Am I becoming weak? Am I doomed to succumb to the hedonistic treadmill?

When the negative feelings settled down, I started thinking at the big question that’s title of this post:

Will I be comfortable withdrawing from principal in Early Retirement?

I felt bad for withdrawing from a credit it took me years to accumulate, even though it’s not my money. FIRE math says I will do the same with my money.

I felt guilty for having accessed to luxury without having earned it, FIRE math says I will do so once retired. I know, it’s not entirely true. I saved for it but it’s hard to connect savings with actual spending in the future. It’s bad behavior of my mind. When I save, I put the future before the present. But then future comes, and if I spend what I saved it feels like I’m not deserving it. A close to pathologic attitude to delay gratification indefinitely.

This attitude needs to change (a little bit).

Are you sure you’ll be comfortable with spending your nest egg down?

That’s why I’ll probably not do a brutal single stage early retirement, but a multistage one. I’ve introduced the idea in my recent interview on ESI Money, but it’s not an original idea: I first read it from Joe over at RetireBy40.

Here’s the rough plan:

  • Stage 1: pure accumulation phase plus one or two passions being explored professionally – earn (as much as you can), save (as much as you can), and invest. We’re here right now. It may be over in 1-2 years.
  • Stage 2: coasting – no more conventional 9to5, 40 hours per week jobs. Maybe switch gracefully, reducing work time to 50-80%, work actively on passion projects, try to monetize them to cover expenses, let investments compound and grow. Maybe exploit some sharing/gig economy too like hosting dinners at our place, rent rooms on airbnb… The goal is to pretend you don’t have a huge nest egg (and let it compound on its own), but aim to cover your expenses entirely with your income.
  • Stage 3: passive & passion income – no more bullsh*t jobs. Keep working on passions, maybe explore new ones, or those hard to monetize. It’s ok to withdraw something, but one should aim to at least an active source of income.
  • Stage 4: retirement – no need to generate income anymore. Work is optional here.

I don’t have a finalized plan yet, with actual dates and numbers, but I think we’re going that way.

As I said in my interview:

The four stages plan doesn’t need to be followed linearly. We may actually jump from 2 to 3 (to 4) and back several times, like every time I want to try out a new passion and see if I can monetize it.

We might end up in stage 4 earlier, in case investments grow quickly or some windfall event happens.

Ironically, that’s almost what I did with my travel credits: stage 1 for 4 years, stage 2 for 2 years and now… I’m in stage 4!

What’s your plan?

Are you still thinking in binary mode?

Now… good night!

17 comments

  1. I used to have a similar fear about spending anything accumulated. Then I changed my mind by doing the following thinking.

    I believe it makes sense to keep some money for emergency fund or early retirement in many cases (myself included). Life has great variability. That causes uncertainty (work, health, …). I believe it is good to have some control over the future and fewer reasons to worry.

    On the other hand, any resources that we stash away now, we admit that we don’t know how to put them in good use for the future. Let me provide some examples why the 7% rate from the stock market is not a sufficiently good use in many cases, draw a parallel, acknowledge that my examples do not cover the whole space, and let it up to you decide where you fall. Then, it is easy to apply similar logic for your corp travel budget.

    Examples where the returns are usually higher than stock market
    – Education (e.g. study at university without scholarship or the opportunity cost of a PhD)
    – Many small businesses around where we live (admittedly, the owners also provide their time apart from capital)
    – Tech start ups on average (but not in most cases)

    Parallel:
    A company that accumulates cash or buys its stock back, basically admits it doesn’t have enough ideas to hire more people/machines to implement them and make more money, because either their market is saturated or they don’t have ideas to expand their market. I am sure you can find a better source that explains the concept better in financial terms for companies.

    Another parallel is strategy games. You don’t want to keep your resources in the bank if you can build either more workers or better army.

    The parallel these two reflect on is that we can view our personal development as either the management of a (small) company or a side on a popular RTS.

    Acknowledgement

    You may not have the opportunity (education), the risk tolerance (start up), time or health to invest in other areas. Then, stock market is okay. Otherwise, do not feel guilty, because by using your resources to change your present you may create a better future in expectation compared to keep them in the bank (or stock market).

    1. Oh, if RTS would pay dividends on accumulated resources you can bet I’d stash away every single stone on Empire Earth 🙂

      Anyway, food for thought. Thanks for having shared it.

  2. RIP, I’m wired in a similar way. Selling stocks or using cash reserves is not what I feel comfortable to do now that I’m fire. I still earn money with my side hustles and there are no plans of changing that yet. In fact I’m crazy about diversification: RE, ETF, Business. The end of the world can come: I’m prepared…sort of 🙂 So your worry makes sense. You’re not alone!
    Actually: pretty much all the big FI names have shit loads of income from their blog, book or side hustles. While preaching the 4% rule. Why? I think it’s more than “just happens”. I think they’re wired in a similar way to us!
    But I can tell you one thing: for me, the ultimate insurance against stockmarket-apocalypse, inflation or deflation shitstorms is “knowing the worst case”. In my case, if all assets would be gone, I would probably take my family back to my parents’ house, grow some chickens, and some veggies in their garden, stop spending stupid amounts on wine, stop traveling a lot. Just live a simple life.
    Hold on a moment: we are actually living in the same house with my parents. And it’s our choice. We pretty much like it (OK , Mrs W might not be as enthusiastic). So is that the worst case scenario? Haha…well then life’s easy. Why the fuck do we care about what the stockmarket might do?
    What’s your worst case scenario?

    1. I know I know your 4 pillars plan 🙂
      I like the idea of “knowing the worst case”, it’s a stoic exercise called “fear setting” and “fear rehearsal”. Seneca first introduced it a couple of thousands years ago!
      Getting used to Swiss lifestyle makes me feel like the worst case is something to avoid at all costs. We’re getting weaker. more time passes here, the more we need to live. The climb in NW may not be enough to compensate for it. That’s Hedonistic Adaptation to non-material stuff, like “quality of life” here in Switzerland.

  3. Sounds amazing, that flight in first! I have seen quite a lot of airplanes from the inside, but only once have been able to fly business and it wasn’t really worth it (1hr European flight). Flying business or first on these long trips is great!

    Plus, you wouldn’t be able to cash out. Anyways, it was a nice psychological experiment right there. Enjoyed reading it!

    1. It’s been inferior to my expectations though. Flying Business for the first time Switzerland to California a couple of years ago was a shocking experience. Business on long distance trips is sooooo much better. You skip lines everywhere: checking, controls, boarding… then you get treated like a king, can sleep, eat awesome food and drink champagne all the time.

      Business to First is a minor improvement. You get someone making your bed, get more food, a better lounge, a taxi to the VIP passport control area and a free pajama. And yes, 3-4 attendants and the pilot that come to you every 5 minutes to entertain you – that was actually annoying, I wanted to stay alone 🙂

  4. Holy cow, MrRIP, I think this was one of your most inspired articles !
    Really a pleasure to read ! 🙂
    I share your feelings but I’m quite a bit behind you with savings so this won’t concern me for the next future (say > 10 years) !

    1. Thank you weirded 🙂
      I guess the message I want to throw out into the wild is “the math is easy, your brain (emotions, feelings, rationalization…) is not. Get to know yourself if you want financial success”

  5. Stage 4 for me but you are right spending down – no way, can’t get my self to do it. Probably will die with a sh…load of money. Won’t my kids be happy. They will spend it down for me.

    1. … so I’m officially classifying you in stage 3.5 😀
      Jokes apart, yeah, that’s one of my fears. Never feeling comfortable with “earning less than I spend”.

      Welcome on RIP, Mark 🙂

  6. I loved this post because I think the same way you do. I love the accumulation phase but then I struggle with spending down whatever I’ve accumulated. I’ve gotten burned by this behavior though when loyalty programs change their benefits or options for cashing out, so now I tend to cash out much earlier. As for retirement, my husband and I are solidly FI but we tend to grow our accounts as large as we can for now. When we do pull the plug on working for good I don’t want to find myself hesitant to spend and if we grow that mound of money high enough we may never draw down on principle!

    1. Hi OFG, welcome on RIP 🙂
      A post that recently opened my mind on how to consider my wealth is the latest one on J.L. Collins blog: Investing for seven generations. Jim shows (not an original idea, as he himself admitted) that you should consider your wealth not yours, but a legacy you leave for future generations, with the agreement that each generation is working to build it and not destroy it. few passages:

      It starts with me. I no longer think of this money as mine. No longer is the objective to invest just for my lifetime. I think of myself as its custodian. Certainly, I am free to benefit from it, but only to the extent of staying well within the 4% rule. My first role is to nurture it and see it grow.

      Awesome 🙂

      1. I love the idea of investing for seven generations. The problem is that we can only impact one or possibly two generations into the future. I can teach my sons to understand the psychological and financial aspects of money, but I don’t know for certain if they will heed my words. Even if they do follow my examples will they teach their own children and can this continue throughout that many generations? Can each generation impart financial words of wisdom for the children who follow? It’s interesting that the idea originated with the Iroquois. Native Americans have a long history of verbal story telling that is passed through the generations. How do we weave stories that can be passed down for hundreds of years to come?

        1. Yes, it’s very complicated… and as you said, the idea originated in a place with strong societal connections and in a time where things changed rarely. With today’s fast pace of change, and a generally more individualistic society it’s much more difficult – but not impossible!

  7. Great post. I have thought exactly like this for a while. At first I thought I need to hit my number, but now, when I can see I can generate even small streams of alternative income, it isn’t black and white anymore.

    I could start downshifting soon, but I like my work too much at the moment. There’s just too little time for all the fun things!

    1. It’s a matter of opportunity cost. As you said: “There’s just too little time for all the fun things”.
      Stage 2-4 happen when you realize that the marginal value of money (which you start having enough) is lower compared with the marginal value of time.

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