Our household reached “Kind of” Financial independence (KoFI) about 6 months ago. Assuming the 4% rule holds, and complementing it with expected revenue from my side gig, I do not need to work anymore, at least not for money.
But since we reached that threshold back in November, our wealth has increased beyond our KoFI level. This gives us some buffer. Now that we have more money than the initial target, here’s the kind of event we could weather. We could sustain one of the following:
1. a 18% drop in my expected side gig income
My side gig will be providing a significant share of our income after I pull the plug from my corporate job. However, the income from that side gig is never guaranteed and could fall significantly, pretty rapidly, for multiple reasons. Today it is making much more than I am expecting, and in practice it would need to fall by 50% from its current level (which is a non negligible probability) before we get below our target. I actually expect it to return much less than it does today in my calculations, but we’d be fine even with a 18% drop from that number.
2. A 7% increase of the Japanese Yen
Well, this one is in the realm of extremely probable. As we are moving to Japan, and we (At the moment) count our wealth in USD, I have to be aware of the exchange rate of the Yen. Once we get to Japan I’ll shift my investments a little bit to get some added security against strong currency movements, but until then I have to monitor the USDJPY pair. I would still be KoFi today if the USDJPY was at 104. But anything below that, and my confidence would drop. At the time of wrinting we’re at 11.3, but I have no idea where it will go next. The USDJPY has oscillated pretty brutally between 75 and 125 in the past 6 years. Since I started counted, the average has been a bit below 100, so in a way I’m not out of the woods yet.
3. a 14% drop of the stock market
Although we couldn’t weather a 2007-crisis like market event, I estimate that we would still be KoFi with a 14% drop of the market. Technically, we could survuve a 10% drop of our stash, but because I’m 70/30 in stocks/bond, and assuming the bonds would stay flat, this translates into a 14% drop.
4. A 7% increase in our expenses
This gives us some buffer if for some reason our expected expenses are not accurate, or if we find we want to spend more in some specific area. This could mean we could decide to spend 35% more than expected on our kids, or 25% more on a house mortgage (which technically probably means a house that is 25% more expensive than planned)
5. Use a 3.55% SWR instead of 4%
At this point this is the most likely scenario: our extra wealth means we could afford a 3.55% Safe withdrawal rate instead of the conventional 4%. I know lots of Early Retirees have been worried about the 4% rule lately, and I would be lying if I said I had absolutely no worry.
Ultimately my goal is to reach full Financial Independence, and to not need the money from my side gig. That money will then be used as our buffer to handle the scenarios above. I could stop working on my side gig (or at least stop accepting money for it), or keep working on it and protect our investments instead.
Of course, there is still some significant risk here, in particular it would be very likely for many of the events above to happen at the same time. A drop in the stock market will most likely result in an increase of the Japanese Yen, meaning I would get hit twice as hard as I assume above. So, in practice, we can probably only sustain a 5 to 7% market drop at this point. Needless to say, we keep saving and investing as long as I hold on to the job.