June 23, 2022

So much as changed in the last six months! As of today, the US Stock Market is down 22.18% since the start of the year as measured by the Vanguard Total Stock Market Index Fund (VTI). Interestingly, Bonds as measured by BND, the Vanguard Total Bond Index, are down 16.12% since their peak in August of 2020. We stopped working September 17, 2021 and the major risk in early retirement is sequence of returns where retiring into a major recession significantly increases a portfolio’s probability of failure. This is because negative returns during the first several years of early retirement along with your withdrawals for living expenses deplete your portfolio before it has a chance to grow. So, when positive returns eventually do come about several years down the line, your portfolio is much smaller than it’s initial size when you retired and the growth on the smaller portfolio may not be enough to support the remaining years. That said, a 3.2% withdrawal rate, which is what we use due to our expected 60 year retirement, has never failed in historical simulations, even in simulations that include retiring at the start of the Great Depression. So, we are confident that the portfolio will be fine. However, we like to do whatever we can to reduce our risk and position ourselves optimally for success.

Net Worth

Currently, our net worth is down 16% versus our 9/17/2020 retirement date when we stopped working and 20.1% from it’s peak level. That is a drastic change!

We have dropped below the Target level which is the level which we based our 3.2% withdrawal rate on. This is just a mental note for ourselves and does not mean the withdrawal rate needs to change. In many historical retirement simulations, the Net Worth level will drop below the starting point prior to increasing again. As I mentioned earlier, in no historical simulations going back to 1871 has the 3.2% withdrawal rate failed when this occurs.

In terms of Asset Allocation, we are still heavily weighted towards equities as indicated below with no major shifts. The US Stock portion is primarily invested in the index fund VTI tracking the Total US Stock Market. The Intl Stocks are invested in individual overseas stocks mostly transportation related that were significantly undervalued based on P/E Ratios and Book Values. The Real Estate portion is property we own in the US and rent out. The Alternatives are mostly US REITS.

Lagos, Portugal Townhouse

We are Portugal Home Owners now! The Asset Allocation above will change somewhat in the near future as we have found an investment opportunity in Lagos, Portugal and have signed a Promissory Note to purchase a 5 bed/ 3 bath townhouse near the bustling historic downtown center!! The townhouse is a current co-living space and we plan to continue to maintain it as such. It is an old house and requires renovation and redecorating but has tenants already. The purchase process has been quite interesting and I am sure the renovations will be as well. However, that will have to be a separate post as the bidding war, hard nosed owner, and competitive to the point of threatening alternate buyers resulted in a very dynamic situation.

Tip: Putting down at least 35% with Millennium Bank gives you the best interest rate and the lowest spread. So, we are planning to put 35% down and take out a mortgage on the remaining portion. The bank has indicated interest rates of 1.8%-2.5% depending on the fixed period which ranges from 5 to 10 years. The rate varies though until finalization of the property purchase and signing over of the deed. On that day, the rate is locked in based on the Euribor index. As you can see in the link, the rates are changing rapidly right now so timing is critical. The bank also applies a spread of about 1.2% which is basically their profit margin. The bank requires you to buy Home Insurance and also Life Insurance from them in order to give you these rates. For us life insurance is 85 euros per month which we think is expensive and Home insurance is 15 euros per month.

Based on my calculations, we should be able to achieve an overall ROI of around 5-8% and a positive Cash Flow between 1-5% but a lot depends on the final mortgages rates and fees. It’s not a massive return, however with how the market is and an anticipated recession, it is the best option for us.

Budget

Maintaining a strict budget is critical to the portfolio’s survival. We track our Budget in Personal Capital but we also have overseas bank accounts so we have to add that portion in manually. Bibi says she doesn’t feel like it’s a strict budget and actually pretty easy to obtain in Portugal. We are over our budget because we were traveling through the UK for 3 months, and then spending one month in France and a few weeks in Spain.

As per the table below, we have spent about $39,073 USD so far as of June 23, 2022. However, some of that spending ($2,688 USD) was to pay for future month expenses (Airbnb for August, Sept, etc.). If I take that out, we have spent $36,385 USD year to date. If we continue spending at this rate of $6,307 USD/ month, we will spend $75,682 USD this year, not including the major one time expenses associated with our Australian Visa and a Car (Puppy is not included since we got Sydney last year). If I add those in, we will spend $82,539 USD this year. That is higher than we would like, especially since this is our first year in retirement and we expect subdued returns on our portfolio for the next several years. The high spending was mostly driven by the Australian Visa and our travels in high cost areas of the UK, France, and Spain. So, we are currently cutting back our costs for the remaining months in order to recover. The Australia visa is an application for Permanent Residence so the costs are quite high. We previously submitted an expression of interest and were granted an invitation to apply for the Global Talent Visa. This is a rare opportunity so, even with the cost impact, we wanted to pursue the full application. We really loved living in Australia during my time working there.

Consulting

I retired last year but . . . . an interesting opportunity has opened up that sounded like an adventure and I try to never pass those up! So I decided to start a Consulting company! It was a hard decision because being work free has been wonderful. Does taking this project mean I’m no longer retired? Bibi says retiring to her means having the option to work and do as you please. We work because we want to, not because we have to. We are fortunate to have the freedom to live where we want, work when we want, and have the life style we want. I have not had my own company before and this seemed like a great experience! The project I am working on allows me to work remotely 20 hours a week and stay engaged in the workforce. It is fun and interesting for me as well as allowing us more confidence to weather the bear market and less concern regarding our spending budget. I am not sure how long it will continue but I am enjoying it so far!!

Summary

In Summary, the Stock Market is Crashing, we are Over-Spending, we Bought a Townhouse in Lagos, Portugal, and I started my own Company! The income from starting my company will more than offset any budget overrun so we will be fine from that perspective. I plan to use any additional savings towards the down payment for the Lagos townhouse but the majority of that down payment will come from dividends from Bi’s international transportation stocks. It looks like it may be a volatile and challenging market for the next few years but we feel good about our investment choices and excited about the new property and my small company. Tell me how your investing is going during this bear market and if you have any tips or insights.