2022 was our first full year in retirement and was definitely an interesting start to early retirement.  From January 1st to October 14th, the US Stock Market (as measured by VTI – Total US Stock Market) dropped 26.16%!   Since that time, it has recovered a bit but is still down 16.04% from January as of this writing.  The US Bond market also tanked, dropping by 17.56% between January 1st and October 26th (as measured by BND – Total US Stock Market).  It too has recovered somewhat but is still down by 12.69% from January levels as of this writing.  According to the Bureau of Labor Statistics, Inflation as measured by the Consumer Price Index for All Urban Consumers increased 7.7 percent from October 2021 to October 2022.  As of December 04, 2022, the national average 30-year fixed mortgage APR is 6.56% according to bankrate.com.  Essentially, assets are down and inflation and interest rates are spiking.   It’s not the best first year from a market perspective.   

However, before we retired, we recognized that Schiller Cyclically Adjusted Price to Earnings Ratios for the market were exceptionally high (see the chart here) and that the market was therefore overvalued and likely to deliver subdued returns for the next 10-15 years.  See this article by Lyn Alden that does a great job of explaining PE Ratios and the Market.  Given this market situation at retirement, we built a buffer into our portfolio which I have explained previously.  

Net Worth

We use Personal Capital to track our Net Worth and I highly recommend using this powerful free tool.  We based our 3.2% withdrawal rate on the dotted line but grew our portfolio well above that level prior to resigning from our jobs.  You could say this was unnecessary and overly conservative but it made us feel more comfortable and gave us more peace of mind.   

The 3.2% Safe Withdrawal rate was based on historical data going back to 1871 which includes periods such as the Great Depression. For more details on this, please see the article “How Much Is Enough for Early Retirement“.

Our Net Worth does not need to stay above the Target level and it is very likely it will dip below that level during our retirement. In fact, some of the historical scenarios in www.cfiresim.com show dips of 60% from the starting portfolio value based on our asset allocations.  So, the current US Stock Market drop of 26% is not at all unprecedented.

Asset Allocation

In terms of Asset Allocation, we are still heavily weighted towards equities. The US Stock portion is primarily invested in the index fund VTI which tracks the Total US Stock Market.  We sold the  Intl Stocks which were invested in individual overseas stocks that were significantly undervalued based on P/E Ratios and Book Values.   Those were mostly shipping stocks that experienced significant gains so we decided it was time to close those positions.  That money is now in cash since we are preparing to buy another property.  The remaining Intl Stocks are mostly in International Index Funds like IDV.  The Real Estate portion is property we own in the US and Portugal and rent out.  The Alternatives are mostly US REITS.

I find it helpful to look at the asset breakdown as shown in the pie charts and table below.  I am targeting shift from 71% Stocks/ 20% Real Estate/ 9% Cash to 75% Stocks/25% Real Estate.  I do not plan to hold bonds right now since interest rates are rising.  The Cash is a temporary position only.  

I would like to have the stocks split into 80% US Stocks vs. 20% International Stocks.  This is because the CAPE PE Ratios for the US Market are still relatively high vs. historical levels (current value of 29.79 vs. a historical median of 15.9).  International markets appear to be less overvalued (CAPE Ratios:  UK 14 vs. 13 Historical/ Australia 17 vs. 17 Historical/ Germany 13 vs. 18 Historical/ etc.).   Right now, I have mostly US Stocks so I plan to shift more to International (see charts below).  IDV (iShares International Select Dividend ETF) is currently yielding 8% dividend yields and allows me to diversify across most of the major developed overseas countries and industry sectors so I am targeting that ETF.  

Net Worth Check – OK

Asset Allocation – Increasing Real Estate and International Stock Positions

Budget

Keeping our Budget in line while travelling from the US to Portugal and throughout the United Kingdom, France, Spain, Greece, and Madeira has been challenging but is also critical to our retirement. We also use Personal Capital to track our Budget since it allows us to see all our credit card spending and bank account withdrawals all in one place. It is also easily downloadable into excel so I can analyze it and add in any spending from overseas accounts.   

Our spending by month and location is below.  January was exceptionally high because I added our one time costs for our Australia Visa (~$4k) to that month.  We actually spent the least while we were in the USA visiting family.  

Year to date as of December 4th we have spent $83k and our Budget target was $80k so we exceeded the target.  The reason for the overrun was primarily the Car Purchase and Australian Visa costs.  If I remove that, we would be at $76k.   

In my last update, Financial Updates & How We are Managing the Bear Market (Did we retire at the worst time possible?), published June 23rd 2022, I indicated we were on track to spend $83k USD for the full year.  There are some discrepancies between this post and that one on the monthly spending.  I think that is because of exchange rates since I have to download data from Personal Capital for our US accounts and then combine that data with spending from our EU accounts which are in euros.  In this version, I also chose to include the Australia Visa costs in January whereas in the June post, I just added it in separately.   

A breakdown of our spending categories is shown below: 

Summary

In Summary, the Stock Market is still down significantly, we are Over-Spending, and our Asset Allocation is shifting towards Real Estate and International Stocks.  The income from starting my consulting company will more than cover the Budget overrun and will allow for additional savings via a Solo 401k. 

I believe it will continue to be a volatile and challenging market for the next few years.  However, I feel good about our investment choices and diversification.  The Portugal Townhouse investment is coming along and the consulting work has allowed us to earn positive income during this down year.  Tell me how your investing is going during this bear market and if you have any tips or insights!

Update – December 31, 2022

Here is the final Full Year 2022 Spending up to December 31, 2022.  We had targeted to spend $80k but ended up spending $90,228 which was mostly due to the purchase of a car and payment for our Australian Visa.  We should recover most of the car purchase funds when we sell it and the Australia Visa cost was an unexpected opportunity.  As I mentioned earlier, the consulting work and other income we earned during the year will more than offset any overrun.  

The breakdown by month with notes by country are below: