Coasting through the Sequence Risk Zone

We often talk about retiring when we hit 25 times our annual spending and can retire on a 4% withdrawal rate. But then we acknowledge that there is still some risk. How to square this circle?

A 4% retirement

With a 4% withdrawal rate the risk is perhaps one in twenty that we'll encounter a bad sequence of returns and our portfolio would eventually fail.

If we are lucky enough to get some normal years at the beginning, with the market behaving and giving us something like average conditions, we would have some excess growth above the 4% we're withdrawing. As the portfolio grows, our fixed amount of cash withdrawal is a percentage withdrawal rate which is diminishing. The 4% withdrawal becomes 3.6%, 3.3%, etc. 

Eventually we reach the "ultrasafe" level. As with all these things, arguments rage as to the actual ultrasafe figure. Some think for the UK it is 3.5%, others say 3.1%. 

This period of time from starting withdrawals at 4% and running until the cash withdrawal has, if looked at with fresh eyes, diminished to 3.x% of the pot, can be called the Sequence Risk Zone.

In the Zone

Getting through the Sequence Risk Zone is our next goal after reaching FI.

Doesn't this make our usual 4% withdrawal idea of FI a bit of a con? Well, no, not really. We're trading freedom time for extra safety. It is very unlikely that a 4% retirement will fail us, and it's very likely that someone retiring on 4% will naturally progress through the Zone without doing anything special.

But if you are naturally cautious, as I am, you will want to traverse the Zone quite quickly.

Here's where the Coast part comes in. CoastFI is when you do the bulk of the portfolio-building work and then quit the well-paid career job but continue doing some work. Perhaps that's part-time, and perhaps it's more fun and less lucrative work. 

I'm embarking on the Coasting phase imminently. I want more freedom and more travelling, but at the same time I don't think I'm ready to do absolutely zero earning activity forever more. 

Coasting

Initially my plan is to treat this period as a sort of career break, or pre-retirement. I've had some success at writing, so the plan is to do more writing and creating alongside some travels. In my head this can be for a couple of years. At the end of that time, I can take stock, see whether writing is a useful way to spend my time, or if I'm bored that may be the point at which I start some other small business.

This is also my solution to One More Year syndrome. This is a frequent phenomenon when people reach financial independence. They're not quite sure, and working feels safe and comfortable, so they stay working for one more year - which sometimes leads to another and another.

So I commend the idea of Coasting to you. It could mean drawing your core spending needs from your portfolio, and using your earnings for the fun stuff like travel. In this way you can spend a few years with a lower withdrawal rate, easing the strain on the portfolio and hopefully allowing it to grow and propel you more quickly through the Zone.

Whilst in the Zone, I'll continue to flex my spending down when necessary, if any crashes come along. I think the dual tools of flexible spending and coasting to continue earning are the best way to cross the Zone. They don't require you to divert capital, as selling stocks and buying bonds would do, and so they don't slow down your passage through the Zone.

I'll probably write more about my Coasting experiences...

Want to read more of my ideas? I have a new book out - Build Your Retirement, 5 ways to improve your wealth in retirement. Or other books here. 

Or you may prefer my FIRE series for beginners.