If you earn and save in one currency but plan to live on another, your real target is not one FIRE number, it is two. You can see both at once, and see how currency drift changes them, with the Currency-Aware FIRE Calculator. This post explains the risk that calculator is built around.
Sequence-of-returns risk#
The 4% rule says you can withdraw about 4% of your portfolio in the first year of retirement, adjust that amount for inflation each year after, and have a strong chance of not running out over a long retirement. The trouble is not the average return over 30 years. The trouble is the order of the returns.
A big loss in the first few years of retirement is far more damaging than the same loss later on, because you are selling assets to fund spending while prices are down. You lock in the loss and you have less capital left to recover. That is sequence-of-returns risk. Two portfolios can earn the same average return and end in completely different places purely because one had its bad years early. Most retirement guides stop here, because for a single-currency retiree that is the whole story.
The second sequence nobody plans for#
If you are globally mobile, you have a second sequence stacked on top of the first: the exchange rate between the currency your portfolio is in and the currency you actually spend.
A retiree whose portfolio is in US dollars, retiring in the Philippines and spending in pesos. What matters to them is not the dollar value of the portfolio, it is how many pesos that portfolio can buy each year. If the peso strengthens against the dollar early in retirement, one dollar buys fewer pesos, so the same portfolio funds less peso spending, and they are forced to sell more of it to cover the same lifestyle. That is a rising withdrawal rate they never chose, driven entirely by the exchange rate.
Notice the direction, because it is easy to get backwards. For a dollar saver spending pesos, a stronger peso is the bad case: one dollar converts into fewer pesos, so their retirement gets more expensive in portfolio terms. A weaker peso is the good case: one dollar buys more pesos, and their money stretches further. The person exposed to the opposite risk is someone who saved in pesos and plans to spend dollars.
A worked example#
Take a retiree with a 1,000,000 US dollar portfolio, planning to spend in pesos, at a starting exchange rate of 1 dollar to 56 pesos. They set a 4% withdrawal, so 40,000 dollars in year one, which is 2,240,000 pesos of spending. By the way, that's a big amount in the Philippines.
Now suppose the peso strengthens 15% against the dollar during that first year, so 1 dollar now buys about 48.7 pesos instead of 56. Their lifestyle costs the same 2,240,000 pesos. But to produce those pesos they now have to sell about 46,000 dollars, not 40,000. Without touching their spending, and before markets did anything at all, their effective withdrawal rate jumped from 4.0% to roughly 4.6%.
If stocks also fell 20% that year, the portfolio drops toward 800,000 dollars, and that same 46,000 dollar draw is now about 5.75% of what is left. A plan that looked safe at 4% is suddenly withdrawing at a rate that historically has a real chance of running dry. Two unlucky sequences, market and currency, hit in the same year and multiplied each other. A single-currency retiree only ever faced one of them.
How to actually plan for it#
The fix is not to abandon the 4% rule. Well, maybe you do have to make some adjustments. I certainly do. However:
Hold a spending-currency reserve, built early. Keep two to three years of spending in the currency you will actually live on, and start moving into it in the years before you retire, not on your first day. That reserve lets you pay for life from cash during a bad-FX or bad-market stretch instead of being forced to convert a large sum on one unlucky day. \
Put FX into the withdrawal plan. When you stress-test your plan, do not only test market crashes. Test what a 10% or 20% move in your currency pair does to your withdrawal rate in the first few years. If the plan only survives when the exchange rate cooperates, it is not a plan, it is a bet.
Target the number in both currencies. A FIRE number in your earning currency can look complete and still leave you short in the country you retire to. Work out what you need in your spending currency, then convert that back, and let currency drift move the target. The Currency-Aware FIRE Calculator does exactly this, and it now shows how your actual currency pair has really moved over the last 25 years, so your assumptions are anchored to history instead of a guess.
Pressure-test the withdrawal itself. Once you know your two-currency target, run the spending side through the Safe Withdrawal Rate Calculator and the Monte Carlo Retirement Calculator to see how the plan holds up across many possible market paths, not a single average.
Bottom line#
The 4% rule is a good starting point, and it is still useful once you understand what it leaves out. What it leaves out, for anyone earning in one currency and retiring into another, is that the exchange rate is a second source of early-retirement risk that can be every bit as damaging as a market crash. Plan for it the same way you plan for a bad market: build a buffer before you need it, test the plan against moves that go against you, and size your target in the currency you will actually spend.
Start with your two-currency number here: Currency-Aware FIRE Calculator.
