To everyone who read the headline of Using Airline Points to Manage Sequence of Returns Risk and feels this is a ridiculous premise, hear me out. I propose that hoarding collecting airline points for travel in early retirement can help manage the worry associated with a drop in our portfolio value at the exact moment we have the time to travel more.
Although my family lived in Los Angeles and was what I realize now was “rich” when I was growing up, we only traveled locally around California and the Colorado River. I was 12 years old when I first flew from Phoenix to LA to attend a friend’s Bar Mitzvah after a family vacation on Lake Powell. In undergrad, I was dead-set on fulfilling my vet school prerequisites, and I didn’t have time for any study abroad experiences. I didn’t have a passport until I was a first-year resident and attended a conference in Crete. After that experience, though, I rapidly did more international travel: a rotation at University College Dublin as a second-year resident and at the Royal Perth Hospital as a third-year resident. Numerous international trips followed as an early attending.
I had discovered travel and how much I enjoyed it.
Then I met my wife, who was in pharmacy school. My wife grew up in rural northeast Georgia in a solidly middle-class family. They didn’t have money for travel, although they would do short weekend trips around the mountains. She did some school trips to Ireland, Toronto, and New York. Other than that, she was nose-to-the-grindstone working to get into and then excelling in pharmacy school. Not a lot of opportunities for travel in those circumstances.
Both coming from families that didn’t travel much, we discovered that we greatly enjoyed traveling with each other. We took numerous driving trips throughout the United States, and we repeatedly visited Australia, New Zealand, Ireland, and Canada for weeks at a time. For the past three years, travel has accounted for ~21% of our yearly spending—between $19,000-$32,000. Even after our move to New Zealand in 2025, we have been very deliberate about visiting friends and maintaining relationships we have had for decades. We have $20,000 set aside in our budget for travel each year, with flexibility for significantly more if an emergency requires us to travel back to the US from New Zealand (e.g., family health problems back in the US).
Suffice it to say that travel is important to us. When we retire, we want to continue to do it.
Managing SORR with Airline Points
One of the greatest challenges for retirees is managing the Sequence of Returns Risk (SORR). SORR matters because you are continuously drawing on your investments during retirement. If your investment returns are relatively poor for the first decade or so of retirement, you will be withdrawing from your portfolio while it is down. When the market recovers, you won’t have as much invested and, so, won’t benefit as much from the recovery. SORR matters—low returns early on are more of a problem than low returns later on in retirement.
This is one of the elements of the 4% rule of thumb. Plenty of strategies focus on managing your SORR. For example, you can adjust your spending down if you have an early decrease in your portfolio. The strategy I describe here is using credit card points instead of cash to travel during retirement to buffer against SORR.
The usual advice for using airline points is to spend them as soon as you accrue them and to do so as efficiently as possible. For efficiency, you want to get at least 1 cent per dollar cost. Therefore, if a flight costs $800, you want to spend less than 80,000 points to get a “good” deal. Some people may argue that you should achieve better conversion rates, and there are often opportunities to do so. But we’ll keep the 1 cent conversion for the purposes of this discussion. If you get a better rate, great! The math will work out even better for you to use points to buffer against SORR. A full discussion of using points to travel is beyond the scope of this article. Let’s focus on using points in early retirement.
More information here:
The Calculus Behind Private Jet Services (Should You Buy NetJets?)
Are Credit Card Points Worth the Investment?
Building Up Your Points Just Before Retirement
Instead of burning through those points while you are working full-time, you could hoard them as you approach the last few years before retirement. This is similar to building a bond tent, which is a strategy for managing SORR. Between us, my wife and I have about 1 million Delta miles and 250,000 Chase points. We accumulated those points by buying everything with our Delta Platinum American Express card (including Delta flights, for which we get 3 miles/$ spend). We flew Delta exclusively for flights around the US and to Ireland, Canada, Australia, Spain, Iceland, and London, while getting the “mileage boost” awards for being Platinum Medallion members for many years.
Yes, I know Delta points are some of the worst. But we love Delta and fly it almost exclusively because our central hub airport when we are in the United States is Atlanta (the site of the airline’s headquarters), and we make frequent use of other Delta hubs like Salt Lake City and Minneapolis.
How does the math work by hoarding those points instead of spending them? Priced right now, our next flight, to Scotland, costs $1,100 or 82,000 points + $191 in fees each. Instead of paying cash, we could use our points, save $909, and have that $909 invested in our portfolio. Now, we project five years into the future and then retire: assuming 6% average real growth (9% returns-3% inflation), that $909 grows to about $1,220 by the time we retire. That’s great—with this move, we have more money than we did before. Now, I could buy that same $1,100 ticket (real) with cash and have an extra $120, assuming a 0% LTCG tax. So far, so good.
But wait, what if the market goes down between retirement and when I buy my ticket? What if there’s a 10% decline in the market in the year before I want to buy this ticket? My original $909 is now worth only $1,035. If I sell $1,035 of stocks to pay for this $1,100 trip, I will have lost $65 in the exchange.
More importantly, though, WILL I sell $1,100 worth of stocks to pay for that flight after a 10% drop? What about if the drop is 20% or 50%? It can be very difficult and scary to spend money after your portfolio declines. You can tell yourself that the 4% rule of thumb should still work, that your portfolio will recover and you will be fine. But . . . what if you’re not? In many cases, if the market declines and you cut back or go back to work, there would have been no need—the market recovered, and your 4% withdrawal was fine. But you only know that after the fact, not in the moment. You can manage SORR in mathematical ways, but the behavioral components are at least as important.
So, this is my proposal: use airline points to manage the behavioral aspects of SORR if travel matters to you. Travel is an important part of our early retirement. We want to do it and to feel comfortable taking trips, even in the face of a moderate downturn in the markets. For that reason, we have been accumulating points for the past few years by paying out-of-pocket for our flights, even if it may have been more financially efficient to use points. Now, if the market drops substantially after we retire, we feel we could still travel using our points.
More information here:
Lessons Learned from Achieving Financial Independence
Life After Financial Independence: Two Perspectives
This Might Not Be the Right Strategy for You
There are numerous drawbacks to this strategy. The most obvious is that we don’t really own these points, and the airlines can devalue them at any time. I couldn’t find a resource online that compares stock market performance with mile devaluation (someone should do this research!). I have the impression that they are poorly correlated if you want to consider points an “asset class.” This is good—as the market goes down, your points are not necessarily devalued at the same time. Nonetheless, devaluation happens regularly, and you have no control over it. Those points we have today will surely get us less if we use them in five years than they would get us now.
Another criticism is that it may not be the most efficient use of the points. You can sometimes get particularly good deals using points, making them worth much more than 1 cent per mile. This seems to be particularly true for overseas flights. Maybe if we had used points more efficiently over the past few years, we would have more money invested than pursuing this strategy.
Finally, this is really probably only useful for you in the few years leading up to retirement and the first few years after retirement. It’s probably best not to sit on airline points for 20 years. Similarly, if the sequence of returns risk doesn’t show up within about five years of retiring, the points may be devalued so much that they just won’t help you much. If the market tanks in Year 7 of your retirement, your points might barely get you an economy flight to the closest big city. Also, this strategy is not going to move the needle very much. If you need a withdrawal rate of 5% to fund your retirement, using points for travel isn’t going to solve your problem of a too-high withdrawal rate. Similarly, if you’re spending 2% a year, points just don’t matter to you. We’re probably talking only hundreds of dollars difference, which may not be worth it to you from a purely economic standpoint.
I haven’t heard of anyone trying this approach, which implies to me it’s a pretty out-there idea. I think I’m going to classify this under “another crazy scheme of Erik’s.” I’m not even advocating you do this. But it makes logical sense to me. It made us feel more comfortable to buy flights while we were still drawing a salary and to use the “free” points after we stopped, even understanding the drawbacks listed above. We’ll see how it plays out in reality.
What do you think? Does this approach to SORR make sense to you? Are there better ways to use airline miles and credit card points?
