Our Biggest Lesson from the Financial Crisis // Don’t Bank on Going Back to Work

Quick note: We will have a post next Monday despite the July 4th holiday (maintaining that streak!), followed by our quarterly financial update on Wednesday. It’s likely to be less rosy than it would have been with a different Brexit vote outcome, but still lots of great stuff to report! Here’s the update from the first quarter of 2016. 

Though the financial crisis of 2008 and the years that followed certainly scarred all of us one way or another, it’s now been long enough that I often find myself thinking of it all in mostly positive terms. It allowed us to buy our first place, and to get our forever home for a downright steal. Or, Sure, our account balances went down, but we didn’t need that money right then, so no harm done. And, most of all, We were lucky and didn’t lose our jobs, so never really felt it.

That “never really felt it” sentiment is pretty scary, because it could easily lull us into thinking that major recessions are not a huge deal, and are a just a time when we want to avoid selling off too many shares of stock. That’s what cash reserves are for, right? No problem! Or, worse, revising history to remember only what came later. Stocks on sale followed by record S&P growth? Recessions are great!

Of course the reality is that the 2008 crisis is called a crisis for a reason: millions of people lost their jobs and their homes, huge volumes of money were erased from world markets, and lots of retired people living off their investments found themselves in a terrifying place. And there’s a huge human cost to all of that: suicide rates went way up, as did rates of homelessness and poverty. While we’d all like to believe that regulators have cleaned up Wall Street and other world financial capitals, each and every one of us knows that it could all happen again. It will happen again.

Remembering the Lessons of the Crisis

Our little microcosm of the two of us weathered the 2008 crisis pretty much unscathed. If anything, we benefited from it, because the burst housing bubble brought home prices down enough that we were finally willing to jump into the market. But we only had to look beyond our own noses to see lots of people affected. We both lost coworkers to layoffs, we know people whose homes were foreclosed on, and plenty of people we know struggled to find new work. Others couldn’t sell homes they were eager to move out of, some had to go through short sales which destroyed their credit, and others spent all their home equity.

If we only look at our own tiny experience of the crisis, we’ll be exactly those people George Santayana was talking about when he said, “Those who cannot remember the past are condemned to repeat it.” Being condemned to repeat the past sounds like a pretty crappy way to spend our early retirement, so we’ll focus on remembering instead.

We took quite a few lessons from the financial crisis, even if we learned them second-hand, including:

• Borrowing against home equity is playing with fire
• If you can’t afford a traditional, fixed-rated mortgage with 20 percent down, you can’t afford that home
• All debt has the potential to steal your freedom
• You will never go wrong saving for a rainy day, especially if you keep some cushion in cash
• And…

Our Biggest Lesson: There Won’t Always Be Work

We had friends who got laid off during the crisis who spent years — YEARS — looking for work afterward. Qualified, eager, hard-working friends. Friends who hated collecting unemployment, who went after every open position with enthusiasm. And that still wasn’t good enough to get so much as an interview most of the time. There are a whole bunch of reasons for that:

1. Recession = Fewer Jobs

There were fewer jobs to go around in those prime years of the recession, 2008-2010. It became so commonplace for unemployed workers to get discouraged by the lack of prospects and quit looking that ordinary people who’d never taken a single economics class could suddenly tell you that unemployment rates were actually even higher than they looked because they didn’t account for discouraged workers.

2. Discrimination against the long-term unemployed is completely legal

There are some pretty scary stats out there (this piece in the Atlantic breaks it down especially well) showing how doomed the long-term unemployed are in looking for work, because employers simply disregard resumes for those who’ve been out of work for as little as six months. Adjusting for every other factor — age, education, experience, gender, race, household income — people who were out of work for six months or longer faced and still face an innumerably steeper climb to finding new work. As Matthew O’Brien writes in The Atlantic piece, “Circles don’t get more vicious than this. The people who need work the most can’t even get an interview, let alone a job. It’s a cycle that could end with the long-term unemployed becoming unemployable.” As he put it in a different Atlantic piece, “In other words, the first thing employers look at is how long you’ve been out of work, and that’s the only thing they look at if it’s been six months or longer.” And if all that isn’t terrifying enough, 60 Minutes reported that this type of discrimination is unregulated and therefore legal.

3. Ageism happens

The stats on long-term unemployment get even bleaker once you start talking about people over 50. As Ann Brenoff writes in a piece on HuffPo:

In reviewing results of the U.S. government’s 2014 Displaced Worker Survey, researchers found that someone 50 years or older is likely to be unemployed for 5.8 weeks longer than someone between the ages of 30 and 49, and 10.6 weeks longer than people between the ages of 20 and 29. The study also found that the odds of being re-employed decrease by 2.6 percent for each one-year increase in age.

And that’s not even the worst stuff in that article. To me, the worst is this line: “The study also found evidence that older workers find jobs that are lower in pay and less personally satisfying compared to their previous jobs.” Want more depressing proof? Read this New York Times article, which quotes Dr. Alicia H. Munnell, director of the Center for Retirement Research at Boston College, as saying that once a worker over 50 is out of work, “it’s horrible.”

Retirees Can’t Bank on Similar Work

For early retirees and those of us aspiring to become them, all of this should serve as a major reality check. Sure, many of us are planning not to need to work again, but a lot of us still say things when talking about our financial plans like, “If all else fails, I’ll just go back to work.”

Sadly, it’s unlikely that “just going back to work” will really be an option for most of us, especially after a relatively short period of unemployment, and especially especially if we’re over age 50 when we realize that we need to go back.

Add to all of that the realities of economic cycles. If the markets keep going up forever, most of us will be sitting pretty. Our net worths will keep climbing even as we spend our annual allotments. No problem there. But when the economy starts tanking in some future recession, our nest eggs will become worth less, and suddenly there’s a very real risk of depleting our assets too quickly, or even running out of money completely. This is the time when retirees are most likely to need to go back to work, and it’s exactly the moment when work will be hardest to come by.

Keeping the Possibility Alive

If you truly want to keep going back to work in the same industry or in a similar position on the table as a future option, do yourself a favor and do these things:

Keep a foot in the door — If you might want to go back in the future, consider semi-retirement instead of full retirement, and keep doing similar work in your industry on a part-time or consultant basis. While there could be future challenges in going from a self-employed position to a staff position, they are likely to be less onerous than trying to get an HR manager to call you back after a gap of many years.

Stay in touch with potential references — Your references will become more important than ever if a future hiring manager is considering taking a gamble on someone who’s been out of the game for a while. Make sure you keep in touch and share updates on relevant projects you’re doing, even if you’re doing them completely for fun.

Keep up on industry trends — It is getting ever-easier to become obsolete in any given job or industry. Don’t assume you’ll be able to pick it all back up in the future, but instead keep following industry news and trends, and stay current on the technology and tools you’d need to do the job again.

Check your ego — It simply may not be possible, no matter what, to go back to work at the same level you previously held. If going back to work is really your back-up plan, be prepared to swallow your pride and go back at a more junior, lower-paid level. Or to do work that’s less satisfying. Research shows that that’s the reality, especially for workers over 50.

Or, if you think that doing all of that sounds a lot like, you know, WORKING, then it might just be time to accept that going back to a previous occupation is not a realistic back-up plan. That doesn’t mean that work has to be off the table completely.

The Other Options for Work

Working to earn money doesn’t have to equal being a full-time employee of a company, but that model does require the least upfront work for the worker, and also provides the fastest payout — it’s why a lot of us on the FIRE path work for other people, even though The Millionaire Next Door insists that the fast track to wealth is starting our own businesses.

But let’s say full-time employment with a company is off the table. There are still plenty of other options: starting a small business, consulting for companies, making and selling things online, and any number of other things you might call side hustles while working full-time, but which might become primary hustles after FIRE.

The most important thing to remember with any of those options is: In a recession, everyone buys less of everything. So whatever it is you’re selling, expect to sell less of it. Also expect to build that business before the recession hits, which means: build it when you don’t actually need it. Because building it when no one’s buying will be ten times harder.

There’s always hourly work, too, but make sure you’re mentally prepared to be a Walmart cashier for minimum wage before you commit to that being your contingency plan. And even those jobs get harder to get when the economy starts slumping.

And if these other options for work also sound like more work than you want to do in retirement, then make sure you have a robust contingency plan that relies on no work at all — things like a large emergency fund even in FIRE, rental property you can liquidate, a retirement budget that’s significantly padded so that you can cut it back dramatically if you need to, and tax-deferred funds you leave alone so that you can tap them only if you absolutely must — these are great places to start.

Your Take

What’s your biggest lesson from the 2008 financial crisis? What’s your backup plan if your FIRE plan doesn’t go as you hope? Do you think our concerns about being able to go back to work are overblown, or are you looking at other options like we are? Let’s discuss in the comments!