Recession, Coronavirus and the Future of FIRE

I hope you’re reading this from a safely holed-up location, well away from humans outside your household, and that you’re healthy and well-stocked to stay home. The coronavirus pandemic is a scary thing, one that is pushing a lot of people to the brink of financial crisis in what feels like the blink of an eye, as jobs and income evaporate overnight. We’ve had to cancel several trips and quit skiing, but we’re healthy and well-insulated against the financial side of this crisis, so feel about as lucky as we could possibly be right now. We wish more people had access to this level of financial security so we could all focus on one crisis at a time, not two simultaneously.

For years while writing this blog, I’ve often felt like a wet blanket, advising readers to save more than they think they need to, or to build in more contingencies and back-up plans before leaving employment. In virtually every instance when someone has asked me to look at their financial plan for early retirement, I’ve given the same four bits of advice:

• Assume a higher rate of inflation
• Assume lower real (inflation-adjusted) market returns
• Assume higher costs for health care
• Assume you’ll get less in your Social Security check

My advice has virtually always implied that people should keep working longer, which is not fun advice to give. When times are good, it’s hard to preach a more financially conservative approach.

Of course, now things are changing, and quickly. Markets tanking have that effect on people. Media outlets are calling every day to ask if it’s the end of the FIRE movement. People are talking more about how important it is to have a multi-year cash cushion. Suddenly the “leaner” approaches to FIRE don’t feel so practical.

For anyone who’s been paying attention, the biggest lesson that 2008 taught us is that relying on your job for financial security is dangerous. Many of us who’ve pursued or achieved early retirement were spurred directly by the Great Recession, and the realization that there truly is no safety net anymore. The idea that this recession, with the massive job losses we’re already seeing and the many more to come, will make anyone want to be more reliant on work is simply foolish. Yes, a work-optional life will be harder to achieve for a while. Your journey may have just lengthened considerably. But this financial crisis will not be the end of the FIRE movement.

What I do hope is that this crisis spurs the movement to be better: to get rid of the bad ideas we’ve allowed to propagate and the voices who’ve been in it for the wrong reasons. I wrote about my hopes for the future of the movement yesterday for MarketWatch, and you can read the whole thing here.

Everyone is a brilliant investor in a bull market, and so the last decade has allowed quite a few authors, bloggers, and podcasters to gain footholds as respected voices in the FIRE movement, whether or not their ideas were actually sound. The one positive effect of the recession will be to illuminate who has been giving out good advice, and who was just in it to cash in on a trend.

The fundamental principle of FIRE is still true: If you spend less than you earn and invest the difference, eventually you will have saved enough that you can live off your investments forever. What was never true, and what is much more obviously untrue now, is that you can rush that process and cut corners, and still end up with an entirely secure plan.

— Me, writing for MarketWatch, 3/24/20

Chautauqua Update:

Because of the pandemic and the global travel restrictions resulting from it, the 2020 Ecuador Chautauquas are canceled. We’re hopeful to bring them back in 2021, and I’ll share more info here when I have it. I’m sad to miss hanging out with a bunch of you, and to miss going back to the beautiful and welcoming country, but it’s obviously the right thing to do. It’s so critical that we all stay home right now and avoid traveling for several months at a minimum in order to protect the public health. #StayTheFHome

The Future of FIRE and the True Meaning of Financial Independence

Mark has been saying for days that I should write a post called “I told you so.” And while I haven’t titled this post that because I’m not interested in gloating, I do hope that this moment is an inflection point for the community to recognize that not all ideas are equally good, even if the fundamental principles of achieving a work-optional life remain sound. There’s been a lot of advice floating around for years that ultimately encourages people to cut corners and undersave, and this is our moment to reject those ideas once and for all. Because as hard as it might be to imagine right now, times will be good again one day. And when they are, too many people will forget all the hard lessons we learned during the pandemic and recession.

A few especially relevant posts you might find helpful:

• Our Biggest Lesson from the Financial Crisis // Don’t Bank on Going Back to Work
• Protect Your Early Retirement From Sequence of Returns Risk
• The Case for Conservative Early Retirement Investment Projections
• The 4% Rule Is Not Your Friend
• You Might Be Underbudgeting for Early Retirement
• Consider a Side Hustle Year to Begin Early Retirement
• The Fundamental Problem with the 4% Rule for Early Retirement Isn’t the 4% Rule
• Rethinking Work in Early Retirement // Contingencies, Sequence Risk and Fail Safes
• Building Climate Change Into Your Early Retirement Plans
• When the Crash Comes // Recession-Proofing Our Retirement Plans
• Minimizing Early Withdrawals in Early Retirement // Hang On to As Much As You Can for Later

I’ve long worried about people retiring with any number of high-risk elements to their plan: less than a million dollars saved, no contingencies or backup plans, a rock-bottom budget that has no wiggle room to cut spending when conditions get tough (like right now), retiring before they actually hit their goal number, using a “safe” withdrawal rate of 4% or more, assuming historical average or better returns in projections, not maintaining two to three years of expenses in cash savings, no budget for real health insurance (as opposed to health care sharing ministry “coverage,” which is not real health insurance), and on and on.

I feel for everyone who’s now in a tough spot after being led down the primrose path by someone spouting overly risky or just straight-up bad advice. I truly hope that most of the people reading this still have time to course correct your plan before making any irreversible decisions.

The reporters who’ve called recently have all been surprised to find me feeling pretty calm about the markets’ wild ride (though far less calm about the pandemic, given my immunocompromised status). Most of my friends in the early retirement community are similarly calm. But that calm is borne of having built extra cautious financial plans that anticipate events such as this one, including holding a large cash cushion (3+ years of expenses, in our case). Of spending years overthinking every aspect of our plan. Of learning every aspect of sequence of returns risk (no sequence risk if you don’t sell shares, so all the more reason to keep padding in your budget). The people I know with the riskier plans have been mostly silent online. I hope they’re okay. But I also hope this crisis really drives home the most important lesson, and one we undervalue far too often:

Peace of mind is worth a lot. If saving a bit more gives you that peace of mind, it’s absolutely worth it, even if it takes longer to get there.

Millions of people in the U.S. and perhaps billions of people around the world are currently panicked, worrying about how secure their paycheck is and how they’ll keep a roof over their head. Not worrying about that, and being able to focus entirely on our health and the health of our friends and family, is maybe the biggest privilege I’ve ever experienced, and that’s what FIRE should truly be all about. We often talk a big game about how financial independence frees you from worrying about money, but that means we need to listen closely right now. If you’re panicked about money, first, I am sending you a big virtual (non-contact, socially distanced) hug. (Check out this post to help.) But second, listen to that feeling, because it is there with tough love but a crucial lesson: if you’re panicked, it means you’re not really financially independent yet, because you haven’t yet secured your peace of mind.

Financial independence is not just a number, because numbers are always in flux. It’s a state of mind you can’t achieve by cutting corners.

There’s Good News Here, Too

The good news, especially for those still working, is that you absolutely can achieve it. Use this opportunity, especially if you have more free time at home, to look at your plans more closely. Find and root out any overly optimistic assumptions. Make sure you have realistic backup plans that don’t rely on going back to work when stocks tank or selling your home when prices are in freefall. Make a backup backup plan. If you own my book, go back through all the checklists and make sure your plan is totally solid. Know what you’d do if stocks dropped more than 30 percent right after you retired (which is not far-fetched – it’s happening to people in the community right now).

This recession won’t kill the FIRE movement — and your specific plan — unless we refuse to adapt and learn its lessons. But if we face it directly and listen to what it has to teach us, it will make us stronger and better for it.

Call to Action for All of Us

Already, the recession is showing us how interconnected and interdependent we all are. When one part of the economy – which is people, of course – suffers, that suffering spreads to the rest of us. The idea that we can let people die without harming the economy is foolish, and of course people are far more important than how much shares are worth right now.

The need out there is already massive, and there’s tons you can do to help, whether you’re financially independent or not. If you already have a donor advised fund (DAF), this is a good time to consider using more of it than you might otherwise use all at once. We’re drawing ours down big time this year because there are so many people who need help.

Here are some things you can do to help, regardless of what resources you have available:

• Donate as much as you can to charity, especially to causes focused on hunger, poverty and homelessness
• Look around your home to see if you have any N95 masks, and donate them to your local health care workers
• Buy gift cards online from local small businesses to help them stay afloat while closed
• Offer to place Instacart orders for less tech savvy neighbors who can’t shop themselves
• Offer to shop for friends and neighbors who can’t go out because they are especially vulnerable
• If you don’t have small children, offer virtual babysitting or teaching via Skype to friends trying to work with young kids at home
• Create an email list or Facebook group of neighbors so people can speak up if they need something or have extras to share
• Counter misinformation on Facebook especially (a known hotbed for misinformation, and especially a problem in the info Boomers see, according to research) by sharing factual info from reputable sources
• Share resumes and work samples with your network for friends and family who are already out of work

Life Is the Most Important Thing

As tough as times like these are, they’re a reminder of what’s truly most important. We saved more so that we could enjoy an early retirement full of travel and time with far-flung family and friends, so that we wouldn’t have to shelter in place. And yet here we are, sheltering in place. We could feel bummed about that, or we can choose to focus on how fortunate we are to be healthy so far and to be together. We’re using this moment, scary and frustrating as it is, to be grateful, and to reach out to those far-flung family and friends virtually, a few every day. Just sending out little well wishes and checking in. Keeping those human connections alive. Because life, love and friendships are so much more important than money. Even if you’re feeling powerless financially right now, you still have power to reach out to others and to be a spark of joy for them in a dark time. Let’s create as many of those sparks as we can, igniting an entirely different kind of fire.