“My FIRE dreams have been destroyed!” lamented an email I received recently. “I was all set to retire this year, but then the stock market started dropping and now I don’t know what to do!”
If this story sounds familiar, you’re not alone.
To many people (including yours truly) looking forward to the long-promised “Roaring 20’s” that surely awaited us after the misery of the pandemic, 2022 has been quite a stinker of a year. War, runaway inflation, and a stock market crash that has surprised everybody by its speed and ferocity. Stop this decade, I want to get off!
Hmm, that sounds a lot dirtier when I say it out loud.
Ahem. ANYHOO. The point is, we all know that stock market drops are a normal part of the investing experience, but if it happens right when you’re about to hand in your notice, it feels like you’re about to cross the finish line and then BOOM, they move it another 100m away from you. Super frustrating.
So what advice do we have for our readers who planned to retire right at a big scary market downturn? Well, here we go…
Yield Shield & Cash Cushion
We have friends who, after watching our admittedly awesome lives, thought “Hey! I want a piece of that!” and decided to go after FIRE. A common mistake, however, is that they hyper-focus on their FI target number for their portfolio, and forget about the Yield Shield and Cash Cushion stuff.
I get that it’s really tempting to pull the trigger the second you cross over that FI threshold, and you might be able to get away with a “pure” retirement target of 25x your annual spending if you retire during a bull market. But as we all know, nobody can predict what kind of stock market you get the year you retire.
We’re probably one of the most conservative, pessimistic voices in the FIRE space, mostly because FIRECracker’s has a limitless imagination for things that can go wrong, but boy are we glad we put all those extra backup plans in place when 2020 rolled around.
The pandemic (and my dad’s cancer diagnosis) royally messed up our retirement plans in February 2020 when we were forced to return back home. In one fell swoop, the entire travel industry shut down, robbing us of using travel to control our expenses. Then the stock market started falling, eventually losing nearly a third of its value, so everything in our portfolio was sitting at a big, scary loss.
The Yield Shield & the Cash Cushion was what ended up saving our butts. Because we had arranged our portfolio to pay us a yield in the form of dividends and interest that, when combined with our cash cushion, was sufficient to cover out living expenses, we were able to sit confidently on the sidelines as everyone panic-sold. Not only that, when the stock market eventually rebounded, our portfolio ended up even higher than when we started.
Remember, the full definition of the 4% rule states that you can retire with a 95% chance of not outliving your money. That means there’s still a small (5%) chance that your retirement may fail. The Yield Shield and the Cash Cushion is how you take that 95% odds of success and turn it into 100%. You can’t fail if you never sell at a loss.
And while building an additional Cash Cushion does require you to work a bit longer than the pure 4% rule would suggest, it really shouldn’t take that much longer. When we retired, our $1,000,000 Yield Shield portfolio was yielding about 3.5%, or $35k. Because our living expenses was $40k, it only takes $5k to cover the gap between our income and our expenses for a year, so building a 3 year Cash Cushion only cost $15k, which for us meant working and saving for another few months after we hit FI.
Was working that extra few months worth it for the peace of mind that we wouldn’t be forced to beg for our jobs back by bad luck or timing? Absolutely, and that’s we continue to recommend that strategy to everyone pursuing FIRE.
Fortunately, with the pandemic mostly behind us, travel has resumed to most of the world, and with it all those delicious, delicious geographic arbitrage opportunities have returned.
Remember, just because you work in a high cost-of-living city like Los Angeles or London, that doesn’t mean you have to retire there. Moving to a lower cost city can drastically cut your costs and make your retirement safer. And if you really want to go nuts, going fully nomadic means you can take advantage of living in lower-cost countries as well.
I get that going fully nomadic isn’t for everyone, but if you can, it’s awesome. When we were living in SE Asia, our cost of living dropped so dramatically that it fell below the yield on our portfolio, so we were actually cash-flow positive during our time there. That’s right, our portfolio was actually paying us to travel.
A close friend and fellow Chautauquan is doing this right now, and she’s telling us that it’s every bit as magical as when we did it. She lived and worked in Toronto, just like us, and just like us thought that life was expensive because Toronto is so pricey. But when she pulled the plug and started travelling, her costs dropped so much that even though her portfolio value got hammered by the bear market, she didn’t even break a sweat. Last I heard, she was travelling in Montenegro, and her rent dropped from $1500 all the way down to just $400 a month!
Ah, geographic arbitrage. It fixes so many things.
And finally, for those of you who maybe don’t hate their jobs as intensely as FIRECracker did when she handed in her notice, partial FIRE may be a good option.
Labour markets remain tight and many companies are scared of people leaving and not being able to find a replacement. That gives you an opportunity to negotiate yourself into a part-time or fully remote position.
Obviously, not every job or industry is open to this. Tech jobs, for example, would normally be very compatible with this, but that sector is going through a rough patch right now as companies realized they hired too quickly during the pandemic. But on the other hand, sectors that normally don’t do this, like in the medical field, are both much more open to remote work after the pandemic.
Stepping back your hours, going to part-time, or making your job fully remote can be a nice intermediate step between the 9-to-5 and full retirement. You can start travelling, you get to keep earning money while waiting for your portfolio to recover, and if you later find out you miss working for whatever reason it’s trivially easy to go back to it since you never really left to begin with.
Asking your boss to go to part-time might seem scary, but in my experience if you’re good at your job and you have a good relationship with your boss, they tend to want to keep you around in some capacity rather than lose you completely.
The economy is in a very weird state right now. On one hand, you have jobs being created left and right, while at the same time the stock market remains in deeply negative territory YTD. As a result, it might seem like a bad time to quit your job.
But as I’ve said before, if you have the time, the money, and most importantly the health to retire, travel, and generally live your life the way you want, you should do it because you don’t know when one of those three things might go away.
That being said, by making a few tweaks to your investments and your early retirement plans like I’ve just mentioned, you can still make your early retirement dreams come true even in such uncertain economy times.
What about you? Has the stock market volatility derailed your early retirement plans? Let’s hear it in the comments below!
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