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I’m not going to lie – being FI (financially independent) is a truly awesome feeling. To realize that you don’t need to work again if you don’t want to takes such a massive weight off of your shoulders.
But if you take it to the next level and throw in early retirement, you’re now solely depending on whatever you’ve put in place to sustain that financial independence.
That’s scary. No, I mean, that’s really scary.
If you continue to work, you don’t share that risk until you actually decide to leave your job.
But once you do, you better hope that your savings or income streams will cover you for the long haul. If not, you could have a real problem.
Right now though, this bull market’s been insanely strong. It seems like everyone’s on cloud nine like we should all be sipping expensive champagne at elite parties wearing fancy tuxes and ballgowns.
According to Grow By Acorns, from 2010-2019:
[…] the S&P 500 rose more than 370% during the current bull market run. Taking into account total returns, which assumes you reinvest dividends, those returns swelled to more than 490%.
[…] the S&P 500 rose almost 29% in 2019 for the 10th best year of returns in history for this index.
Of course, everyone’s thrilled to see that, but let’s think this through a little bit.
First of all, for those in the accumulation stage who are still working and saving, a strong market isn’t the best thing for your portfolio. If you’re not planning to leave your job for a while, you should be rooting for the market to be in the toilet.
Buying shares at a discounted price is a fantastic way for your portfolio to grow. When you’re getting ready to start withdrawing the money is when you want that market to boom.
But if you’re FI and either retired or close to it, this powerhouse of growth in the market can be really scary.
Because even though we have absolutely no idea when the next market crash is going to happen, psychologically we don’t believe it. We start to think that we do know. We reason that if the market’s been this strong, it’s got to be close to the top and ready to come crashing down very soon.
Couldn’t tell you. The market could have lost everything it gained over the past decade or more by the time this post comes out. Or it could keep growing strong for years to come. Absolutely no one knows when a bear market’s going to happen and if they try to convince you otherwise, be sure not to take their advice for your own finances.
Can the FI and RE folks survive a market crash?
Even though we don’t know when things are going to go south, it’s still Ok to wonder about it. Really, it’s the smart thing to do. You should always be preparing as best you can for any scenario, good or bad.
In fact, Tracy Alloway, the Executive Editor at Bloomberg recently threw out her own bit of speculation with this comment on Twitter…
One thing I’ve often wondered- does the financial independence/retire early movement (#FIREmovement) survive the eventual end of the current bull market? The idea of pouring all your money into $VTSAX and living off it for the rest of your life feels like such a bull market thing
— Tracy Alloway (@tracyalloway) January 10, 2020
That’s a fair question. First of all, if you don’t completely understand the intricacies of how most folks in the FIRE movement do their planning, it could seem like the only way you’d survive is if the market is always going up.
Plus, there are plenty of naysayers hoping the FIRE movement will die. The media loves that as well – instilling fear and doubt makes for better news, right? That can cause a lot of people (like possibly Tracy) to be curious if the end is near!
Fortunately, we know better. A big takeaway from the Trinity Study tells us that we can safely pull out 4% of our portfolio (adjusted for inflation) every year. It’s even been dubbed as the 4% rule by the personal finance community. The research shows that over a 30-year period, following this withdrawal strategy rigidly should prevent us from ever running out of money.
In many cases, you’d actually end up with more money in your portfolio than you started with. The study was based on historical returns and takes into consideration the ups and downs of the market – including the end of the bull markets like Tracy’s referring to.
So if you’re FI (financially independent) and you’re basing your retirement plans off of the 4% rule of thumb, the end of the bull market shouldn’t ruin you… though it may bang you up a little depending on when you retire and when it ends.
But not everyone relies solely on the 4% rule (including me). Generally, that helps get you in the ballpark to FI, but then you put other plans in place such as:
- The bucket strategy (Fritz does a great job discussing this in his post How to Build A Retirement Paycheck From Your Investments)
- Pulling out less than 4% of your portfolio every year
- Just being more flexible on your withdrawal amount depending on market conditions
- Having other income streams in place
And we can easily adapt and cut some costs if the market tanks. Then we have a duplex we own in Ohio throwing off some money that isn’t tied to the stock market. Finally, I do anticipate that we’ll bring in additional income through different outlets like this site and other projects.
Seems pretty solid to me! I shouldn’t have a care in the world or rarely even need to think about money, right?
What, me worry?
We’re now a little over a year in since I walked away from my career and things have been great (both financially and otherwise).
Now, that said, I do have some things that do weigh on my mind. I don’t know about others who have reached FI and pulled the trigger on early retirement, but I do think about money and the “what-ifs”… a lot!
- Do we really have enough money saved in our portfolio?
- What if the market crashes sooner than later? Could the sequence of returns risk ruin us?
- What if we have a major downturn and five years’ worth of expenses in our bond fund ladder and savings in our bucket strategy isn’t enough?
- What if stock market returns aren’t good enough over the next few decades or inflation starts climbing much faster? The Trinity Study and the 4% rule are based on historical data from the years 1926 to 1995. But things can change and that could throw our planning right out the window.
- Speaking of change, what if we decide to move back from Panama – a place where our costs are so much cheaper? We did base our spending as if we were living in the U.S., but can we truly afford to live there?
Am I worried because we just thought “yeah, we’re good” and quit my job?
Not at all. This has been years of learning and planning. Then on top of it, I’ve had three different financial planners give the thumbs up on our numbers and plans. Three!
So no, I’m certainly not concerned that we jumped into this without a sound plan in place.
But there’s no way to be 100% certain about this. Shit happens. Yeah, I said it. It does. We don’t have a pension, annuity, or anything like that in place. That means we don’t have any “guarantees” on our finances.
The entire foundation of our plan is that, based on “historical data”, our portfolio should sustain us for decades to come. Then we put some mitigation techniques in place (like I mentioned earlier) to help carry us in the case of some variance.
We should be fine, but there’s still a lot at stake. It’s not just me and Lisa enjoying the benefits of being retired – we have a nine-year-old daughter here we need to be concerned about.
So yeah, I do worry about the future. History tends to repeat itself but it’s not completely predictable either. It could all fall to @#$# at the drop of a hat.
I absolutely do feel we made the right move. We did some thorough planning and at some point, you gotta pull the trigger. Like I wrote in the article How to Get Up the Nerve to Retire for ESI Money, you can’t let “one more year” syndrome be what controls your future.
In the meantime, I’ll be rebalancing our portfolio a little more often. Once you know your desired asset allocation, rebalancing can ensure that you’re buying low and selling high.
For example, let’s say that you have a desired portfolio asset allocation of 75% stocks and 25% bonds. As stock prices go up, the values in your portfolio go up. That means that the percentage of stock allocation might move up to 80%.
Periodically (once or twice a year), you then go in and sell some stocks and buy more bonds to get the percentages back in line. It’s also important to do it in times when bonds start taking a bigger percentage of your portfolio as well – sell some bonds and buy more stocks to get the numbers back in check.
See how this forces you to buy low and sell high? With how crazy this bull market’s been, I’m going to do the rebalancing more often for the time being… maybe every couple of months?
Jim Collins discusses this a lot more in his post Stocks — Part XXIII: Selecting your asset allocation from his phenomenal Stock Series, which I recommend that everyone read.
And if you’re wondering how to see what your asset allocation is, I highly recommend Personal Capital. It’s free and lets you easily connect your investment accounts. With a single click, you can then see what your asset allocation is. Then you can make changes and see the updates on the site (or app). I love how simple it is!
Like it or not, none of us will ever have 100% control over your destiny – even with the blessings FI has given us. All I can do is enjoy today (I do!) and the real quality time my family and I are spending together while still always keeping an eye on the future. Then, we just adapt as needed.
If you’re already FI, do you still think about the possibility of things crumbling? If you’re not FI, does that idea make it more difficult to know when to pull the trigger and stop working?
Thanks for reading!!