Well boys and girls, like it or not, we’re soon to be in a recession – if we’re not there already.
The COVID-19/Coronavirus pandemic appears to be the black swan event that became the catalyst for the downfall of one heckuva long bull market.
To try to contain the virus and flatten the curve, many businesses were ordered to shut down temporarily. In many places, bars, wineries, breweries, and restaurants (sometimes with the exception of takeout or delivery) were forced to close their doors.
And those businesses that weren’t ordered to shut down aren’t getting enough traffic to justify staying open.
People don’t want to travel prompting the shutdown of hotel chains and airlines eliminating large percentages of their flights. And the cruise business is completely in the toilet.
Small businesses? Forget about it. There will be a lot of these companies that simply aren’t going to come out of this period in time.
Between all of this, businesses are forced to lay-off employees to try to stay afloat for as long as they can. How do you pay employees if you don’t have revenue coming in?
Each layer of this event has affected other layers. One by one, the world economy is starting to crumble in a domino effect.
As time goes on, public businesses will continue to report their earnings… most won’t be good. In fact, many will be downright horrible.
I think we’ll look back and see that the recession has already started. Things are bound to only get worse for a while, too.
A lot of lives are going to be affected. Families who thought they had steady jobs are now suddenly out of work. Mortgages and rent payments are going to be a huge burden on many.
I hope that you’re in a position where you’re not living paycheck to paycheck. I also hope that you’ve been able to build up your emergency savings. If there ever was a time where having that stash of cash in place would pay off, now’s probably that time.
Then there’s another area the recession is going to affect… the FIRE (financial independence / retire early) movement and early retirees.
The FIRE movement
My friend Joe from Retire by 40 says that when he started blogging in 2010, there were only three early retirement blogs. Over the past decade though, the number of FIRE bloggers has continued to grow considerably.
I jumped on the bandwagon and started Route to Retire in 2015. This was a couple of years after inspiration from Joe’s blog that showed me the path to FIRE wasn’t just some pipe dream. Even in the close-to five years that I’ve been blogging, I’ve seen hundreds of others starting their own site.
Like anyone in the community will tell you, financial independence (FI) is an admirable goal. Reaching FI gives you more freedom in your life than you may have ever thought possible. Having the flexibility to leave a job you may decide you don’t want to or can’t do anymore is huge.
Being able to try other interests and find new passions without worrying about a paycheck is liberating. And really, The Path Is Simple, but It’s Not Necessarily Easy.
Here’s the problem…
You’ve probably heard the saying that “everyone is a genius in a bull market.” For many, riding this bull market has been easy. Folks have seen their net worths grow in ways they never could have imagined.
Life’s been great – it’s like the Roaring Twenties all over again.
With all this economic prosperity and low unemployment, what could go wrong?!
Welcome to the recession
Oh, yeah… there’s this.
We don’t know yet if we’re already in a recession, but the signs are pointing to a yes. And of course, the media is excited to have even more to talk about:
- America Is Likely Already In A Recession—Even If Trump Won’t Admit It
- Trump Says We May Be Headed for a Recession: Are You Prepared?
- The global coronavirus recession is beginning (looks like they’re already trying to coin a name for it!)
Life has changed in an instant as a result of the economy tanking mostly due to the COVID-19/Coronavirus pandemic. In fact, it’s very possible the world may never be the same.
But for now, we need to focus on the here and now. A couple of great quotes from two of the most revered folks in the financial community:
“Never confuse genius with luck and a bull market.”
— John C Bogle from “Common Sense on Mutual Funds”
“Only when the tide goes out do you discover who’s been swimming naked.”
— Warren Buffet
The past is the past and the good and bad decisions we’ve made over the years are now starting to rise to the surface.
“You’ve made your bed, now lie in it.” Come on, Jim – are you just tossing in every quote you can think of?!!
We already know that many folks are ill-prepared for a time like this financially:
- Just 43% of Americans say they could come up with $2,000 for an emergency
- 40% of Americans don’t have $400 in the bank for emergency expenses: Federal Reserve
- 58% of Americans Have Less Than $1,000 in Savings, Survey Finds
It’s still early, but as more folks get laid off and paychecks stop showing up, shit’s about to get real. It’s gonna be one helluva mess and an economic stimulus package isn’t going to fix it. It’s only going to put the country into a bigger deficit.
Is there a better course of action? I don’t know the answer to that, but just know that regardless of what crutches are put in place, we’re in for a rough time. It’s going to get ugly.
The recession, the FIRE community, and early retirees
As far as the FIRE community and early retirees, my buddy Steve inspired this blog post with his post on Twitter recently:
He’s right (he’s a thinker like that). We can’t just preach about saving/earning more and the ability to retire early without being able to back it up. It’s time to see if the FIRE community has been making the right decisions along the way and can withstand these hard and uncertain times.
It’s easy to lecture about the right thing to do while everything’s going smoothly. The true test comes with being able to ride out the rough time of a recession as well.
Unfortunately, I have a feeling we’ll see several FIRE blogs start to fall off the radar. We’ll probably also lose a lot of followers in the community. That’s not a slam against anyone. It’s just a feeling that the pessimism that a recession tends to bring will make the goal of financial independence seem like a lost cause.
But there should still be a strong base of folks who can stay the course and remain strong during this time. If folks have practiced what they’ve preached, this should be a bump in the road on the path to FI (maybe even a big bump). It’s definitely something we need to keep an eye on but it’s not the end of the world.
It may also be the start of seeing many new faces and hearing new voices.
Think about it – this economic downturn is new to many younger folks. Going through good times in a bull market is all they might remember. This downturn presents a great opportunity for them to be putting money in the stock market to grow for many years. They’re in a great place to start themselves onto the road to financial independence.
This recession can also be a wake-up call for many people, regardless of age, to realize that they don’t want to be behind the eight-ball the next time around. The power of being financially sound can be the difference between not being able to afford your mortgage payment or just making slight changes to comfortably make it through the hard times.
It’s also my hope that anyone who’s already in early retirement has planned for this very scenario. A recession in early retirement, especially in the early years of leaving, has the potential to be devastating to their plan. I’ll talk about that more in a moment.
But I do wish the best for anyone in this position of early retirement. As someone in this exact scenario, I can feel the pain. Without a solid plan in place, the chance of failure goes up dramatically. But for those who have prepared beforehand, this shouldn’t be the catalyst for most early retirees to need to go find a job.
Will this early retiree need to go back to work?
In a way, I was very lucky. As I got closer to early retirement, over the past few years, I started strategically shifting our funds. To pull off FIRE successfully, I had major concerns about the sequence of returns risk. If the stock market crashed right after I left my job, we’d be in real trouble pulling from our stock portfolio.
If you’re unfamiliar with the sequence of returns risk, here are a couple of mind-blowing posts:
- The Ultimate Guide to Safe Withdrawal Rates – Part 14: Sequence of Return Risk by Karsten (aka Big Ern)
- Understanding Sequence Of Return Risk – Safe Withdrawal Rates, Bear Market Crashes, And Bad Decades by Michael Kitces
To help battle that issue, I learned from Fritz at The Retirement Manifesto about the idea of building a retirement paycheck. That changed everything for me and I ended up growing a large “bucket 1” for early retirement. In my case, that consisted of 1 year of living expenses in cash (checking and online savings account) and 5 years in a bond fund ladder.
That turned out to be a very smart move.
We’re now in a position that we have enough money outside of the stock market to cover us for at least six years before we’d have to sell any equities.
Can the recession last more than six years? Absolutely.
Will the recession last more than six years? I have no idea.
In the meantime, six years is one helluva long time. So many things could change between now and then:
- The recession could be brief – things could turn around by the end of the year.
- The recession could crawl on for a decade… or more!
- I could be bringing in a little more or a lot of income from other things I’m working on… like this blog!
- We could end up selling our rental property (a duplex). I don’t plan to, but if I had the right offer, I’d absolutely entertain the idea.
- It’s possible, we could be in a down real estate market and be enticed to buy another rental property.
- Maybe Panama could be something of the past. The plan was to take it year-by-year and we’re leaning toward staying another year. But who knows how long we’ll be here?
These are just a handful of things that can happen. I can’t predict the future, but we can adapt as needed.
I still can’t see myself ever needing to go back to a 9-5 job – it just seems like there are too many opportunities out there to make money. But as long as I’m healthy, there’s always the J-O-B option to fall back on.
The bull market that ran for over a decade is over. How long this downturn will last is anyone’s guess.
I love the FIRE community and hope my fellow bloggers and podcasters can hang in there. But I have a feeling we’ll lose some of them. However, I do think we’ll gain some new friends in the community as well.
More concerning though are the actual early retirees who aren’t currently working. I hope that many of those who have actually pulled the ripcord had prepared for the worst beforehand. If they have, they might need to adapt along the way.
If they haven’t, it’s very possible that the job market could be even more crowded as some early retirees head back to work.
Are you prepared for the recession? Will the FIRE movement die off because of it?
Thanks for reading!!