If you listen to some people I’m a fool. My future is doomed. I believed a fairytale.
You see, I worked for and achieved FIRE, financial independence retire early. Already viewed as a pipe dream by some, the recent stock market performance (end of 2018 downturn) has made people who said FIRE was unrealistic do a victory dance. One former proponent of this life choice, who goes by the name Financial Samurai, has had a conniption and now believes FIRE is dangerous to play with.
This so called Samurai is calling for a recession which will certainly happen sometime or another and goes as far as renaming FIRE during a recession as “Foolish Idealist Returns to Employer.” It didn’t take much of a downturn for people like this to become irrational. People who had a plan that succeeded over the last 10 years suddenly discover that investments can lose money too. This isn’t a surprise to anyone who has been through downturns before but, if all you knew were gains, it can be quite shocking.
Savings and investments are meant to grow over time and shouldn’t be needed until the day that you are no longer working, i.e.: retirement. But here’s the key: your savings aren’t needed in full on the day you stop working. The money you spent a lifetime accumulating is meant to last, not years, but decades, and in that time the market, can, and will, recover.
For those of you still working and getting worried about the recent large (and it is large but by no means the largest) declines in stocks, I have some questions for you.
Are you retiring tomorrow? Are you retiring next year? Are you retiring in five years?
I get that it’s painful to watch your balances decline but you have time to make it up. In 2008 when the DOW was down nearly 50% I continued buying. My personal portfolio was down 16% — that hurt. But what happened in 2009? I gained 24% — that felt good. Today, my personal net worth is down 4.4% which hurts more since I’m dealing with bigger numbers ten years since the last downturn.
We may see further declines in 2019, or it might be flat, or we might see the market zoom higher. Even if it’s flat to down next year, there’s nothing to worry about if you’re still working and still investing. In fact, you’re setting yourself up for success by sticking with your plan and buying low.
But what if you are retired or about to be? This is my situation exactly. I retired at the age of 48 at what turned out to be the height of the stock market. I have lost a whopping amount of money (on paper of course since I haven’t actually sold anything). Is my retirement ruined? Do I have to go back to work?
Of course the answer to both of those questions is no. Why? Because I had a plan that took into account the possibility of a down market, even a sharply lower market. I did this with four different contingencies.
First is that my wife and I planned, what I call, a tiered retirement. I retired, she did not. We still have her income. This was a conscious choice that fit our lifestyle and our vision of the life we wanted to live. Had we intended on retiring together it would have meant a few more years of work for both of us.
Second, I made sure we had a one to three year cushion of cash to use if the markets dropped. This way we didn’t have to sell securities that had lost value.
Third, I built up a bond position that generates income every month which I then reinvest in stocks and/or bonds buying more shares which generates more income.
And the fourth and final piece is that, if necessary, we can spend less. We can cook more at home, give up that gym membership, not go on that extravagant vacation, and many other options.
Because we prepared for the worst we have not panicked and we’re not losing sleep. Other than item one on my list above, we have not had to implement any contingency plans. We haven’t had to dip into our cash reserve, we haven’t had to sell any bonds, and we haven’t had to adjust our lifestyle.
Our FIRE has not been extinguished and it will take a lot more water to douse it.