Can You Still FIRE During a Recession?
For a while, I was interested in the financial independence movement, often called FIRE (Financial independence, early retirement). Probably since 2004, when I found an old copy of Vicky Robin and Joe Dominguez’s book Your Money or Your Life in the public library. As I have written many times before, YMOYL was the book that inspired me to keep track of every penny I made, spent and saved up – a habit I have kept for over fifteen years.
A couple of years ago, I seriously thought about early retirement. My freelance income has grown year after year, and I recently moved to a cheap city in the Midwest. Why not see how much money I can save, what kind of investment portfolio can I build, and how quickly can I grow my net worth?
This year I learned how quickly my investment portfolio can shrink. I know that stock losses don’t count until you sell, and that the market is likely to recover at some point, but this made me ask myself if I need to change any aspect of my financial strategy in order to create and maintain financial independence during a bear market and possibly a recession.
So far, the only real question I have in my head is whether I should focus on increasing my cash reserve beyond my current six-month emergency fund, or leave my emergency fund as it is and invest more of my future income in investments. (Suggestions are welcome.)
However, my basic strategy for financial independence has not changed. In many ways, it has not changed since 2004. Here’s what I practice and recommend:
Focus on FI, not RE
For me, the financial independence aspect of FIRE has always been more attractive than the aspect of early retirement. I don’t think I’m the kind of person who will ever stop writing, for example, and I would like to think that I will write most of it for money. On the other hand, financial independence would allow me to live for longer periods of time without new income (for you grammar scholars, my income stream would become constant, not continuous ) and would give me the freedom to engage in larger-scale activities. projects.
This puts my FIRE spirit in line with both Vicky Robin, whom I had the privilege of interviewing for The Billfold in 2018, and Tanya Hester, author of The Job of Choice: Early Retirement Without a Penny . Both Robin and Hester want FIRE applicants to focus more on the independence aspect than the retirement aspect, and understand that financial independence as a concept is different from “having enough money in the bank so you never have to work a day in own life”. … “
As Hester recently wrote for MarketWatch :
Basically, those in FIRE are striving for one thing: stop relying on work. While many people get hung up on whether early retirees are making any income, it doesn’t make sense. The goal is not to demand money from work, never to do a single thing that brings money to a person again. I called my book Job by Choice because it clarifies this point more clearly: it is about making work something you can do, not something you have to do. The idea that a recession with massive layoffs and layoffs, many of which we are already seeing, will make people rely more on their jobs is just silly.
If anything, we should expect to see more people interested in ensuring their financial security on an ongoing basis, especially workers who are too young to be hit by the Great Recession of 2008-2009, an event that has certainly pushed many of us. who ‘you are already retired or aspiring to FIRE to take your financial future into your own hands.
Or, as Vicki Robin said on the Lifehacker The Upgrade podcast:
The part that was meaningful to Joe is extremely important to me: the question of what is freedom for? […] You’ve reached a level of freedom where you really need to create meaning for four or five decades without someone else structuring the agenda.
You don’t have to retire early to create a life where you define your own agenda. You just need sufficient financial security to free yourself from the constant hustle and bustle of money.
Continue the two-step path to financial security
This means that the real question is: can you create and / or maintain true financial security during a recession? I would like to think so. It will be more difficult (and may take a little longer) if you begin your journey to financial independence during a recession, instead of entering a recession with an existing investment portfolio and cash reserve.
But I remember what I was doing in 2004 when I was working as a telemarketer; I remember what I was doing in 2008 when I was working as an assistant manager; and I remember doing in 2019 when I had my first six-figure year as a freelancer. Despite my earnings varying greatly, my strategies for financial independence were identical: Track every penny I make, track every penny I spend, and see how much money I can save.
And yes, there was a period in 2012 when I invested a lot of money in a business that didn’t go anywhere and ended up in debt. But I never stopped tracking, which meant that when it was time to get out of debt and start saving again, I was ready.
So, this is my advice if you are worried about whether you might be FIRING during a recession. Continue to follow the two-step path to financial independence:
- Keep track of your capital
- Look for ways to increase your net worth
For some of us, this will mean finding ways to increase our income. Others may want to focus on reducing our costs. You can buy a house, sell a house, sell a second car, or move to a cheaper residential area. You might even want to invest more money while the market is down, hoping to reap the rewards when the market rises again – although I wouldn’t recommend doing this unless you already have a solid reserve fund. (Remember, because stock losses don’t count until you sell them, you need to have enough cash reserves to support yourself during a recession without selling your stock.)
There are many options – and even if you don’t build your net worth to the point where you can retire early, you will be much closer to the financial security that so many of us are looking for.
Don’t retire too early
It’s time to quote Tanya Hester again. Esther successfully retired with her husband at the ages of 38 and 41 respectively and just wrote a blog post about the future of FIRE :
I have long worried about retirees with any number of high-risk items in their plan: less than a million dollars saved, no contingencies or backup plans, minimal budget with no wiggle room to cut costs when conditions get tough … (as of now), retirement before they actually reach their target, using a “safe” withdrawal rate of 4% or more, assuming a historical average or better rate of return in projections, not supporting two to three year spending in the form money savings, no budget for real health insurance (as opposed to the “coverage” of the ministry for health sharing, which is not real health insurance), and so on.
I sympathize with everyone who is now in a difficult position after someone is leading the path of the primrose unnecessarily risky or just downright bad advice. I sincerely hope that most people reading this still have time to correct their plan before making any irreversible decisions.
There are many FIRE calculators and FIRE bloggers out there who assume it’s all about simple math; Once you have a certain net worth and a certain type of investment portfolio, you can live off a 4% withdrawal rate for the rest of your life.
In fact, the math may not be that simple, and this is another reason why I recommend focusing on half of FIRE’s financial independence rather than half of early retirement – and that financial independence becomes even more important during a recession when some of us may find ourselves temporarily “retired,” whether we like it or not.
Remember you are in control of actions, not results.
Here’s my last piece of advice: remember that you are only responsible for your own actions. You have no control over whether you get fired or the market crashes, for example, but you can control whether you update your resume this afternoon or avoid unnecessary impulse buying.
You have no control over whether you keep your emergency fund intact for the next 30 years, or whether you spend this entire year doing something really unexpected, but you can control whether you top up your emergency fund every month or not. you create repayment funds for irregular but predictable expenses, such as car repairs. (Yes, I’ll be that pesky personal finance professional reminding you that even $ 10 matters.)
I know there are months when you can’t save anything, and some months you end up in debt because the math just doesn’t work. Then you’re back to the two steps I mentioned earlier: find out your net worth and look for ways to increase your net worth. Keep working on the plan and focus on the parts of the plan that you can control.
You may or may not end up on FIRE during a recession, but since you have no control over it, you can continue to work towards financial independence.
Anyway, that’s what I’m going to do.