Barron's - July 13, 2020
For people pursuing financial independence or planning to retire early, the coronavirus pandemic has offered perhaps the ultimate stress test. Many FIRE adherents have watched their income take a big hit. Many have seen their investment portfolios drop sharply and remain volatile even after rebounding. Many have endured both.
Now, then, would be a good time for those pursuing FIRE strategies to evaluate their plans by asking themselves four crucial questions, says Michelle Underwood Gass, a certified financial planner, who works closely with FIRE clients.
Do I still want to retire early?
The crisis has created an opportunity for many investors to slow down and reflect on their goals and priorities. As they spend more time at home, they may even be getting a taste of the life they imagined enjoying in retirement—reaffirming plans for some but possibly causing others to rethink.
One of Gass' clients, a man in his early 30s with enough savings to retire, took a voluntary three-month furlough from his high-paying job in the tech industry, and he's found that his financial plan works but full retirement is less exciting than he expected.
The furlough "gave him a chance to test the waters and see if this is something he really wants to do before he pulls the plug and makes it permanent," she says. "He's realizing that he doesn't want to do that for the next 50 years."
Whether or not you can give retirement a trial run like Gass' client, the pandemic can help clarify the viability of your financial plan or it may help provide perspective on life and whether leaving the regular workforce early is the right move.
Are living costs manageable?
Many FIRE followers are used to cutting way back on discretionary spending, but some may not appreciate the cost of necessary expenses until their income is curtailed. Basic necessities such as rent, food, utilities, and insurance often amount to a sizable percentage of earnings even without taking an income hit.
The pandemic has been a wake-up call for many people, particularly for those who've lost a job or watched as friends and family have lost theirs. "It gives them a trial ride and the chance to consider, 'Do I need to make bigger adjustments to my fixed costs?' " Gass says.
Depending on your essential expenses and personal circumstances, cutting fixed costs might mean moving to a smaller house to reduce your mortgage payment or shopping around for lower-cost insurance policies.
Is my income strategy sustainable?
Volatile markets and an economic downturn offer a good opportunity to reconsider your withdrawal plan, Gass says. "The 4% rule" that says how much a person can safely afford to withdraw every year of retirement has long been considered conventional wisdom, but some now say it may be too aggressive to weather the current and future downturns safely. "We recommend a withdrawal rate closer to 3% to withstand the inevitable ebbs and flows of the market," she says.
The long bull market led some FIRE adherents to play down the importance of maintaining substantial cash savings. But the pandemic underscores the importance of having a deep emergency fund. At a minimum, investors should have enough to cover six to nine months of expenses—and preferably more for an early retiree, Gass says. Those who have enough cash to cover them for an extended period are less likely to worry about riding out a potential long-lasting downturn. If your cash cushion isn’t there yet, now is a good time to focus on building that.
Do I need to adjust my timeline?
If the economic impact of the pandemic has thrown off your financial course, it may be time to revisit whether your FIRE timeline is feasible. To ensure you're ready for early retirement, Gass says investors should keep their fixed costs low, have the security of a sizeable emergency fund, and only put long-term investable savings toward equity investments to avoid needing to sell at an inopportune time.
If those pieces aren't in place, consider amending your plan. "It may be prudent to re-adjust or delay planned financial freedom by a few years," she says, depending on how soon you aim to leave your day job.
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