Coronavirus has grounded mankind. Quite literally.
We’re all stuck at home amidst global lockdowns – working from home, shopping from home and even meeting our friends and family virtually from home. Businesses have ground to a halt. The tourism industry is in shambles. And the global economy is teetering at the edge of a recession or a depression, the jury is still out. Our politicians are putting their best ‘foot’ forward in the fight against COVID-19. They are hoping against hope that the economy would just go into a state of hibernation, only to get up once all the mayhem is over a la Sleeping Beauty. But we all know that that is perhaps fools’ hope. Coronavirus is changing our reality irretrievably and while it’s at it, it’s also changing the FIRE Movement.
Is the FIRE Formula Still Valid?
COVID-19 has impacted everyone in the FIRE community very similarly, but at the same time very differently. Ofcourse everyone’s net-worths have fallen irrespective of whether they were ‘firing’ or ‘fired’. I have heard of portfolio declines of as much as $1 million. Yes that is one followed by six zeroes! We have all seen our retirement timeframes move out by months or perhaps years. Those who had only just retired are probably the worst hit. Their investments have fallen well below the ‘25x Expenses’ mark, necessitating going back into the workforce.
Quick FIRE refresher: It is a commonly held belief in the FIRE world that you can retire when you have raked up a total net-worth which is 25 times that of your annual expenses. This assumes that the corpus that you put together should be able to last you about 25 years if it did not grow at all and you withdrew the same annual expenses year after year. In reality however, this nest egg of 25x will grow at a rate generally expected to be 4%. That would basically take care of your annual expenses, so you wouldn’t really have to dig into your savings.
How the FIRE Community is Dealing With the Heat
But the mental impact of the pandemic has been quite varied within the community. Many who have been spooked, their portfolios are in deep red. They watch as a lot of the wealth that they had worked hard to create just disappears into thin air. Quite a few of them have been left wondering if they should cash out right now and take what they can save. On the other hand, there are other investors who are looking at this as a shopaholic would look at a ‘Sale’. An opportunity to buy stock at a discount.
But irrespective of what the current situation is doing to individuals, there are a few changes that it has brought to the collective.
- Highly equity focused portfolios – The FIRE movement was born and raised in the last 11 years. It has been one of the longest wealth-creation runs in history. That means that most of us have not really seen any downturns during our investing lives. That irrational exuberance has led some of us into taking a very aggressive stance when it comes to our portfolio mix. It is a commonly accepted rule of thumb that a portfolio should not completely comprise of equity. That a healthy contribution should be from defensive assets. However, many have ignored that advice and hold as much as 90% to 100% in equity. This Coronavirus downturn should be a strong lesson against putting all your eggs in one basket.
- 4% withdrawal rate may not be enough – Or another way of saying it is that the Rule of ‘25x Expenses’ should perhaps be closer to 30x. The reason for that, is that no one really knows when the next downturn is coming. So if in the worst-case scenario, you end up retiring just before a downturn strikes, you might end up with a retirement corpus that suddenly shrinks from the magical number of 25x to something significantly lower. That could lead to a lot of worry and heartache, like it has for a lot of our FIRE brethren right now. However, if you start out with a higher number, any sudden falls will not have you scrambling, atleast not initially.
- Retiring in low cost countries – On the fringes of the FIRE movement is another movement called Lean FIRE. The tenets of Lean FIRE mandate that you live a lean life and minimize your expenses at the cost of comfort. This is so that you can achieve FIRE earlier than you otherwise would. There is nothing wrong with that guidance. On the contrary, cost reduction is a key premise of the overall FIRE movement. However, a lot of ‘fired’ retirees were moving to lower cost countries in order to minimize costs. With the Coronavirus outbreak, a lot of them have had to move back to their home countries. Due to the travel restrictions, fear of sub-par healthcare facilities or just generally to be closer to their friends and families in these times of crisis. Such a move invariably increases their costs and jeopardises their FIRE status. So it is better to assume your retirement annual expenses, and hence the required retirement corpus, based on realistic scenarios which are closer to your regular pre-FIRE life rather than fantasies. If afterwards you are able to reduce your annual expenses, that’s fantastic. But let that not be your Base Case.
- Maintaining that emergency fund – In the excitement to invest every penny that we own, a lot of us tend to forget about the all important Emergency Fund. Or if we do remember it, we tend to underfund it. The rule of thumb has been to maintain an Emergency Fund that equals 3 months’ expenses. However, we usually forget that when bad things come, they tend to come in clusters. The Coronavirus crisis has caused many people to lose their jobs, their investments have been wiped out. And with rents to pay and mouths to feed, they have been struggling. The proverbial rainy day has well and truly arrived, and with a vengeance. Therefore, it is better to have an overfunded Emergency Fund at all times. Is 6 months’ worth of expenses a good number?
- Continuing to invest in the bear market – The market may be down, but this is an opportune time to shop around and fill your coffers with cheap shares. A lot of us, including me, have been left wondering how we should manage our investments and whether we can time the market. That’s because we would invest on a particular day and then the markets would fall wildly on the very next. This got us thinking whether we should wait for the bottom to arrive. But who knows when that would happen or if it’s already past us. It’s best to follow the same strategy that we were following when the markets were rising. Then, we were investing regularly. So now when the markets are falling, why should our investment strategy be any different? Consistency is the name of the game.
- Keeping a foot in the job market – Mr. Fireball & I don’t not really intend to retire after we achieve FIRE. We intend to continue working on things that we really enjoy without being tied to a desk in a 9-to-5 job. However, many others in the FIRE community feel differently and want to truly and completely retire from working. Quite a few of those who had recently ‘fired’ and retired are now seeing their portfolio values falling off the cliff and feel helpless. They will find it doubly hard to replenish that fall partly because they have been away from the job market. But also because the current job market has suddenly shrunk so much that it would be extremely hard, if not impossible to find any kind of work. Therefore, until you are well and truly out of the woods, it may make sense to keep a foot in the door of the job market. Perhaps a part-time job that you can fallback on when the going gets tough would be just what the doctor ordered.
The Coronavirus Crisis may well be the first real crisis that the FIRE movement is facing. However, the basics still stand on very firm ground. Invest regularly, minimize expenditure and while you’re at it build a slightly larger nest-egg than you think you actually need. That’s all that’s needed to achieve Financial Independence/ Retire Early.
When life gives you lemons…..