March was one of the most eventful years of any lifetime, or at least it felt like it. For us, we flew back from Orlando in late February after a fun week catching up with family, attending a friend’s wedding and getting in some Disney time (Rise of the Resistance is an absolutely amazing ride by the way). Since then it seems like everything has changed:
- The DOW Jones had its 2nd, 5th and 13th worst performing days ever. It also had its 4th, 11th and 19th best performing days.
- The S&P was down 34% from 2/19 to 3/23. It’s up 24.5% since then.
- Total cases increased from 88,585 to 1,518,023 (+17x)
- US Cases increased from to 75 to 427,460 (as of 4/9/2019) (+5700x).
- Restaurants, churches, non-essential business.
- Sports, NBA, MLB, Hockey
- Conferences and events canceled or postponed
- Primaries (except Wisconsin due to terrible reasons).
- Basically anywhere you’ll encounter people is shutdown unless you need it to live.
- Most states or cities have shelter in place requirements
- So many people have lost their jobs that unemployment numbers look like a graphing mistake
- People unable to pay bills, their rent or afford food
- Parents learning how to home school for the first time
- Shortages of cleaning materials and household supplies
And this is only the big stuff. Stress, depression, increases in household violence, profiteering – there’s no shortage of bad news if you look around.
There’s also no shortage of good news out there! Some of my favorites include John Krasinski’s Some Good News (weekly on YouTube), Make Me Smart with Kai and Molly (daily podcast), and ChooseFI (now also daily!).
Feel free to pause and watch the latest episode of Some Good News. I can wait.
Optimism and Realism In The Financial World
In the Financial Blogging world, there’s no shortage of great writing out there either. Most touches on the same core ideas: buy and hold investing works, don’t sell, this doesn’t mean the end of FIRE, and (of course) wash your hands.
I subscribe to way too many blogs (Feedly is my goto delivery system) and have been loving how transparent and optimistic the financial community is about the world:
- Our Next Life – Recession, Coronavirus and the Future of FIRE
- Life Outside the Maze – Now is the Best Time to Pursue Financial Independence
- Financial Mechanic – I Lost $70k in One Month – Should I Give Up On FIRE?
- Mr. Money Mustache – No, You Didn’t Just Lose Half Of Your Retirement Savings
- The Mad Fientist – Coronavirus Market Crash – Is This Time Different?
- Bitches Get Riches – Pandemic Lightning Round Series
- Millennial Revolution – Return of the Bear Market: Are You Ready?
- J.L. Collons – Taking Advantage of Mr. Bear
- Early Retirement Now – Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)
- Get Rich Slowly – How will the coronavirus affect your personal finances?
And so many more.
Contrast this with 2008. Back then most news that I consumed was by talking heads on MSNBC or some other TV station. As it turns out, the online personal finance community is filled with very smart, optimistic people that provide a much more in-depth, unbias analysis of the current situation.
Many of these articles were written after the market dropped significantly and before it rose again.
Reading over these articles and others in the news, there are a few themes that absolutely scream out:
Don’t sell. If you’re investing with index funds using a diversified strategy, and you don’t need the money immediately, you should absolutely not sell. I’m sure many people learned this the hard way and sold at the bottom, missing out on the 20% climb since then. We can’t know what’ll happen tomorrow – the market may well drop another 20%. If you thought that and missed last month you would’ve missed the best month of investing since 1938.
Invest more or continue to invest. If you have more money to invest now, it’s a great time. Those with steady paychecks can continue to add more money to the market now.
This has happened before and it will happen again. We can’t know when the stock market will drop, but every investor knew it would eventually. The markets have just grown too much since 2009 and it was about time. I personally thought the student loan crisis would trigger it.
There’s a common trend: just keep on investing. If you were investing before just keep it up. If you’re new to investing you may be able to take advantage of the falling market. These are the same investment fundamentals I focus on in my free investing course, The Minimal Investor. You can read it online, or sign up to get an email each week for 10-weeks.
Why Would This Mean the End of FIRE?
I’m still looking for someone who’s actually asked this question (besides trolls on Twitter). The real question I’m hearing is: “how are people who retired early handling this?”.
MarketWatch posted about how this will change the FIRE movement and even The New York Times followed up this trend with their article: They All Retired Before They Hit 40. Then This Happened.
Side note: want to be notified when there’s a mention of financial independence in the news? Sign up to Minafi to get notified of FIRE in the News.
This market drop is the first real test of the financial independence movement. I too believe it will shift some thinking – mostly away from optimism and towards realism.
This is a good thing! It means fewer stories about how “anyone can FIRE easily in their 30s with 25x saved up” to “create the life you want and save for it”.
Here’s what I mean by that:
#1 – The 4% Rule Doesn’t Work.
Please, put down the pitchforks! Hear me out on this one. You can do all the math in the world and come up with a historical percentage that your plans will work out. You can run FIRECalc analysis on your future plans and see 95%+ success. You can use Personal Capitals Retirement Simulator and see another vote of confidence. You can find other places that will tell you “yes, you’re good to go.”
But none can tell you for sure. They can’t know if there will be a black swan event like Japan in the 1990s. Or if you’ll come down with cancer and have major medical bills. Or if your spending will stay in sync with inflation. Or even if you’re including all variables in your calculations (are you including a replacement car when yours breaks down every ~15 years? All kids expenses including weddings 25+ years away? All future wants and needs? Healthcare?).
Even as someone who loves future planning, I admit there’s no way I could include every variable in my financial independence with options number.
The reason why I don’t think the 4% rule is a good baseline is that there are too many variables to know what your spending will be in the future. Take a chart like this one:
Hitting this point doesn’t mean you’re FIRE. It means you’re in a very healthy financial position, which grants you a lot of flexibility for what you want to do next. What it doesn’t mean is that you’re set for life.
That doesn’t mean you can’t still FIRE at 4% though! It just means you’ll need to be flexible with spending – and that’s OK! Instead of taking a trip
one year, maybe you’ll have medical bills. Instead of buying a new phone for one year, you can go care for a relative in need. If you want to do both you can save more or make more income (which is its own can of worms).
This recession combined with a pandemic shows just how hard it is to plan for the unknown.
People can “retire early”, go the “work optional” route, or whatever you prefer to call it with withdrawal rates above or below 4%. One way I like to think about it is like this:
- <3% Withdrawal Rate: Ride that wave! If you’re happy you could live like this forever!
- 3% – 3.5% Withdrawal Rate: Chances are you’re good. You can exceed your budget each year by a healthy amount and it’s unlikely to impact much.
- 3.5% – 4.5% Withdrawal Rate: Try to stay inside your WR for the year. Try to cut spending a little in down market years.
- 4.5%+ Withdrawal Rate: You’re going to need to be very flexible. Cut spending in down years, use geoarbitrage or other techniques to cut spending, decide what’s most important and focus on that.
I recently wrote about the FIRE Matrix which hits on this topic in another way – using 33x is a much more safe goal long-term. This shows how my “FIRE Goal” area is at 33x saved up, or 25x with side income to cover half my expenses.
My Takeaway: We’re going to see more people focused on hitting a 3.5% – 4.5% number then embracing a flexible lifestyle rather fully retiring, or people who want to fully retire doing it more in the “FIRE Goal” area on the chart above.
#2 – Taxes Matter A Lot.
Hitting 25 times your spending in an investment account is a major achievement! You’re in the final stretch now, where you might not need to work for the rest of your life.
There’s a big difference between hitting 25x your spending in a 401(k) and in cash. A couple withdrawing from their 401(k) in California would need to withdraw about $90,000 to have $80,000 after taxes. That’s 12% more! That’s the difference between needing 25x and 28x – or 33x and 37x.
Luckily, most people retire with a mix of accounts – tax-deferred, tax-free growth and brokerage accounts. By withdrawing parts of your spending from each of these in a given year, you may be able to reduce your taxes to zero!
My Takeaway: We’ll see more people talking about taxes! I’m surprised by how much I enjoy reading and writing about taxes. It feels like trying to solve a puzzle where each type of account is a piece with its own abilities. I’ve found that just about all bloggers out there know about this too, but every individual’s tax situation is soooo different that it’s tough to write about. I enjoy reading how other bloggers are minimizing their tax-footprint for their situation.
#3 – Healthcare Matters A Lot and Costs A Lot.
When Mrs. Minafi left her job at the beginning of this year we did a lot of research on what we should do for our healthcare. Going without insurance wasn’t an option. One emergency appendectomy could cost 20% of our total investments overnight.
We quickly narrowed the countless options down to three choices:
- $175/person/month: A high-deductible plan with an HSA.
- $400/person/month: A mid-tier plan similar to what we had through our employers (but not as good).
- $700/person/month: Keeping our current insurance through COBRA.
Double these numbers since there are two of us. $350 vs $1,400 proved too huge a difference. We signed up for the high-deductible plan with an HSA through HealthCare.gov. The process was relatively simple too: we filled out a form, picked a plan, uploaded the COBRA docs (which proved we had insurance and lost it, which qualified us for a “special enrollment period”), then paid for our plans and opened up an HSA at Fidelity.
The result of all this for us? After adding another $50/month for dental covered we’re spending about $400 a month for a household of two. If we wanted a Silver Plan that would’ve been about $900 a month even with a credit based on our income.
We’re in good health and this sounded like a great price. The math works out to the point where if one of us hit our out of pocket maximum ($4,000 per person) for the year, it’d be about equal to the next tier up. If we both hit the out of pocket max then we should’ve picked the next plan up.
If COVID-19 put us in the hospital, we’d very quickly be on the hook for our out of pocket max.
In other words, if my wife and I come down with COVID-19 and end up in the hospital, it’s likely we’ll need to pay up to $8,000. And that’s assuming we’re in-network! ($13,800 is our out-of-network max)
That’s kind of a lot. It may be less if we don’t hit the maximum, or if part of it is covered by some other legislation, but absent that we’ll be paying it.
I anticipated we’d have some large medical bills at some point in our life, but I hoped it would be years down the road when our investments could grow.
Being covered with decent insurance is an absolute must in the United States. Even if you’re retiring young and you’re healthy, you’re buying insurance against catastrophic charges that could bankrupt you in weeks.
My Takeaway: We’ll see fewer people recommending going without insurance. We’ll also fewer people recommending high-deductible plans (yes: that means me). If the US government issued a special enrollment period right now I’d have to think heavily about jumping to the next plan up.
#4 – FI Is Alive, RE Is Alive.
One of the things I’m most grateful for right now is that I don’t have to worry about going into work each day, dealing with bureaucracy or keeping a company afloat amid a crisis. As if looking out for yourself wasn’t enough, if you’re a manager or decision-maker at a company right now you have others looking at you for guidance in an already troubled time.
Trying to stay focused on that with everything else going on in the world (and in your own household) is no easy task. Many of our friends that I’ve talked to are stressed out and in need of a break.
The idea that all of these stressed-out people wouldn’t be happier without a job makes no sense to me.
Retirement takes many forms. I call myself retired, even though I have a blog. It’s something to do, and I love having a project that I’m able to grow. Minafi loses money each month, so it can’t well be called a business any more than having a garden in your backyard (which cost me a lot more when I had one).
Some people call themselves retired even though they work part-time, act a landlord, teach at a school, play gigs in a band (hi Dad!) or volunteer.
“Retirement” is a more a blank space for you to put your time into. It’s the option to change it up when it stops being fulfilling without the need to base that decision on whether you’ll be able to pay next month’s rent.
During the COVID-19 crisis, one of the most amazing things has been how some businesses have pivoted to provide new services. Mrs. Minafi’s hairdresser is selling do-it-yourself kits for home hair dying. My CrossFit gym allows for checking out equipment, has daily at-home exercises and live streams. Our local library started a “seed library”, where you can check out seeds to grow a local garden.
Some of these businesses may even realize they enjoy their pivot more than their actual business! Each is filling a need that’ll still be there after the quarantine.
My Takeaway: This crisis will show a lot of people what’s most important – and what’s most important isn’t the bottom line of your employer. It’s going to be having a healthy household and family, not having to worry about your finances and being able to thrive even when the shit’s going down.
The Market and COVID’s Impact On the Minafi Household
We’re extremely fortunate in so many ways that I’ve been reluctant to share the impact on us. Mostly because it’s been minor during a time when so many others are suffering.
Our household is relatively well situated for this. There’s me (37), my wife (36) our dog (11) and our apartment we rent (Salt Lake City).
We have 3 years in cash in our high-interest Simple accounts (my favorite bank), and aren’t relying on income.
We only have one furry kid, so our only home-schooling consists of “paw”, “sit” and “stay”.
Salt Lake still allows using open spaces, so I’ve been running a lot to train for a marathon I signed up for in July.
Our friends we’ve talked to are all doing well. Some have lost hours or income, but as households, there’s no one we’ve spoken to that’s been in immediate need of help to pay bills.
We’ve been making a lot more meals at home too – which ties in with my April theme of creating. Sourdough bread, pad thai, burgers, carbonara, fried rice and many other dishes that don’t need much fresh produce have been our focus so far.
From a financial standpoint, we have seen our net worth drop a significant amount. According to Personal Capital, we dipped from $2.27m to $1.67m (-26%) to $1.93m (+16%).
So far we haven’t sold anything, aside from some tax-loss harvesting. I was finally able to sell some $VSMAX I bought forever ago and roll it into good old Vanguard Total Market $VTSAX.
I do think that the markets will dip more in the coming months, but I’m not going to bet on it. We have a well-diversified portfolio right now with about 30% bonds, 10% cash and 60% equities, which lets me sleep well at night. If anything, we’ll dip into cash and buy more equities if the market drops another 30%.
Our spending was way down in March to about $5,600. We got a full refund of $1,200 for a trip we planned to South Korea and Taiwan that was canceled (we were really looking forward to that one!). Annual spending of $5,600 with $1.9m in savings would put our current WR rate at about 3.4%. That’s low enough that I’m absolutely not worried about running out of cash.
One metric that we do track is my financial spreadsheet is our withdrawal rate over time. Since Mrs. Minafi only left her job in January there’s not enough data to do much with it yet. I plan to use it the same way as how I used my savings rate as a canary for lifestyle inflation.
It also sheds light on what our life looks like with less spending. It hasn’t seemed any less fulfilling, aside from the lack of time with friends. What I miss most are in-person game nights, birthday parties and celebrations. What I miss least are dinners out, watching movies in theaters and any time at all spent at an airport.
More than anything else what we’re doing is staying home, social distancing, washing our hands and staying safe. I grew up with asthma, which puts me in a high-risk category to end up in a hospital if I do come down with COVID-19. We’re taking no chances we don’t need to take.
For now, we’ll continue to shelter in place, spend lavish amounts of time with our dog, play video games until we’re experts and learn to cook like professional chefs!
How do you think COVID-19 and the market drops will impact FIRE? How are they impacting you?