Employers around the world are axing staff at a rapid rate, proving a stark reminder that job security can disappear in a matter of months, if not weeks. This highlights that not being financially independent is a significant risk. Highlighting, one of the reasons people started trying following the FIRE (Financial Independence, Retire Early) movement in the first place.
Even large corporations that have millions if not billion pound or dollar revenues have laid off thousands of employees. There are many out there that are being paid 80% of their salary by the government, but for how long and what about those that were laid off before this intervention.
This presents a serious long-term financial risk and one that will repeat itself over the countless boom and bust economic cycles such as 2008 and now 2020. Maybe next time governments won’t even implement furlough interventions?
Just Attempting To Achieve Financial Independence Can Pay-Off
Even being part-way to financial independence or taking the first steps to sure up your finances can go a long way in protecting you. For example, paying off debt, reducing your expenses, building up an emergency fund and additional savings.
It’s therefore likely that someone attempting to achieve financial independence will have significantly less expenditure, as they will be used to spending as little as 30% of their income. Although realistically this figure is probably somewhere between 50% or 70% for many people.
By contrast, someone who regularly spends 90 – 95%% of their paycheck may struggle to reduce their outgoings because of large financial commitments (e.g. expensive mortgage payments). This will reduce their ability to minimise their expenses or have saved a cash buffer. At the very least reducing their outgoings may be a shock to the system.
Critics Of The FIRE Movement
The FIRE movement has it’s sceptics (e.g. Suzie Orman) and many of these sceptics say that those living the FIRE lifestyle will now be regretting their decision and this could spell the end of the FIRE movement. Yes, this is not an ideal time for people to retire, but having a passive income or being able to withdraw from savings at a low sustainable rate is a lifeline.
In addition to this, they are no worse than anyone who has recently lost their job. The only difference being that those targeting the financially independent lifestyle, won’t have been dependent on their jobs, or under the illusion that a job is a safety net.
Those who are already financially independent could, in theory, withdraw from their investment at 3 or 4% in the event they lost their job. Even those on a lean level of FIRE could afford to pay a significant part of their expenses.
Investing In A Raging Bull
Everyone is a brilliant investor in a bull market, and it’s far too easy to pat yourself on the back when things are going well. FIRE has gained traction, as you can see by the growth in Financial Independence bloggers and podcasters throughout social media (yes I am counting myself as one of them).
However, I’d say there is a net positive benefit of all the contributions, in terms of information sharing around personal finance and investing. Even if mistakes have been made, this is a far cry from the more common apathetic approach to the retirement cliff edge that many people face. Which in my opinion is even more dangerous.
For example, this movement has challenged the idea that you need to commit your life to an uninspiring job/employer. All whilst developing a community which encourages people to take positive action with their personal finances.
Unfounded Advice
On the other hand, there may be some unfounded and unsound investing strategies promoted over the last few years. These will now be put to the test and illuminate those who are providing evidence-based guidance vs those just cashing in or at the least getting excited by the trend.
The sad result of the latter is that many people will give up with investing as a result of being burned by failed stocks. Having habituated to the long-running bull market, their confidence may have been shattered if they panic sold in the bear market.
By contrast, those that spent the time to understand investing and will have anticipated a market crash will be ready to hold the course through these volatile times. Consequently, their investments will be able to stand the test.
Build A Solid Foundation
This is of course, why you should always do your own research before investing. Don’t just take a blogger’s word as gospel because they have a fancy site or lots of followers. You must always examine the logic and evidence in the content; question the source of their facts and figures and engage in active discussion with them.
I encourage you to do the same with even my content. At the end of the day, everyone is always learning, even people who have achieved FIRE and been through the frequent stock market corrections, bear markets and recessions.
This is because not a single person can predict the future of the stock market. We can only make our decisions based on historical evidence, and formulate hypotheses based on this information.
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Will The FIRE Movement Change For The Better
Those that frivolously jumped into the FIRE movement expecting nothing but portfolio gains, may lose faith and drop out. Those that stick with it will take some learnings on both the technical and emotional elements of investing. For example, how they feel when the market bottoms out, or why the security or options they thought they would have ceased to exist.
Is Geographical Arbitrage Dead?
I previously had confidence in the theory that, if the markets should crash, I could live somewhere cheaper to wait out the worst of a recession. However as the 2020 coronavirus has demonstrated, this is not always going to be the case, as transport gets locked down.
People should, therefore, revisit their FI numbers to take into consideration the cost of staying in their own country, or a high-cost country if geo-arbitrage was going to be part of their plan. Whilst you may still be able to get to another country, you might not want to. For example, you might not want to be in a country with more limited forms of healthcare.
Too Much FIRE Diversity
A recession, especially one caused by a pandemic is also where certain types of FIRE e.g. Barista FIRE may come undone. As we have seen casual work was the first to go, due to restaurants and cafes closing for example, so using part-time work to prop up being partially financially independent.
I don’t want to hate on this idea, it’s something that investigated itself when running the numbers. It’s something that is very tempting to consider if you really don’t enjoy your job. In some respects, someone targeting lean FIRE might not be in any worse position than someone else who has been laid off, because to a degree they are somewhat financially independent.
However, pursuing full financial independence via a stock portfolio or other revenue streams seems more of a sensible option given what we now know about recessions and responses to future pandemics.
Perhaps we have just over-complicated Financial Independence and we need to go back to the basic principle?
The Idea Your Can Just Go Back To Work
Being that I recently quit my job to travel and move to Australia I am very familiar with this myth. I am lucky that both my partner and I have found jobs here during a recession, however, things might not have worked out this way.
This was always an educated risk when we quit our jobs in the UK, before achieving financial independence. That being said, we did follow our own financial advice and have a solid amount of cash reserves, should a worst-case scenario arise.
What we didn’t anticipate is that the job market would disappear overnight and I think this provides two valuable lessons:
- Apply extreme caution before quitting your job prematurely before reaching a healthy FI number and have significant cash reserves.
- Remember that you cannot always just go back to work, as many have advised when weighing up early retirement.
Returning to my above point, we should perhaps attempt to achieve a more robust level of financial independence rather than the bare minimum (e.g. Barista FIRE).
Focus on FI and Drop The RE
With the above in mind, I have realised even more so, that attempting to generate multiple sources of income, both active and passive but especially the later are essential. This is for 2 reasons:
- You never know when one source of income may become restricted or non-existent
- In times of crisis, it’s important to have both generalised and specialised skills sets in order to adapt to a limited job market.
- When there are limitations on leisure activities or opportunities to work, having a hobby or side-hustle to work on, are important for wellbeing.
This is why I think it’s important to approach financial independence in a very active way and consider how we can positively use our time in the lead up to and after achieving financial freedom. This is why I think we need a new approach to financial independence.
Thus approaching our finances with a ‘work optional’ approach is important. With many lurched into unproductive unemployment people may also come to understand that retirement, and not having a purpose is a shock to the system and not something they want. If you have been struggling then check out these ideas for coping with the stress and uncertainty.
Financial Independence As Phenix From The Ashes Of Recession
As with every science or discipline, personal finance and the FIRE movement may have a paradigm shift. Moving away from the lean, minimum level of financial independence, towards productive Financial Independence; focused on entrepreneurialism and increasing sources of passive income.
Financial Independence Is A Necessity, Not A Nicety
The fundamental principle of FIRE is still true, in the sense that if you follow the responsible steps of spending less than you earn, investing the difference then you can sustainably withdraw and live off your investments, for a sustained period of time.
All of this taken into consideration, those seeking FIRE will most likely be in a better position than those who refuse or believe they cannot save money. Yes, someone trying to achieve FI by investing in the stock market may have suddenly had their portfolio sliced in half. However, they are also likely to have a higher net worth and, if they have followed fundamental steps of personal finance, a solid emergency fund.
Your Financial Survival Depends On It
This being said, as this bear market has demonstrated, many people are out of a job. This is nothing new, it has happened frequently throughout history and will continue to happen, as the boom and bust economic cycles are inevitable. Therefore, achieving financial independence is not a choice, it is a necessary commitment.
The government is here to bail many out this time, but it may not be in a position to do so in future. If you think you are under the illusion that you are a loyal employee that you are safe, then think again and look around.
Clearly being financially independent and only working a few hours a week for entertainment kept the covid19 situation from being anything more than a distant news story. I work for fun and don’t care if that job goes away. I’ll never need to earn more money even if the stock market drops another 75%. In fact our fun stuff, tennis, running, hiking and fishing have continued unabated throughout the last few months. Being partway along the FI journey would give anyone more options in this financial jam, but being all the way to FI with sufficient margin, well, it makes it less than a minor annoyance.
Hi Steveark, thanks for commenting. I am glad to hear that you have been able to keep doing the things you enjoy. Also that your finances have remained robust against the stock market declines.