Warren Buffett: “Fear is the most contagious disease you can imagine. It makes the virus look like a piker.”
The stock market and the bond market which my wife and I have been relying upon to fuel our early retirement, has seen its peak exactly 16 months into our retirement, in December 2021. When we retired early in August 2020, thanks to the concept of FIRE (financial independence retire early) movement, we thought we had prepared ourselves for the inevitable ups and downs of the financial markets.
What we didn’t realize at the time of our early retirement were the macroeconomic conditions that we didn’t even know existed. Things like demographics and when people consume vs invest, were simply not known to me when I was researching all things finance-related and FIRE related.
How was I to know that thanks to globalization, when people take manufacturing or services related jobs in the cities, that that would transform how many kids they would have? And how was I to know that having fewer kids would translate to having less people to consume materials that drove the world’s economies the past 30+ years?
Things we didn’t notice prior to the pandemic came to the forefront like labor shortages at any number of restaurants/retailers/service industries, why the news channels were covering supply chain issues, and why the stock/bond markets were in huge sell off modes right around the beginning of the year in 2022. Little did I know at the time, but I would eventually find out that baby boomers retiring in droves around the time of the pandemic(demographics) and geopolitics had lot to do with these symptoms.
I had not been interested in macroeconomics, demographics, and geopolitics prior to 2020, but boy did I get into that in a big way as soon as these issues came to the forefront during the pandemic. I came upon Peter Zeihan, a noted geopolitical analyst and futurist, who explained better than anyone I know why macroeconomic conditions are changing.
It was Peter who explained how baby boomers’ retirement these days have added to labor shortages throughout the advanced world adding to inflation, and also how the decline in both stock/bond/crypto markets can be attributed to baby boomers looking to convert their risky investments into something much safer like cash/treasuries. Add to this volatility, is the ever changing nature of geopolitics especially between the United States and China, adding to uncertainty.
Thinking back, it was inevitable that after hitting their peaks in December 2021 when things seemed to go up and up every month prior to that month, the decline of financial markets would come soon after that thanks to all these underlying factors. Markets would continue their downward spiral until October 2022, when they would start their slow recovery that month.
On one of my prior posts, I had explained what we were doing to deal with the market turmoil. At the time, I had explained how we were using our cash reserves and lowering the amount we withdraw from our municipal bond fund each month.
Using cash reserves was something we planned on when we considered retiring early. We didn’t think much of it, as we understand market turmoil is just part of the natural and healthy part of financial markets.
What we didn’t plan on was it happening so soon after retiring though! We were hoping for our municipal bond fund to continue on an upward trajectory for at least several years, so we can reap the rewards of monthly interest income and see the price of our fund go higher. Like all good plans, no plan survives the first contact with the enemy…
We came up with Plan B when we realized we were selling our bond fund at lower and lower price every month after December 2021. Our Plan B was to reduce the amount we sell each month of our bond fund by about $850 per month, and substituting this amount from our cash reserves until things got better.
Well, things certainly did get better by the end of 2023! By then, all of major stock market indexes recovered to where they were as of December 2021. *Bond markets had not completely recovered but at least they were trending upward.
Thinking back, there are several observations that we made based on our experience with our first official market downturn after early retirement. We think these are important tips for anyone interested in following the footsteps of all FIRE (financial independence retire early) movement adherents. These are:
- As we always like to say, always have Plan B, C, D, etc…
We studied and researched all the usual stuff about the FIRE movement, but going through a market downturn after only about a year and a half, was jarring. Everything we prepared for and learned about was tested in real life.
It was no longer just in textbooks, so to speak, but something we had to calmly discuss and to come up with a plan. In the end, we decided to sell less of our municipal bond fund and supplement the difference from our emergency fund. We did this for roughly a year before going back to the original scenario of using primarily our bond fund.
- Market downturns are scary and when it happens to you, you may panic when it’s your hard earned/saved money, but don’t do anything rash, solely based on your emotions
During the accumulation phase of our FIRE journey, when we encountered market downturns, we didn’t really worry. We knew our retirement accounts (401k, IRA) wouldn’t be touched until we hit 59 1/2 years of age.
We took the downturns as opportunities to buy more mutual funds/index funds at discount, thereby growing our nest egg. In fact, we actually cherished each of these downturns as when they eventually ended, we would always end up with more than we started beforehand.
It was slightly different after our early retirement, when we were relying mostly on our municipal bond fund to fund our monthly expenses. To see it decrease in value every month was difficult. One of the worst thing that can happen to retirees is if the market has a downturn as soon as retirement starts.
This takes away the value of the initial nest egg, but it also suffers the double whammy of forcing you to sell your stocks/mutual funds/index funds at a huge loss, making thing much worse. Although we didn’t run into the worst case scenario, it was maybe the second to worst case scenario.
The important thing out of all this market turmoil is that we didn’t panic, then sell, to get something safe, like cash/treasuries. Had we done that, we would’ve sold it at a big loss.
We preached for years the importance of staying put when market has a downturn, and we fortunately kept to our core principles of investing, which is don’t sell at a huge loss, and don’t let your emotions get in the way of investing.
- Another thing we preached is this: “Markets will eventually recover”
Just in the past 4 years since our early retirement, we’ve already seen 2 market downturns. One was during the pandemic (2020), and the other was after December 2021. The first downturn took less than 7 months to recover, and the second downturn took roughly a year to recover.
As scary as all these downturns can be as you’re living through them, it’s important to always step back to put things into perspective. In every single downturn, the markets always recovered. Of course, some downturns take longer than others, but each and every one of them recovered, only to shoot up higher than before.
Look at the big picture and don’t panic. This is why you should always have this next very important thing!
- You need an emergency fund!
One of the biggest mistakes we made twice in our lifetime, is that we cashed out our 401k accounts when we needed cash to pay our bills. Had we left these accounts, who knows? We may have retired sooner.
It was so hard to save up money when we were young and wanted to spend more than we made! We really lived the FOMO (fear of missing out) and the YOLO (you only live once) lifestyle. This is a huge mistake. Have an emergency fund to cover expenses for a rainy day.
This is equally true after retirement when there will eventually be a market downturn. Instead of selling your stocks/bonds/mutual funds at a huge loss, use emergency fund to cover all or some of your monthly expenses.
In conclusion:
Dealing with market downturns after retirement is a scary proposition. When it’s your livelihood, your hard earned money, and your ass in the game, you tend to be emotional.
We stuck to our guns and stayed true to the things we preached like staying put during market downturns, not getting emotional, and to use Plan B to deal with it. Having an emergency fund helped us out tremendously for the past year.
We’re so grateful markets have recovered as of December 2023. We’re also grateful we are still able to live this early retirement journey after living through two separate market downturns.
They have certainly tested our patience and at times we questioned our commitment to the FIRE movement. In the end, our level heads and our strong belief in the FIRE movement helped us to come out on the other side, relatively unscathed.
We wish you luck in your own journey of FIRE. Thank you for reading and good luck!
Jake
Wandering Money Pig
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