The “financial independence, retire early” (FIRE) movement was all the rage in 2018 and 2019, but the COVID-19 pandemic has changed the way we think about a lot of things. Has the upheaval in 2020 changed the desire to FIRE? And how might retirement plans be affected by the current situation?
In recent years, the “financial independence, retire early” (FIRE) movement has caught the collective imagination of a subset of investors.
FIRE investors aim to save and invest enough to quit the rat race way before age 60 and focus on pursuits that provide meaning and fulfillment. Even if FIRE devotees continue to work or become entrepreneurs after early retirement, the idea is that it’s based on their choice, not on financial constraints.
But 2020 has been tough. Millions are out of work, the economy slipped into recession earlier this year, and concern is widespread about how long the stock market can continue its unprecedented run. How does a year like 2020 affect the FIRE movement, and what can investors do to protect their retirement plans in a pandemic?
One of the biggest aspects to reaching FIRE goals is investing. Many of those looking to achieve financial freedom have worked out a specific target net worth to obtain through investing, often using an indexing strategy.
Many in the FIRE community remain on track. Other than a somewhat-scary market drop in March, the stock market hasn’t reflected that the underpinnings of the economy could be in trouble. In fact, the anonymous FIRE blogger “A Purple Life” recently wrote about hitting her FIRE number and moving forward with plans to retire this year.
But it’s not just about a stock market that continues to grow. Dara Luber, senior manager, retirement product at TD Ameritrade, pointed out that many in the FIRE community understand there are ups and downs to the market.
“Most participants in the FIRE movement always had a plan, because this is something they know they want to do and they know how the market works,” Luber said. “We’ve hit some volatility, but when you’re planning for FIRE, you know that’ll happen eventually and you plan for it.”
So even if the current situation creates setbacks for some members of the FIRE community, many are equipped to move forward and keep working toward their goals. The current year hasn’t been kind to many people, but for those who pursue FIRE, having a plan for volatility and being prepared can help them weather whatever 2020 throws at them next.
Sticking to the plan isn’t always a straight line, however. In some cases, you might have to make some small pivots in your portfolio and in your spending.
“First of all, in 2020 with the pandemic, people are naturally shifting where they spend their money,” Luber explained. “Eating out and traveling are budget items that have almost completely disappeared for many people.”
With this change in spending, it’s possible to keep moving forward with FIRE plans, even during the pandemic.
“For many, they were always going to save a portion of their income,” Luber said. “With changes to some of the biggest-ticket items, staying on track with FIRE might actually be a little easier. You’re stuck inside, what are you going to spend money on?”
However, there are other pivots that might need to be made during difficult times. Although the stock market is doing well right now, Luber acknowledged that it’s not likely to last forever. Plus, the pandemic could lead to job loss, income reductions, and other challenges that could offset some of the forced spending cuts and result in FIRE setbacks.
No matter how well you think you’re doing right now, Luber suggested three ways to potentially protect your portfolio during uncertain times so you have a better chance of staying on track for FIRE.
It may seem basic, but it’s an important part of making sure you stay on track for FIRE during 2020—and even after you reach your financial independence goals.
“Figure out your ‘need to have’ and ‘nice to have’ spending,” Luber recommended. “No matter what your age or stage of retirement, reviewing needs and wants can help you avoid problems later. Cover your needs and adjust spending on wants as necessary.”
The key is to make those adjustments before you’re forced to, especially during a year like 2020 when unexpected events (like a global pandemic) change the equation. Even if you haven’t been financially hit by current events, you don’t know what’s coming next. You probably don’t need to cut everything unnecessary from your life, but Luber recommended reviewing your spending and making some changes.
“Maybe you spend a little less on treats for yourself and bank the difference,” she said. “You still enjoy life, but maybe you don’t spend quite as much so that you can better position yourself, just in case.”
Another way to position your portfolio is to shift your asset allocation and use a bucket strategy.
“Rather than keeping everything in stocks, the investor could consider if now might be a good time to sell a portion to get cash for the next couple of years,” Luber said. “It frees up some cash so you aren’t forced to sell during a crash.”
Grant Sabatier, who reached millionaire status by age 30 and frequently writes about achieving FIRE through investing on his blog Millennial Money, suggested keeping any money you need in the next five years in cash.
Everyone has different comfort levels and risk tolerance, but it can make sense to protect at least some of your assets from immediate dangers related to economic stresses, while still leaving a portion of your portfolio in stocks to benefit from a potential recovery.
Finally, Luber recommended reviewing your investing plan and goals at least annually. This helps you identify small tweaks and pivots that can help you adjust to the landscape.
“You don’t know when life will throw you a curveball, whether it’s a change in life circumstances or a global pandemic,” Luber said. “You need to make sure your plan still makes sense for you. Although a good plan might not need major changes, it’s still smart to double-check and see if a course correction is in order.”
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