FIRE-ing in a Down Market

from Jeremy

Say you put away the nest-egg you need to get yourself started with Financial Independence Early Retirement (FIRE), but then on the day you are ready to call it quits the market takes a big dip into either a correction or a fall. What are you supposed to do? I'll tell you: you do math.  

Rather than lose your head by watching any of the financial networks blabber about doom or fret over the fact that your portfolio just lost over 10%, take solace in fundamental elementary school level math. Math never lies! You look at the numbers, interpreting them how you wish, but the equation tells you the truth every time (as long as you carry your 1's properly!). This is key to keep in mind when you are overwhelmed by financial planning or some financial industry hack is trying to sell you some expensive financial product. They don't expect you to do simple math to solve a problem for yourself. Instead, they try to scare you so that you'll ask them to do the math, and take your money, from you. Don't let them confuse you, financial planning is simple math anyone can do. And, in a down market, it's exciting for FIRE types! 

Say for example, you have a portfolio worth $100,000. Not huge, but a good chunk of change. The market goes down 15%, so now you have $85,000 worth of holdings. Are you $15,000 poorer? Do you have to delay your retirement plan based off of a 100K plan now that you only have 85K? Should you have bought bonds instead of stocks? Do you switch them out now to save what money you have left in case the market goes down furtherWell, let's do the math: 

Are you $15,000 poorer? 

Yes, today on paper you have $15,000 less than you did before the current dip. Does that mean you are poorer because of it? Nope, not at all, unless you sell everything today and cash out, which you're not likely to do (don't sell everything today and cash out!) 

Even if you're retiring today, you weren't planning on using all $100,000 today. Odds are you're planning on living on something like 4% of that money. Since we're using easy numbers here, that's $4,000 a year. Therefore, take what you're using today, probably 1/12 of $4,000 ($333.33) out of the pot. So, instead of $85,000, you have $84,765. You only removed what you needed today, and you'll keep removing what you need, and only what you need, every month until you're done. By the time you need that last $15,000, it will probably have returned, disappeared, returned, disappeared, and returned again, plus interest.  

Over the course of a 40 year retirement say you earn a paltry 5% return on your investments. (Chances are you'll do a lot better than this, but let's just use this conservative number for simplicity's sake.) You have 84K+ today, so it's going to take a while to get back to 100K. How long?  

84 + (84 +5%) + ((84+5%) +5%) . . . = 100 

Total time necessary is: 4 years. 

Now, of course, money doesn't only come in, it goes out too. Using our 4K a year cost of living, how does this look in terms of math? 

84 – 4 + (84+5% - 4) + ((84+5% - 4) +5%) . . . = 100 

Total time necessary to return to 100 is: 34 years 

NOTE: You didn't go down. You didn't lose your retirement. In fact, every year the retirement pot you have available went up. Not only that, but you had a 40 year retirement time frame, and it took only 34 years for you to get back to where you wanted to be on day 1, which means you never ran out of principle. 

Of course, living expenses don't stay flat either, do they? So, let's factor in inflation. Say inflation is 3% a year, which is the average. How does that math look? 

84 – 4 + (84+2% - 4) + ((84+2% - 4) +2%) . . . = 100 

Total time necessary to return to 100 is: DOESN'T HAPPEN! (In fact, in 28 years this scenario runs out of money). 

Why am I showing you this? Because, although you don't need to freak out with down markets, you do need to consider their long-term repercussions and not always just stick with a plan that you see has confronted reality. What's interesting to note is, even the full 100K would run out in this math scenario in after just over 36 years. Clearly, this scenario is not sustainable, so something has to give. Either more needs to be saved, less taken out, or a supplemental source of income found during the retirement period. 

What I'm trying to teach here is that simple math allows you to understand your position. It tells you that whether the market went up or down, you have choices you can make. It will not tell you what those choices are, although it can help with that, but it gives you different alternatives based on what factors you put in. 

What factors will have to be in the equations?  

  • Expected expenses 

  • Cushion for unexpected expenses 

  • Inflation 

  • Timeframe 

  • Any supplemental income you can/will expect to make 

Yet, with whatever you put into the equations, you'll always be doing simple math that is possible to accomplish on a piece of paper with a pencil or pen and an eraser. Using a calculator really helps, but it's not necessary. 

How does this relate to the real world?  

Here's our example to show you how a down market is touching our plans. 

Before the market dip we were on track to have approximately $475K by June 2017. This is less than our ideal amount of $600K for FIRE, but close to our threshold of $500K to even make FIRE work in the U.S., although more than our $400K threshold to make fire work abroad. 

After the market dip, our portfolio seems to have settled around 370K, too low for any of our thresholds. At our current rate of saving, we will add approximately 60K to this pot by June 2017. Assuming no market movement whatsoever, that gives us $430K, just above our international threshold. 

Therefore, we have choices to make.  

  • Do we stay where we are, waiting for the market to go up? 

  • Do we move domestically to live more of the life we want to live while saving more and building our own financial independence income stream through creative projects we love? This may include continuing to work in other areas as well for 2 years to supplement our income as we build out our creative projects. 

  • Do we go abroad and build those creative projects, knowing full well we may have to return to jobs at some point in the future? 

We've done the math on each of these, and each of them works out for us. Yet, this is where math stops and choices are made. Which option would we prefer connected with which level of risk are we willing to take? If it was just Jan and I we'd have dropped the jobs and been abroad a long time ago. Yet, with two kids, we're a little less inclined to do that, for more than just financial reasons. We want a community, we want financial independence, and we want to live with the freedom to do what we enjoy doing every day over the long-term. Therefore, we're looking at each of these options before us and realizing, the market downtown is a blessing for us in multiple ways: 

  1. It allows us to purchase more shares of investments at sale prices, which is great for the long-term sustainability of our FIRE plan. 

  1. It forced us to think through what makes the most sense, rather than going on auto-pilot toward a goal we set for ourselves some time ago. 

  1. It enabled us to understand that market downturns will happen, recessions will happen, and through it all, we'll have what money we need to make our plans work for us, giving us that reassurance that we're on the right path. 

Here's a great post from a fellow Financial Independence blogger which talks about retiring at the absolute worst time, and how that works out. Check out Jeremy's other posts, all top notch! 

In the end, what we're advocating is that you conduct some simple math for yourself. Set up your plans, and periodically come back to those plans with a new piece of scratch paper and pencil, and do the math again with today's numbers. Do your plans still work? Do they need to be adjusted? What alternatives are out there for you and your family to hit all, some, or a few of your targets by your target date, or to move that target date to fit the reality of our times. This won't always mean settling for less. As the market goes up you may find yourself moving a few things forward based on the same simple math. Either way, plans have to conform to reality, but reality can conform to our imaginations on how to shape it. Enjoy your reality, and may we each shape it in the way that suits us best. 


What are you doing with the opportunity of the market dip? 

Is it altering your plans in any way? 

What would you do if we have a second great recession? 

What choices are you making today that determine when/how you'll get to do whatever it is that you love? 

How can we help you figure out your FIRE plan? 



Do you use Personal Capital to track your spending? If not, may we recommend you do so. It's very handy, and Free! Not to mention, you'd be helping us out by singing on. Check it out!