For most of us, the market ups and downs since August, 2015 have been both loss-provoking, as well as status-quo maintaining. First the market goes down, then back up to about the same level, then down again. As I write this we're on our way back up. Will we get to the previous point? Go past it? Fall again in the near term? Who knows? What's even more important, who cares? None of that matters. What matters is that we've planned for what we need, are on track to have that, and reassess our plan periodically to ensure we're still on track, or need to adjust our target.
What I mean by who cares is not that it makes no difference in your life. Of course it does make a difference if the market goes up on average 8% a year (as some financial advisors suggest it will) vs. stays flat for a decade or more, as Japan did, and continues to do, now more than 20 years after they first went into a zero interest rate environment. The final amount we have will be different. What that number is matters some, but what matters more is what we're planning on doing and how our plans confront the reality of our resources.
In a fluctuating market we may get caught up in moving in and out of different investments in order to time the market and either take advantage of or save our plan. This is a backwards approach. Rather than altering your investment strategy, which is a fool's errand, the key is to figure out when and how to adjust our plans. We cannot control what the market does, and attempting to do so will lead to far more losses than gains. What we can control is what we'll do with the money we have, and when to implement that plan.
Investment Strategies are for the Long-Term
When we set-up our investment plan, we did so for the long-term. We're looking at saving enough to FIRE within the next X years (whatever that number is for you), and then earning enough with our investment strategy to stay ahead of inflation during the time that we're FIRED. We're not investing to get to our number through market beating returns, or necessarily use earnings to make up the lions share of our next-egg. This is often where people get confused. When preparing for and building up to FIRE, it's savings that gets us to our number, not market returns. Market returns are for post FIRE, when we're living off the money we've already saved.
This key mindshift helps us consider our savings period to be the most important part of our retirement strategy. How much can we save? That's the key and only question. The market return on that savings will average out, as our savings plan will be quite simple. Therefore, our long-term goal while working towards FIRE is how much can I consistently put away to save the most I can in the quickest time possible. This also goes for bonuses, tax returns, and other windfalls of money. If I can put those away into my savings during this time too, then I can hit my FIRE goal far faster.
What's great about this strategy is that it is wholly independent of market returns. Now, the market may go down some during this time, compelling us to re-target our FIRE plan, but it will not determine if we get to FIRE or not. That was built off of savings, which we wholly control.
Look at Your Target, are you on Track?
So, let's take an example and see what I'm talking about. Say you want $500,000 for your FIRE plan to work. You put away $40,000 a year. Therefore, it will likely take you around 12.5 years to hit this target with your savings alone. Chances are market returns may get you there sooner, or delay you a little, but on average 12.5 years will allow you to hit this target.
Great! We now know our timeframe. So, say we're 6 years into the plan, and instead of having $240,000, we have $310,000 or $210,000 (both are possible). Either way, we need to go back and reassess our plan and timeline. In one case, we may be ahead of schedule, while in the other we may be behind. No problem though because we're not FIREing today. If we're behind our plan it's because the market is down, which means we're buying more with our consistent savings of $40,000 a year. In the long-run this will help us a lot as we'll own more dividend paying shares when we are FIRED. If our plan is ahead, fine, but then we're also paying more with our consistent savings of $40,000 a year, meaning we'll own less dividend paying shares in the long-term.
See what I mean, either way, we're good. We may want to adjust our time-frame, maybe alter our FIRE plan to live in a less expensive place, or simply stay with the plan we have. The key lesson to take away is that the FIRE plan can change. The investment strategy stays the same. We buy more when the market is down, we may get to move our plan ahead when the market is up. In the long-run, both are great options!
Finally, what this means for my family:
On a personal level, I can tell you we're going through this same process as I write this. Market fluctuations are taking us from our initial FIRE plan. Therefore, we're having to re-assess our plan. We're maintaining our monthly investments into our investment accounts, as that never changes unless my job or something else calls for that money instead. At the same time we're maintaining our savings rate, we're looking at our plan to figure out do we want to alter it in any way based on the current level of savings we possess?
Ideally we'd like $600,000 to FIRE. This would give us the life we want to lead, with little requirement to work again, particularly if we live abroad. As of now, we're on-track to have around $470,000 at the time we've called for our FIRE to start. This leaves us with a $130,000 shortfall in savings. Our choices are:
We could work for another 2.5 years to make up that gap.
We could FIRE at the same time, but work part-time to make up the gap.
We could go abroad right away, figuring we'd spend so little in Spain, Thailand, or Ecuador that we could make up the difference.
Since we're middle of the road types, we're looking at the middle option as our best bet. It's not being free from work, but it's doing the work we love for what money we think we'll need. For me that's teaching and writing. For Jan that's blogging and grant review as well as some program stuff for women's and children's health. The great thing about FIRE is we can do what we love for the little money we need, rather than work at a job we don't really want for a lot more. We're each setting ourselves a goal of $25,000 a year. This $50,000 total coming in will put us in a low tax bracket, help us get health care for the whole family, allow us to live very COMFY in Chicago or internationally wherever we end up, and gives us the time in each day to do what we love most. It's the good enough path.
Funny thing is, this is actually our ideal plan. Neither one of us are the type to do nothing at any point of the day (although we each appreciate down time at the beach!). What this plan allows is for us to stay engaged, do what we love, live modestly, not tap into our savings for the time we need it to be there, and then hit the international living scene when we're ready both savings wise-and family-wise for that chapter of our adventure.
Market Turbulence is our friend
What I've talked about here is the fact that market turbulence either allows us to own more shares, which is great! Or it allows us to FIRE earlier, which is also Great! Either way, the only thing that changes is our plan. Our investment strategy and implementation always stays the same. We don't make anything by timing the market, shuffling in and out of funds, or listening to most of the financial community. We plan to save what we need. We save it. The timeframe may move forward or backwards. When we've creatively figured out how to meet our FIRE needs, wherever those happen to be, we either decide to pull the trigger, or adjust the plan according to the reality we face.
It's a COMFY way to live, an easy way to retire, and a fun way to plan for the future.
Let us know if you're on the FIRE path.
Let us know if we can help you plan your FIRE path.
Let us know what's your biggest hurdle toward FIREing yourself.