With the recent market pull back due to Covid-19 we are no longer financially independent (FI). The market is down greater than 20% as I write this. By the time you read this, things may have recovered or even further declined.
We Were Financially Independent (FI)
Last year I wrote about us crossing the line to financially independent. Essentially we hit a point where we had 25X expenses in Net Worth. During much of the last year, this was excluding home equity, despite as you recall we own our home outright.
Why 25X? Well, 25x expenses denotes the point where most studies show the money will last at least 30 years. Mind you if I were to retire now I would need to cover expenses way longer then 30 years, so I was not at my retirement number. Still it was a fun milestone.
Our Max Net Worth Expense Ratio
By early this year that number had swelled further to 27x expenses. Still not our number but way up over such a short period. I enjoyed watching our saving to expense ratios rising.
But as mentioned before I never once measured our net worth as a sign of success. The S&P 500 last year returned 30%. I didn’t have to do much at all to achieve my 2x increase in expense ratio.
Enter Covid-19, Bye Bye Net Worth
And then the virus hit, and the market sunk into correction territory, greater than 20% decline. Again a movement largely out of my control. If I were measuring my net worth as a goal I’d be beating myself up after thinking I was a super start last year. 2 whole years of savings out the window, despite a moderate increase in savings rate (the thing I actually control). Which year was more successful again?
Not only the above, but the question was asked am I panicking over the declines? Well, no. As of this writing, the market was lower as recently as December of 2018. (The market has declined further since this was written, but the point still holds) Less than 2 years ago my investments in the stock market were still lower than they are now. It is enough to make you question the definition of a market correction.
Market Timing, a Stopped Watch is Only Right Twice a Day
It also really nails the stupidity of talking about market timing. If I go back to 2018 I wrote several pieces on why not to market time. I even wrote pieces on the subject in 2017. The general “expert” consensus even then was the market was over-priced and was sure to decline. And yet here we are after a major correction 2 years later, and the market is still up.
Lest you think I’m cherry-picking the pull back in December of 2018, most of the entire year of 2018 we were lower-priced then we are today (March 11, 2020). It really puts the decline in perspective. Even if the decline continues the point is made. After all, even at this point, people are losing it over the amounts they’ve already lost. Nevermind that if they’d pulled out in 2018 they’d still have lost compared to being in the market.
Retire with a Buffer, fi is not necessarily FI
This whole situation also illustrates the foolhardiness of pulling the plug exactly at net worth equals 25x expenses. Why? Well if I were just at 25x when the market declined I’d now have 23x. In other words, I would no longer have 30 years until the money runs out from today forward. This is what is called sequence of return risk.
Basically, if you have a decline very early on in your retirement, the sequence of that decline will result in the worst outcome for your remaining money. Conversely, if a decline were to happen years down the road the impact would be much less. The best way to combat that sequence of return risk should be obvious. To build some sort of buffer. That buffer should keep you above the target expense ratio in spite of either a surprise increase in expenses or a sequence of return situation.
Covid-19 Won’t Impact Most People’s Retirement Income
All this adds up to me being very glad I don’t intend to retire until 55. I should have plenty of savings at that point to weather storms. But it also means that I am largely indifferent to the stock market impact of Covid-19. It’s a long way to retirement, and what happens today should have little to no impact on when I need that money. For most people not at or near retirement, the same should be true. I fear for those in retirement or near, but the rest of us should keep the situation in perspective.
How are you doing financially? Anyone else no longer financially Independent (FI).