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Early Retirees Are Probably Unwittingly Benefitting From the COVID-19 Pandemic

This article is part of a series on personal finance during the coronavirus pandemic. Please check out the Coronavirus and Your Finances Series (link will open in a new window).

The law of unintended consequences pushes us ceaselessly through the years, permitting no pause for perspective.
–Richard Schickel

January 1, 2020 marked the first day of our early retirement. I was 46, and my wife was (and still is) 45. Aside from serving on some boards, we were no longer tied to work.

Meanwhile, in Wuhan, China, a novel coronavirus was spreading like wildfire.

We were planning trips. We had a couple of trips to Colorado already in the works, since one of our portfolio companies is there, and I could tie in fun with a board meeting. We were going to go to Poland. We’d just booked a tour of China.

At some point, just like most early retirees, after a glass (or bottle?) of wine, we had the “I don’t know if this early retirement thing is really going to work for us” discussion.

It’s like in swimming lessons, where the instructor pushed you along on a paddleboard, and then, suddenly, she was no longer holding you, and you had to swim on your own. That’s what job security was for us – the paddleboard holding instructor who was keeping us afloat and not needing to swim.

As a CFP(R), I was more aware of the early retirement risks than most people. I knew about the spending smile in retirement. I knew that the first 10 years of retirement held the highest sequence of returns risk. Heck, I interviewed the guy who wrote about it back when he lived in Japan (#oldschool).

Then COVID-19 happened.

We had gone to the USWNT’s dominating performance over Japan in the SheBelieves Cup on March 11, hung out with the Dallas American Outlaws (and breathed all over each other). Six days later, the Japanese FA president, who was at that game, tested positive for the novel coronavirus. Leagues shut down. On March 22, Dallas County, Texas issued a shelter in place order, and we’ve been hunkered down at home since then.

In the interim, we’d rescheduled our Poland trip to May, since that was the latest we could reschedule it thanks to American Airlines’s policies. Our flights were cancelled yesterday, allowing us to request a refund.

As of now, our China trip has not been cancelled, although, given our tour company’s trend in allowing postponements, we suspect we won’t be going until 2022 at this rate.

In the interim, the S&P 500 is down nearly 14% year to date (as of April 15, 2020). So, an early retiree’s worst nightmare seems to be happening, particularly since SAFEMAX for FIRE is much lower than the typical retirement safe withdrawal rate.

Fortunately, because we REFIRED, our portfolio is holding up much better, down only 4% since the close of the markets on the last trading day of 2019 (though who knows if that will hold, as residential real estate will likely lag the downturn in the economy from COVID-19), and that includes some very speculative investments that we recently made.

But even if our investments were asset allocated with the S&P 500 and corporate bonds, we’d be down 9% on the year.

However, there is a bright side to the COVID-19 pandemic for most early retirees.

The shelter in place requirements across most of the country have limited our activities.

Because our activities are limited, our spending is limited.

We’re not going out to eat.

We’re not traveling.

Most of our discretionary spending has dried up.

For us, 2020’s year to date spending is 50.2% of last year’s year to date spending.

So, while our seed capital that is going to fund our retirement has dipped, our spending has been slashed in half.

This is the unplanned, enforced version of retirees adjusting their spending to avoid running out of money that we discussed in “Will I Run Out of Money in Retirement?

Naturally, I do not expect this pattern to continue indefinitely. Eventually, we’ll discover a vaccine, and life will return to somewhat of the normalcy that it was before this pandemic broke out (at least, until the next pandemic breaks out).

However, in the interim, however long our quarantine lasts, we’re, effectively, buying ourselves more runway, since our spending has been slashed so dramatically. Yes, we’re deferring the spending that we might have otherwise made, but some of that spending that we didn’t do we won’t make up for. For example, we’re not going to go out to eat twice as much for six months after we’re released from the shelter in place order to make up for the dining out that we didn’t do. We’re not going to double up on trips to make up for what we didn’t do while cooped up. Yes, we’re deferring, but most of the discretionary spending will simply return, not increase.

We’ve also proven that, if we need to, we can cut our lifestyles pretty significantly, be (reasonably) happy, and make it.

I suspect that most early retirees in our situation are getting an unplanned test run at tightening the belt to find out if they could make it long-term if they needed to reduce their lifestyles to stay retired, or if they would choose to go back to work. This information is quite useful, as it is giving early retirees a taste of how far they’d realistically voluntarily pare down expenses before making the decision to return to the workforce. That is valuable information, as usually, that’s a theoretical exercise, and we’re pretty terrible at predicting how we’d react in stressful situations.

Has your spending changed since the COVID-19 pandemic outbreak? What have you learned from it? Let’s talk about it in the comments below!

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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