Retirement
Can FIRE members survive a recession?
The idea of being financially independent and retiring early might appeal to young Aussies looking to escape the nine-to-five, but what happens if the market turns?
Can FIRE members survive a recession?
The idea of being financially independent and retiring early might appeal to young Aussies looking to escape the nine-to-five, but what happens if the market turns?
While the Australian economy might have the current record for the longest streak since its last recession, dating back to 1991, economies eventually turn, with investors relying on dividends being negatively affected.
In a conversation with nestegg, FIRE guru Aussie Firebug, who has chosen to remain anonymous, discusses the options for early retirees if the market turned for the worst.
Noting a Trinity study, Mr Aussie Firebug believes a 4 per cent drawdown rate on 25 times expenses has a greater than 95 per cent chance of lasting the investor’s life, although he acknowledges that market conditions can make early retirement difficult.
“Even if you do get really unlucky and you retire the year a major crash happens, even if that happens, you still have another 40 years to either tighten your belt and bring spending down a bit or return to work,” Mr Aussie Firebug said.
Finance expert from Canstar Steve Mickenbecker also agrees with younger investors having more options than older retirees.
“If you’re 75, maybe you don’t have the options of younger Australians and return to the workforce to sit out the recession,” Mr Mickenbecker explains.
The finance expert also noted that people who built enough wealth to retire early have skills the workforce requires, noting that “not every job goes in a recession”.
Mr Mickenbecker advises that younger retirees need to revisit their sums as soon as possible to see if it is still viable to leave the workforce.
Mr Aussie Firebug believes that realistically, early retirees have options, with doomsayers “scaremongering” the FIRE movement.
“A lot of finance people scoff at the idea of a 4 per cent withdrawal rate, when in reality [FIRE retirees] have so many options across at least a 40 year time period to make adjustments,” Mr Aussie Firebug said.
However, pulling the pin on work early does not come without any risk. Using the example of someone who retired in 2007 with $1,000,000 relying on a drawdown of 4 per cent before the GFC would have net assets worth $600,000 in 2008 due to the market correction.
The Trinity study notes that an investor in 50 per cent bonds and 50 per cent stocks that has a drawdown rate of 3 per cent instead of 4 per cent has a 100 per cent chance of not outliving a 30 year retirement.
nestegg has previously reported how investors can live a “kick-arse” lifestyle and retire early.
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