Should You Retire Early During a Recession?

At last, you achieved financial independence after many years of intentional living and are ready to retire. Unfortunately, 2020 is a horrible year to pull the ripcord. COVID-19 spread around the world like wildfire and forced most businesses to shut down. The economy contracted for the first time in 11 years and we are officially in a recession. Millions of Americans are unemployed. Small businesses are struggling to stay open. Some corporations seized the moment to expand and grow their profit. However, many more businesses lost a large percentage of their customers and income. This recession is a huge one and nobody knows how long it will last. There are a lot more uncertainties than usual. Is this a good time to retire early?

Early retirement problems

Early retirement during a recession is tricky. The problem is we need to fund our lifestyle differently than in traditional retirement. If you retire at 65, you can rely on Social Security Benefits, pension, and retirement savings. That monthly retirement income replaces your paychecks. However, those options aren’t available when you retire early. There is no more reliable monthly income. You need to set up your own passive income stream and/or live off your savings. Well, you can access your retirement savings by building a Roth IRA conversion ladder. That takes a lot of planning and attention.

Financing early retirement

Every early retiree obsesses about their finance. There are many options and everyone approaches it differently. I retired from my engineering career 8 years ago, when I was 38. I still have many years left before I can access my social security benefits and a small pension. For the next 10-20 years, we will rely on the combination of our passive income, my blog income, and my wife’s income.

Right now, we are doing okay because our income is higher than our expenses. In fact, we can still save 50% or our income! That’s pretty amazing, but our saving rate will drop drastically after Mrs. RB40 retires early in a few years. That’s okay, though. We should be able to cover our cost of living, but we won’t be able to save as much. Putting off withdrawal will enable our investment to grow. That will be more than enough to fund our full retirement when we turn 65. Fortunately, we aren’t planning any big changes in 2020. Mrs. RB40 isn’t retiring until 2022. Hopefully, the recession will be over by then.

What if she decides to retire this year? I think we’ll still be okay, but finance will be tighter. The recession created a lot of problems for people who want to retire in 2020. Let’s talk about some of these problems.

Passive income reduction

This recession is very painful for workers. Investors are better off, but we are affected too. All sources of passive income are looking iffy. If you don’t have some margin in your finance, you’re probably very stressed out right now. Let’s take a look at some real-life examples.

  • Rental property – Many unemployed renters can’t pay rent so landlords are hurting. Landlords still have to pay the mortgage, property tax, insurance, and utilities. It’s a bad situation for everyone. Luckily, our tenants are still working so we’re okay for now.
  • Dividend income – Some companies are cutting or suspending their dividend payments. Disney suspended dividends for the first half of 2020 and probably will cut the next one too. That’s understandable because their theme parks and cruises are mostly shut down. On the other hand, the Disney+ subscription service is doing very well. I’m holding on to our Disney shares because I think they’ll be stronger than ever after the recession is over. I expect our dividend income to fall by 10-20% in 2020. Most companies are hoping for a short recession and are still paying dividends. This will change as the recession drags on.
  • Real estate crowdfunding – I’ve been an investor in real estate crowdfunding since 2017. It’s been good, but 2020 is a tough year. This is how real estate crowdfunding works. Investors pool their resources and invest in apartments, office buildings, retirement homes, strip malls, storage facilities, and other big real estate projects. These projects are all impacted by COVID-19. Customers are avoiding shopping and they are buying online instead. Hence, many retail tenants can’t pay rent. The office space is going to change too. Many employees are working from home and they love it. Why should a company pay for a big office if nobody wants to come in? As you can see, the pandemic created a lot of problems for real estate investors. Some of our projects already suspended payout and probably more will follow suit as the recession drags on. However, there are some new projects that are trying to take advantage of the pandemic. I saw one that’s planning to convert a mixed-use property into a medical office. They’re getting a good price due to the recession. So there are opportunities as well.*

*Sign up with CrowdStreet for free to see what kind of projects are available.

2020 will be tough for passive income, but it should recover after we get back to normal. If you can invest more, now is the time to do so.

Do you see the problem? Passive income is dropping as the recession drags on. Retirees can’t count on their passive income as in normal years. Also, this year is a great time to invest more. I picked up more shares of Disney because I’m sure they will resume paying dividends later. A retiree with little or no margin won’t be able to capitalize on that kind of opportunity this year.

Stock market volatilities

The stock market is nuts! It dropped 30% in a few weeks early this year, but it came back to hit a new high already. This makes no sense to me because the pandemic is still raging out of control in the US. I guess investors are counting on a vaccine to get life back to normal by next year. That still doesn’t make much sense to me. Even with a vaccine, it probably will take a while for customers to spend again. There are so many unemployed workers already. Companies probably will lay off more workers as the recession deepens. Many companies are earning less, but their stock price is higher than before the recession. It feels like investors are throwing valuation out the window like the dot com era. Of course, I’m one of those investors. Disney is not earning much these days, but I purchased some shares. Investors are just too optimistic.

Anyway, we don’t know what the stock market will do next. I think we will see a 10-15% drop before 2020 is over, but who knows. The market can’t defy the economy forever. If the recession continues, the stock market will drop.

This is a big problem for early retirees. Many of us count on investment growth to fund our early retirement. Since we can’t access our pension and Social Security Benefits yet, we sell stocks to pay for our living expenses. Selling when the stock market is down is bad. It depletes your capital too quickly.

Most early retirees minimize this problem by having a big stash of cash. I think most early retirees have 1-2 years of spending money in the bank as a buffer. That way, you can delay selling when the stock market crash. Ideally, the stock market would recover by the time you need to sell. The stock market staged a remarkable come back over the last few months so most early retirees are okay. We can sell now to replenish our saving accounts. However, it is a scary scenario. What if the stock market crashes again? We’re not out of the woods yet.

For retirees who plan to retire in 2020, I hope you already built up your cash savings. You didn’t sell when the stock market was down, right?

Active retirement problem

There is another big problem this year. The pandemic shut down travel in many parts of the world. Young early retirees want to travel, but they can’t. Many of them are stuck in their home country until further notice.

Unfortunately, the pandemic continues to spread in the US. Most countries don’t want any American visitors right now. If you can’t travel, why retire early? You’ll be stuck at home so you might as well work a bit longer and shore up your savings.

Don’t quit with nothing

Retiring early during a recession is the wrong move for most people. This recession is huge and we don’t know how long it will last. Worse case, the stock market could crash again and keep dropping for a couple of years. Quitting your career right now is not a good move.

This is what I would do if I was planning to retire this year. I’d be working from home so life would be a lot better already. Then, I’d work just half a day. If my manager calls or sends emails, I’ll ignore them. I’ll skip most of the Zoom meetings and go offline every afternoon. Out of sight, out of mind, right? When I can’t avoid the manager, I would talk to him about putting me on the top of the layoff list. I might get lucky and receive a severance package. Quitting and walking away with nothing is the least optimal path forward. Even if you get fired, it’s better than quitting. At least you can file for unemployment to help ease the transition into early retirement.

Of course, this is easier to say than do. Back in 2012, I couldn’t operate at 50% on purpose for months on end. I’d feel too guilty about it. Now, I probably could do it. If you can downshift like that, go for it. It’s better than just quitting. There is no consequence. There is no need to maintain a good relationship with your employer/manager. They will forget about you as soon as you walk out the door. Don’t put any effort into maintaining a good relationship unless you plan to go back to work at some point. Make a clean cut and burn the bridges.

Bad year to retire

In summary, 2020 is a bad year to retire early. Unless you prepared really well and have plenty of margins and backup plans, it might be better to continue working a bit longer. That way you can build up your cash savings and passive income. If you can’t stand working anymore, then just cut back and work minimally. It should be pretty easy to avoid your supervisor when you’re working from home. Once the pandemic is over, it will be a better time to retire early. In 2020, engineer your layoff instead of quitting. (This link goes to my review of Financial Samurai’s book.)

Of course, this doesn’t work for everyone. Purple still plans to quit her job in September. That’s not financially optimal, but she is owning it. She prepared for this for many years and doesn’t want to delay early retirement. I think it will work out fine for her. She lives very frugally and she is flexible. She can adapt if something goes awry. It takes a lot of guts to retire early during a recession.

Okay, what do you think about retiring during a recession/pandemic? It’s bad timing, so why not put it off a bit? What do you think about my idea of working just 50% and asking for a pink slip?

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