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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, retiring can be scary when a recession is looming. The future is very uncertain. Inflation, geopolitical conflicts, the pandemic, and supply chain issues make retiring a very scary proposition. Is this a good time to retire early?

*Updated for the upcoming recession.

Early retirement problems

Early retirement will be tricky during a recession. The problem is we need to fund our lifestyle differently than 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 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. However, that takes a lot of planning.

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 10 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% of 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. Mrs. RB40 is taking a sabbatical and she’ll figure out what to do next when we get back from our long vacation.

What if she decides to retire this year? I think we’ll still be okay, but money will be tighter. The recession created a lot of problems for people who want to retire. 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 – In a recession, a lot of workers will lose their job. Unemployed renters can’t pay rent so it will be a big problem for the landlord too. It will be a tough situation for everyone. Luckily, our tenants are still working so we’re okay for now. Dividend income – Some companies reduced or suspended their dividend payments since 2020. Disney suspended dividends and hasn’t reinstated them yet. They really need to start paying dividends again. However, if a recession hit, they probably will keep dividends suspended. Real estate crowdfunding – I’ve been an investor in real estate crowdfunding since 2017. It has been very good for us. 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. All these projects will be affected by a recession to various degrees. However, the timeline for these projects are quite long – 3 to 7 years. This recession should be over by then.

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

Real estate crowdfunding is coming along very well this year.

Passive income probably will decrease in a recession, 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 just a few weeks in early 2020. But it came back very strong and hit a new high. The economy was great since then. However, the government printed too much money. This cause inflation and now the Fed is raising interest rate. This probably will cause a recession. Investors are scared and many of them are fleeing risky investments. Stock and crypto are down quite a bit again.

Anyway, we don’t know what the stock market will do next. The stock market might drop another 20%. We’ve seen this before in 2000 and 2008.

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. Many of them 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 some stocks.

Personally, we will continue to invest. We don’t need to withdraw yet so we’ll take the opportunity to build wealth. We do have a good size cash buffer.

For retirees who plan to retire in 2022, I hope you already built up your cash savings. You didn’t sell when the stock market was down, right?

Don’t quit with nothing

Retiring early during a recession is the wrong move for most people. The next recession will be wide ranging. Everyone will be hit by the highest inflation in 40 years. This will be particularly difficult for retirees of all ages. 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, 2022 is a bad year to retire early. Unless you already prepare 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 recession is over, it will be a better time to retire early. In 2022, engineer your layoff instead of quitting. (This link goes to my review of Financial Samurai’s book.)

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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