Prof Scott Galloway says:
The definition of “rich” is having passive income greater than your burn. My dad and his wife receive about $50,000 a year from dividends, pension, and Social Security, and spend $40,000 a year. They are rich. I have a number of friends who earn between $1 million and $3 million, with several children in Manhattan private schools, an ex-wife, a home in the Hamptons, and a lifestyle fitting of a master of the universe. They spend most, if not all, of it. They are poor. By the time you’re thirty, you should have a feel for what your burn is. Young people are 100 percent focused on their earnings. Adults also focus on their burn.
Recently I was musing about the impact of the virus on F.I.R.E. movement. My first reaction: they are done. One thing is to enjoy your accumulated wealth while the market went up for the entire of your saving and planning life, another is to have put aside 1 million and realised that now you have only 700k left. You inevitably start to question the 4% rule: will I still have enough to put food on the table or I have to start to look for a job again? Will the stock market ever recover? Is this time different?
I was wrong again. The main lesson you get out of FIRE acolytes is to get your burn right: this is something no crisis will ever take from you. You arrived here more resilient to a financial shock than others because you are already used to a ‘frugal’ life, expenses are cut to the bone and you have savings that, if not enough to be fully retired, can help you if you get fired.
Last year a friend of mine wrote me that he wanted to buy a Peloton: he was so hyped about it and how cheap it was at 13 pounds a month (the app, the recurrent cost). He lives in Geneva, I told him to buy a real bike and go out to enjoy the lake and the mountains. A growing number of companies and investors are realising how great is a recurrent revenue stream from a subscription; 13 pounds is not a lot in absolute terms but the issue is when these start to add up: utilities, internet provider, Netflix, Amazon Prime, mobile phone…you get it, 9.99 + 9.99 + 9.99 and at the end of the month you are 300/400 pounds poorer. I am not saying do not have ANY subscription, I am suggesting to choose the ones that provide a real value to you and not fall for the latest fashionable proposition, because once you are in they will do everything to keep you paying.
Something that young retirees got wrong, in my opinion, is their ability to find back a job, if they will need to. Obviously each case will be different and I possess only anecdotal evidence, but I sense the expectation of getting back their corporate life at the same level at which they left, which is delusional, more so after a recession. Because yes, what your financial model is missing is the fact that if you have to go back to the 9-to-5 labour, most likely will be because your financial plan did not work: unless you decided a very weird asset allocation, your portfolio will be in a dire position exactly when the rest of the economy is suffering as well.
It is a great story to have taken a sabbatical to travel the world, unfortunately most HR would prefer to hire someone who spent that year getting more experience for the open job. I know a couple of people who left their job to get an MBA and shift their career, only to end up in the same sector, same job after two years of eating only canned food because they were temporary broke. And all of this happened while the economy was growing, not during a recession. Your skills are also an expiring good, the more time you dedicate to your family and garden, the faster they decay and become useless.
Now imagine how will you feel, not only going back to a life that you made a lot of sacrifices to put behind you, but also in a lower position compared to when you left. Ouch.
The saving grace for FIRE-ers will be a “V” recovery. If the market bounce back fast, as in fact seems of happening, then it would simply be like a bad nightmare. If it will take years to bottom, lot of people will start to re-think the viability of their financial strategy, because it takes a big character to stick to a plan while the world seems to go in the opposite direction. Have you ever spoke with someone that got fired and is unemployed? In Luxembourg and Switzerland (places where I lived and worked) they get 80% of their salary from the State for almost 2 years, a time long enough for the majority to find back another job; you would expect to find them quite cool about the situation, even relaxed despite the circumstances, while all of my friends lived with a level of stress higher than when they had to work 60 hours a week. And I agree with them: it is not rational, you know that everything will eventually be alright, and yet you cannot help it, every day is a mountain to climb without peace (The only guys I know that sailed it through with a smile on their face are guys the you normally consider, and are, assholes).
The problem for us Europeans, FIRE or not FIRE, is that once we will retire, we will face the same dilemma: will I outlast my money?. Defined contribution pension systems depend on your savings and your portfolio decisions; with rates close to zero (or negative), thinking of living out of bond coupons in retirement to have 100% certainty in your cash-flows is impossible, unless you manage to put aside millions and decide to live like a homeless.
F.I.R.E. is teaching us how to manage our burn and save…unfortunately we are still missing a bulletproof financial plan to outlive black swans.
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