The recent market crash has made us realise how important it is to be ready for a sudden downturn.
Being ready, in this case, means both financially and psychologically.
2 years worth of cash
A key component of our strategy, when we retired, was to always keep 2 years worth of cash, while investing the rest in the stock market.
Up until a few weeks ago, I felt that amount of cash was not only adequate, but maybe even a bit too much.
The recent market crash
In early March we realised COVID-19 was spreading around the world, and governments were not well prepared to handle it. So we liquidated a big part of our portfolio. We are now 75% in cash.
The other 25% we kept invested in companies that we thought shouldn’t be affected by the pandemic, for example online betting businesses. In hindsight we should have sold those as well and locked in our profits, but we underestimated just how far reaching the consequences of the pandemic would be. After all, an online betting company will ultimately be affected if the sport events they accept bets on are cancelled!
Anyway, we are convinced markets will start going up again when a solution for COVID-19 is found. As we keep 2 years worth of expenses in cash, we should have enough to weather the storm without having to touch our capital.
But what if the pandemic continues, or the market keeps being depressed for many more years?
The need for flexibility
The reality is that as early retirees (and recent ones, on top of it!) we don’t just look at 2 years in the future. We look long term, and so even having 2 years of savings in cash is not enough to feel safe.
What really makes the difference for us is: flexibility.
- We do not have a mortgage to pay. Many banks have issued payment holidays, but at some point they’ll want the money back, and that may be way before the economy recovers. Luckily this is not a risk for us.
- We do not have any loans, including no credit card debt (we consider that a big financial mistake!)
Of course we do have some commitments (rent, for example), but our contractual situation allows us to get out of any of these within 3 months at most.
- The two years we keep in cash contain a bit of padding. To be on the safe side we have assumed slightly higher expenses than our average of the last few months. This money should stretch for a few more months, maybe an extra quarter.
- We can reduce our expenses further. The lockdown has given us an indication of what our expenses could be if we cut going out completely. Of course we wouldn’t go for something that extreme, but I reckon we can probably shave another 10% from our monthly expenses if needed without too much of a sacrifice.
- And, we can still move somewhere else! This is probably the ultimate and most important of all, in terms of giving us peace of mind. We have just moved internationally, and so we know it’s not difficult to relocate again. There are plenty of places in the world where our money could go much further.
(Note: I have not mentioned the obvious ‘We can get back to work’ as it doesn’t depend entirely on us. We may not be able to find a job even if we wanted. Plus it would defeat the purpose of Early Retirement.)
I think this market crash has highlighted that ‘financial safety’ is not the only thing that needs to be baked in early retirement plans. Flexibility is another key component.
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