Hey all, Anders here. If you don’t follow the financial news, good on you. But if you do, you may have heard that we’re either in, or near, an economic recession. In fact, here’s a quote from Forbes just yesterday (09/22) in their article: Recession Tracker: Are We In A Recession?
“According to the general definition—two consecutive quarters of negative gross domestic product (GDP)—the U.S. entered a recession in the summer of 2022.”
So, technically speaking, we entered a recession during the summer. But what does that mean for you and your coast FI plans? Let’s explore below.
While a recession can feel scary and unknown, at its simplest, it’s just a period of economic contraction. In other words, instead of the economy growing like it normally does, it’s actually shrinking. So, as coasters, should we be scared?
Well, it depends.
Here’s the problem as I see it:
When you’re coasting to financial independence, you’re still dependent on your income to cover your living expenses. In addition, you’re banking on investment growth—with no more savings needed—to reach full financial independence at a future date. So, your income and asset growth are critical when coasting, but both can be impacted by a recession.
So how can a recession derail your plans?
The biggest threat a recession poses to coasters is a loss of income.
Typically, slow or negative economic growth leads to layoffs. Then, as more people are laid off, they spend less money, the economy slows even further, and more people are laid off. It’s essentially a negative feedback loop, with one thing causing the other, and so on.
But remember, when you’re coasting, you’re still relying on your income to cover your living expenses while your assets compound in the background.
So how can you measure and mitigate your risk?
First, measure your risk by determining the likelihood of a loss of income during a recession.
Start by googling: Is (insert your career) recession proof?
Then, think about the results. Do they make sense? Are there any unique aspects to your situation that would make you more or less recession proof than someone else in your same career? This should help you start to get a better understanding of what kind of risks you face with your income.
Next, do what you can to mitigate your risks.
If you find yourself in a risky situation, do what you can to reduce your risk.
Here are some ways to do that:
Identify a recession-proof fallback. If your career typically struggles during a recession, identify a second, third, and even fourth fallback option just in case. And remember, these don’t have to be your long-term dream career, just something that would get you by in a pinch for a short period of time.
Give yourself a nice cash cushion in case of emergency. Most financial planners recommend a 6 month emergency fund, giving you ample time to figure out your next move in the event of an income loss.
If you’re self-employed, consider adding extra clients for diversification. One of the great things about freelancing is that my income comes from roughly 10 different clients. So, if one or two struggle during a recession, I’ve got others I can count on for work.
If you’re employed, do what you can to make yourself indispensable at work. While the case for quiet quitting has been all the rage recently, what would it look like to do the opposite? If you’re concerned about the possibility of lay-offs, what could you be doing to make yourself indispensable at your work?
Once you’ve measured and mitigated your risk, you can then shift your focus to other areas of your plan.
Now let’s talk about your investments.
When you’re coasting to FI, you’ve reached a point where savings is optional.
But, you’re still relying on investment growth and the power of compounding to take your assets the rest of the way. And recessions are usually accompanied by market downturns and portfolio losses.
So, should you be concerned?
Again, it really just depends on the specifics of your situation.
If you’re close to your financial independence date (less than 5 years) then you might want to re-evaluate and adjust your plan as needed.
But, if your financial independence date is farther away (5+ years) then you might not need to make any changes.
That’s because most recessions are fairly short, and most market downturns rebound fairly quickly. In other words, just because your portfolio is down right now doesn’t mean it’ll be down two years from now. And, as a small silver lining, future returns are typically better after a market downturn.
So really, it just comes down to these two questions:
How soon until you need your investments to cover your income?
How much will this recession impact your investment portfolio?
Depending on how you answer those questions will determine what you should be doing (if anything) to stay on track.
So, if you’re concerned about the impact to your portfolio, here are two tips to consider:
You can delay or modify your retirement date. If your portfolio is dropping right when you would’ve started withdrawing, you can always delay or modify your approach. Delaying is straightforward: just wait longer till things recover. Or, consider modifying, drawing some income from your portfolio while you continue earning income at a modified or lower amount. (Think, partial or phased retirement.)
You can start contributing to your investment accounts. The other option would be to contribute more to your investment accounts to get them back where you need them. Maybe this means scaling up work for a bit as you increase income to save more. Then, rather than delaying retirement, you just top up your investment accounts to get you where you need to be, then retire on schedule. As an added bonus, by contributing to your investment accounts during a market downturn, you’re buying shares at lower prices, getting you more bang for your buck.
In the end, while we may technically be in a recession now, no one knows how long it will last and how difficult it will be. It may be nothing for a short time. It may be something for a short time. It may be something for a long time. At the end of the day, all you can do is evaluate the playing field and make adjustments to your game plan given all the knowledge you have.