The first six times we reported on our quarterly financial progress here at Retiring On My Terms, the news was always positive.

The three key metrics we’re tracking on our path towards early retirement and financial independence – net worth, 529 account funding, and passive income – all increased every single quarter.

Sometimes the growth was fast, and sometimes the growth was slow, but fairly consistent income, responsible spending, and a generally supportive stock market enabled us to make steady progress towards our goals ever since we started this blog.

Of course, that all changed during the fourth quarter of 2018, when the S&P 500 index plunged nearly 14%. As good as we try to be at saving and spending, a quarterly decline of that magnitude, the likes of which we hadn’t experienced in more than seven years, is bound to leave a mark on just about any investment portfolio.

And ours was no exception, even though, somewhat surprisingly, we still managed to make progress on one of our three key metrics despite the market rout over the past three months.

Although the market was quite challenging during the fourth quarter of 2018, when we look back at where we were a year ago at this time, the news is pretty good. While the S&P 500 index was down more than 6% for the full year in 2018, it’s worst performance in a decade, our net worth, 529 account funding, and passive income are all higher than they were at the beginning of the year. We’ve taken a big hit over the past several months, but need to keep in mind that we’re playing the long game here, and, so far, we’re still winning at that!

I. Net Worth: 79.5% of Goal (-6.4% during Q4 18)

As you might have expected, the poor quarter for the stock market had the most significant negative impact on our net worth (excluding home equity, 529 accounts, and potential Social Security benefits), which dropped by 7.5% during Q4 18, leaving us 640 basis points further away from our long-term goal than we were at the beginning of the quarter.

While it’s disappointing to be moving in wrong direction, I do take some comfort in the fact that the 7.5% decline we experienced was a far cry from the 14% decline in the broader U.S. stock market.

Part of that can be explained by the fact we continued saving a portion of the money earned from my job during the quarter, which helped replace a portion of what we lost in the market.

More important, however, is the fact that although the majority our net worth is in stocks, we probably hold more cash and bonds than most of our peers. While this limits our upside relative to the overall stock market when times are good, it helped cushion the blow over the past three months. We built up our cash position in part so we could take advantage of a potential market downturn, so I plan on transferring about 10% of that money into our brokerage account to purchase some additional shares of stock over the next few months, hopefully at prices 10-15% below where they were a couple months ago.

Thinking back to where we were a year ago, our net worth rose by 2% in 2018, which is a pretty decent result in the context of the U.S. stock market being down by more than 6%.

Looking ahead to Q1 19, I expect to get paid my annual bonus for 2018 before the end of the quarter. The company had a good year, and I took on some new responsibilities and worked on a few high-profile projects, so I’m hopeful I’ll be rewarded fairly for my efforts, which would give our net worth a nice boost, even if the stock market remains volatile.

That said, with the big hit our net worth took over the past quarter, I think it’s very unlikely we’ll achieve our short term net worth goal, set at the end of September near the market highs, which was to get to 90% of our target net worth by the end of Q1 19. The stock market would have to climb by about 10% over the next three months for us to have any chance of achieving our short-term goal. It will be great if that happens – but I’m certainly not expecting it!

II. 529 Account Funding: 49.2% of Goal (-4.0% during Q4 18)

Similar to our net worth, the value of the 529 accounts we have established to fund our children’s education declined during the fourth quarter. The value of those accounts dropped by 7.5% during Q4 18, which moved us 400 basis points further from our target funding level than we were at the beginning of the quarter.

Because these accounts are invested primarily in stocks, given that we have close to seven years until our oldest is college-aged, the performance of the mutual funds we owned at the beginning of the quarter wasn’t much different than that of the broader market. We limited the decline in the value of our accounts to 7.5% by purchasing additional shares at lower prices a few times during the quarter.

The money we added, however, wasn’t nearly enough to offset the plunge in the stock market, and we failed to achieve our short-term target of getting to 55% of our long-term funding goal by the end of 2018. I noted three months ago that I was confident we could achieve this goal – barring a material downturn in the market! Unfortunately, the downturn we experienced was more than significant enough to keep us from hitting our short-term 529 funding target.

Looking back on the full year, however, we did make good progress, largely because of additional contributions we made to the 529 accounts. Those contributions helped us increase the value of the children’s 529 accounts last year by 18%. That said, we’ll need to increase the pace of contributions, and get a lot of help from the market, to have any chance of hitting our long-term funding target for the 529 plans over the next two and a half years.

We need a new short-term goal to shoot for at this point, and I’m hopeful we can get to that 55% funding level by mid-year. Our home state continues to offer tax credits on a portion of any 529 contributions we make, so we remain incented to continue funding these accounts. Hopefully the stock market will be a little friendlier over the next few months also! 

III. Passive Income: 33.9% of Goal (+0.9% during Q4 18)

Our passive income target remains our “stretch goal” as we pursue early retirement and financial independence. While it would be incredible to fund our lifestyle entirely via passive income, realistically there’s no way it will happen by our Target FIRE Date.

Even though our passive income took a hit during the fourth quarter when a couple of stocks we own experienced significant dividend cuts, over the course of the past three months this was the only one of our goals where we still moved in the right direction, despite the turmoil in the markets.

Our expected annualized passive income climbed by nearly 3% during Q4 18, moving us 90 basis points closer to our admittedly ambitious goal. For the full year, our annualized passive income grew by 24%, moving us 660 basis points closer to our long-term goal.

Negatively, those dividend cuts did contribute to us failing to make our short-term goal of getting to 35.0% of our target by year-end 2018. Since we plan to deploy some of our cash into the market over the next three months, I’m going to kick the can down the road as far as our target goes, and believe we can get to 35.0% passive income funding by the end of this quarter.

IV. Target FIRE Date: Friday, July 2, 2021

As I write this, we are just 2 1/2 years away from our Target FIRE Date, and Q4 18 provided the first significant headwinds we’ve experienced since we started documenting our journey towards financial independence.

I’ve long believed we could hit our net worth target in 2020, and still think it’s possible, but stock market returns over the next 18-24 months will likely play a huge part in determining whether or not we get to our net worth target before our Target FIRE Date. If the S&P 500 has another down year in 2019, achieving out net worth target sometime next year will be almost impossible.

The weak equity market also derailed our progress on our 529 funding. Given that we’re less than halfway to our goal at this point, I’m increasingly pessimistic that we’ll reach it by mid-2021.

Passive income has always been our most ambitious goal, and while there’s no way we’ll get to 100% funding of our anticipated lifestyle through passive income over the next 10 quarters, we’re going to continue trying to increase that figure every day!

Thanks for reading, and here’s hoping the market is kinder to all of us over the next quarter than it was over the past quarter!