If You’re FI, Why Haven’t You RE?

question-mark-4785077_1920I recently wrote about how the strong U.S. stock market enabled the ROMT family to achieve our long-term net worth goal earlier than expected.

That achievement naturally could lead readers to wonder:

“So ROMT, if you think you’re financially independent, why haven’t you retired early?”

It’s a great question, and one I’ve been thinking about a lot lately!

There are several reasons why I haven’t pursued early retirement, even though our net worth says it might be possible:

I. Net Worth isn’t the only financial metric we’re focused on

While the 4% rule says we may have a large enough net worth to fund an early retirement, net worth isn’t the only goal we’re working towards on our path to financial independence.

With two middle school aged children, including a soon to be teenager, we’ll be thinking about college expenses before we know it. While we’ve been contributing to 529 accounts for over a decade, we still haven’t saved enough money in those plans to fund our kids’ educations.

Right now, we’ve set aside about 75% of what I was hoping to have in the 529 accounts before I’d feel comfortable retiring early. Even when we do get to 100% of our 529 account funding target, that figure still won’t be large enough to fully finance four years of tuition, room and board, books, travel, and other expenses for each of our children. The bigger cushion we end up with on the net worth side, the better chance we’ll have at making up any gaps we have in educational funding when college expenses begin.

II. I expect to get paid my 2019 bonus shortly

At this point, I’m only a few weeks away from receiving a bonus from my employer for a lot of hard work and long hours last year. Even if I believed we had enough to fully pay for both our early retirement and our children’s educations, it would still be crazy to not stick around a bit longer to receive money that will increase our likelihood of success.

III. Sequence of returns risk could be our enemy

Most of our potential early retirement has been funded by the longest bull market in U.S. history, which resulted from the longest economic expansion in U.S. history. While we don’t know whether the bull market will continue for another day, week, month, year, or decade, we know it won’t last forever.

At some point in the future, the stock market will drop significantly in a relatively short period of time. Back in 1987, the Dow Jones Industrial Average fell 22.6% in a single day. At the beginning of the 21st century, the NASDAQ Composite Index dropped by nearly 80% over 30 months when the dot.com bubble burst. More recently, the S&P 500 lost over half of its value between October 2007 and March 2009 during the global financial crisis and great recession.

While bear markets are bad for all investors, they can be especially difficult for those who are no longer earning a regular income, like retirees. A significant decline in the stock market at the beginning of retirement – referred to as sequence of returns risk – can easily derail even the best of plans.

Recognizing that we’re at or near all-time highs in the U.S. stock market and have benefited from an unusually long economic expansion, having a little extra cushion in our net worth probably isn’t the worst idea if we want to ensure a successful and enduring early retirement. If the stock market drops 10, 20, 30% or more shortly after I do stop working full time, I’d rather have to only tighten our belts for a few years instead of immediately having to find a new job.

IV. Uncertainly around the U.S. election

capitol-22546_1920There’s a chance – admittedly using broad brush strokes – that the 2020 U.S. presidential election could come down to a referendum on capitalism versus socialism.

As the probabilities of various candidates winning the Democratic nomination and the presidential election change in the coming months, the U.S. stock market will undoubtedly be influenced. Recall the massive overnight moves in world stock markets and U.S. stock market futures when there was uncertainty regarding whether President Donald Trump or Hillary Clinton won the 2016 election. Whether or not our president will be working with a friendly House of Representatives and Senate will also have a significant influence on how markets react in November.

The proposed policies of President Trump and the Democratic nominee will differ materially on issues like healthcare, taxes, trade, financial markets, and education. I believe I’ll have a much better sense of what the coming years in the United States will look like nine months from now than I do today. Consequently, I’d prefer to avoid making a major financial and lifestyle decision until I have a better understanding of the potential impact of the upcoming election on the economy and early retirees.

V. Geopolitical uncertainty is also high

Outside of the U.S., there’s also a lot happening. The continued spread of the coronavirus will have an impact on the global economy and financial markets, in addition to the awful impact on those who are infected and their families. Terrorism is sadly now a given in many parts of the world, while the resolution of Great Britain’s Brexit will influence the economies of dozens of countries.

I recognize there will always be many unknowns around the world. If the first four reasons I outlined weren’t also concerns, it’s unlikely I’d delay early retirement solely because of issues outside of the U.S.

Do you think it make sense to slow roll early retirement for the reasons I’ve outlined?

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