How the COVID-19 pandemic changed our financial independence retire early (FIRE) plan

Back in mid-January, when I started hearing about COVID-19 spreading in China, I naively thought it would be something similar to what we experienced with SARS. Then in late February when COVID-19 started to spread in more countries, my co-workers and I started talking about how COVID-19 will be an eventuality in Canada and the US. Given the data from China which stated that the majority fatalities were older people, most of us downplayed the danger and impact of COVID-19. We thought the worst case would be a few weeks of quarantine at home and that would be the end of it. When we talked to co-workers in China who were going through a few weeks of lock-down, they also downplayed the overall impact of COVID-19.

Just like many people, I was very naive. 

At the time of writing, there are over 1.6 million confirmed COVID-19 cases with over 102,000 deaths worldwide. The USA, Italy, Spain, Germany, and France have all surpassed China in terms of confirmed COVID-19 cases. The medical system in Italy and Spain is getting completely overwhelmed. Because of this, the fatality rate in Italy and Spain is significantly higher than in other countries. Germany and France are having similar struggles as Spain and Italy too. In the US, the medical system in some states is close to capacity. Things are getting worse each day…

Here in Canada, things aren’t that much better. The number of confirmed COVID-19 cases is increasing daily (Canada is tracking the doubling-case-every-three-day curve) and more and more people are getting admitted to ICU. Several Canadian provinces have made moves to extend orders to stay home. BC Health Minister Adrian Dix even told people in his province that there’s “zero chance – none” that the order meant to tackle COVID-19 will be lifted by the end of April. Some health officials even went as far as predicting that we won’t see the end of social distancing and the order to stay home until this summer. As far as I can tell, Canada is not at the peak of the COVID-19 curve, so we still have a long way to go. 

The spread of COVID-19 caused the global stock market to tumble in late February and throughout March. After governments lowered interest rates multiple times, started bailout funds, and injected huge amounts of money into the market, things have stabilized a little. However, I don’t think we have seen the full economic impact of COVID-19 yet. Considering that many businesses are closed indefinitely, many people are staying in their homes and reducing their spending. On top of that, the unemployment rate is just starting to increase. Needless to say, the COVID-19 pandemic is having a HUGE negative impact on the global economy. What we are seeing in the stock market is probably just a hint of what’s going to happen in the near future. A recession is extremely likely now, and some experts have even said a recession is guaranteed. A few economists have gone as far as stating that we will see a depression, similar to the Great Depression. Scary stuff! 

Here at home, we are definitely seeing the impact of COVID-19 on our lives. Schools have been closed since March 13 and I have been working from home since March 16. For the most part, we are staying put in our house as an attempt to help flatten the curve. Mrs. T and the kids have not been out of the house for weeks (luckily we have a good size backyard so we can run around and get some fresh air there) and I have only gone out of our house a few times to get groceries. Originally Mrs. T and I had planned for a staycation in the middle of April, but it has been cancelled due to closure of the hotel. Tool is scheduled to play at Rogers Arena on May 31 and the band had just announced postponement of the show. I have been waiting to see them live again for over 13 years but I suppose waiting for a few more months is not an issue. We have plans to head to Banff and Jasper in the summer and this may be in jeopardy as well. Will FinCon happen in late September and will we go to Disneyland? Given the current dire situation, I think it’s more important to control the COVID-19 pandemic than heading out on vacations. We have been and will continue to do our part to flatten the curve. Vacations and other fun plans can wait! 

My work, for the most part, is secure, and I am busy managing my product portfolio and planning new product launches for later this year. Since most of what I do on a daily basis is not location dependent, I haven’t really missed any beats when it comes to work. To keep up with communication, I have been video conferencing a lot with co-workers. My boss even started a regular “coffee time (or tea)” Lifesize meetings among our team to chat and sync up.

Financially, when I updated our quarterly net worth in early April, we saw a drop of over $200k in our net worth. From a net worth point of view, we are roughly back to where we were around July 2018. It sucks to see a big decrease in our net worth, but I keep reminding myself that the ups and downs are normal on our financial independence journey. 

For those of you who might be new, you may not know that although we can be financially independent today, we are choosing to delay our financial independence. We are building our dividend portfolio so that in the near future our dividend income can cover our expenses. So what’s happening with our dividend income? How has the COVID-19 pandemic changed our financial independence retire early plan? 

In short, it hasn’t changed our FIRE plan. We are still on track to become financially independent by 2025 or earlier. Having said that, we realize that life can be up and down and things can change in a hurry, so if our FIRE timeline was to change, we are totally OK with it. Although we have already seen a few dividend cuts, our dividend income remains stable. The goal of receiving $30,000 or more in dividend income in 2020 will remain a very challenging goal (it was already extremely ambitious when I set the goal in early January). Given the current economic conditions, it is likely that more companies we own will announce dividend cuts, which will pose further challenges to our 2020 dividend income goal. At the same time, the bear market we are seeing provides a good opportunity to accumulate more shares. So the two factors may cancel each other out in the long run. In comparison, when the financial crisis happened around 2008, I was not as financially savvy as I am today. As a result, I didn’t invest like a madman and I certainly wasn’t taking advantage of the cash pile I had. 

Facing a really volatile bear market, I am actually quite excited. Hopefully the bear will stay for a while, so we can continue to accumulate assets.

As I step back and take a more macro view of our financial situation, I have realized a few things regarding our long term FIRE plan:

• Having a cash buffer, or high savings rate remains extremely important. 
• We are investing 100% in equities. One of the advantages, during a bull market, is that our investment portfolio can increase in value very quickly. On the other hand, during a bear market, the portfolio can also decrease in value very quickly. Therefore, it is extremely important to understand our own risk tolerance, so we don’t lose sleep when our investment portfolio is losing values. 
• Because we are still in our accumulation phase and still relatively young, our bonds allocation is small (only a small percentage in my work’s RRSP). As we get closer to financial independence and possibly early retirement, it will be important to shift some of our assets to self-directed bonds. Re-balancing every half year will be very important.
• Passive income diversification becomes extremely important when you are relying on it for living expenses. We currently hold 60 individual dividend stocks and two index ETFs. For the most part, our dividend income is diversified. But it would be nice to have other passive income streams like book royalties, rental property, peer to peer lending, GIC ladders, etc. 
• Although we are planning to live off our dividend income, companies can cut or suspend dividend payments in bad times. When that happens, that means a reduction of income and it may force us to sell some principals to cover the difference. Selling during a bear market is never desirable. Therefore, once we are closer to pulling the early retirement trigger and living off our dividend income (not sure when exactly), it is crucial to have two or three years worth of expenses sitting on the sideline in the form of either cash or bonds.
• Unlike many other FIRE folks, we aren’t planning to utilize the 4% withdrawal rule. What I have realized is that the 4% withdrawal may not be 100% bulletproof when facing a prolonged bear market. If we were to make withdrawals from our investment portfolio, it would be wise to consider a withdrawal rate of 3-3.5% or even lower.
• Make sure we “hit our numbers” with a good amount of margin. For example, we anticipate that we need $50,000 in dividend income to cover our living expenses. To be on the safe side, consider building up the dividend income to $60,000 before living off it completely. Don’t just foolishly believe that things will work out in the end. 
• Knowing that a “FIRE date” is not set in stone. Being flexible with our FIRE date is extremely important. Being able to adapt to the different living situations is important too. For example, consider downsize or geoarbitrage.
• Geoarbitrage, when there’s a global pandemic, may create some uncertainties. It is always nice to be in your “home” country during a crisis. If we were to seriously consider geoarbitrage in the future, we need to make sure that we’re in a country with a good medical system.
• Bull markets and bear markets will come and go. Nothing lasts forever. Don’t set our FIRE plan based on the current market condition. Use conservative numbers when running long term simulations. Focus on the important things like living below our means, investing for the long term, having a high savings rate rather than trying to find corner cutting ideas to expedite our FIRE journey. 
• I remain skeptical with borrowing to invest (i.e. leveraging). While borrowing to invest when the market is low seems like a great idea, the reality is that you never know when the market is truly bottom. Although the upside can be quite high when you borrow to invest, if the market has a few weeks of bad days, leveraging means you can get wiped out completely. Why? This thing called the maintenance margin requirement. Please let me explain.
  • Typically, you can borrow 50% from the broker, meaning if you have $5,000, you can borrow $5,000.
  • The more tricky part of leveraging is the idea of maintenance margin requirement. Typically, the maintenance margin requirement is 30%. This means if you make a trade, you must maintain a minimum of 30% of the position in your own cash.
  • For example, say you purchased $10,000 worth of a stock using $5,000 of your own money and $5,000 from the broker. At $100 per share, you own 100 shares of the stock. The 30% maintenance margin requirement level for this trade is $3,000. 
  • Now let’s assume the price of the stock drops by 40% in a span of two weeks. With the stock price at $60, your shares are now worth $6,000. The 50% shares that you own with your money is now worth $3,000. You are right at the margin requirement level. If the stock price falls further, your broker will send a notification email to you. You can have the following options: put more cash into the account to meet the $3,000 maintenance margin requirement, sell some stocks to make up the difference. If you don’t meet the maintenance margin requirement, the broker can and will sell the stock for you to protect themselves. 
  • As you can imagine, things can get out of control very easily if you are leveraging in multiple positions. 
• Even when it comes to taking out a Home Equity Line of Credit (HELOC) to invest (i.e. Smith Maneuver), we remain skeptical. Although the risk is slightly lower than borrowing directly from the broker, the risk is still there! 

Now, on a positive note, staying put at home over the last number of weeks has also given me time to reflect and ponder about life. I have really enjoyed working from home and not having to deal with the daily commute. Furthermore, I have been able to sit down with my family for all three meals and multiple hygge each day. Since we aren’t in a rush to get anywhere, we have been able to take a slower approach when it comes to meals and bedtime. It has also been nice to be able to see what the kids are up to regularly and join in their silly activities when I am not preoccupied with work. 

Because we are stuck at home, we are also spending less money than usual. We aren’t spending money on things like gas, eating out, preschool, after school activities, etc. Spending less money means we have more money to set aside for investing. From the looks of it, we will probably need to stay home for the entire month of April, at the minimum. Who knows, maybe staying at home will help us reduce our overall spending for 2020. Maybe we will be able to spend less than $50,000 for this year rather than the $54,906.02 in 2019.  

So far, the COVID-19 pandemic has reminded me that we need to remain flexible and adaptable on our financial independence retire early journey. The old saying “plans are useless, but planning is essential” is definitely true! A bear market does not mean FIRE is dead.