Five Moves We’re Making To Prepare For High Inflation And Potential Recession

Multiple companies, such as Tesla, Coinbase and Redfin, are announcing layoffs. Some companies have rescinded previously made offers (Coinbase again! also Twitter), while some are decreasing hiring (Netflix, Peloton, Facebook). You also can’t visit any news site without seeing a post on crypto winter, which impacts not just crypto values but also the job market at crypto firms.

At the same time, we’re facing the highest inflation rate in recent memory. My favorite retirement calculator is courtesy of Financial Mentor, and one of the variables you can model is inflation rate. Try it for yourself, and you’ll see that an increasing inflation rate kills a portfolio. Your raise might not be enough to keep up with inflation (here are some of my negotiation tips in Forbes if that’s the case).

Luckily we have made most of our major purchases already – home, car (which we plan to keep for a few more years), college educations for our kids. That said, we still have day-to-day expenses:

• Food is much more expensive, and we can’t stockpile that, especially since we prioritize fresh fruits and vegetables and farmers’ market items.
• Our utility company just announced a high double-digit rate increase on electric service.
• Healthcare is always a wild card.

We have not started living exclusively off our investment portfolio yet – we are still consulting, since given our ages (51) we could expect to spend four decades or more “in retirement”. Now with inflation and a slowdown in the job market, we’re even more concerned about touching our portfolio. Instead, we’ve decided to focus on five moves:

1 – Increasing our cash position

We sold three of our real estate properties in the last year – our house in Costa Rica, our second of two condos in Costa Rica and the 2-bed Jacksonville Beach condo we were living in before upsizing to our current 3-bed. The choices of what to sell were somewhat opportunistic, but we deliberately wanted to trim our real estate holdings and shift to cash. The real estate market seemed unjustifiably frothy, and our allocation had grown out of whack.

With those sales, we have gone from 70% real estate / 30% paper to 40/60 (or 50/50 depending on how aggressively you value the real estate). This makes us much more liquid and less at risk to have to sell something too cheaply in a downturn.

2 – Moving from variable to fixed interest rates

Another way we increased our cash position was completing a cash-out refinance of our primary residence. Our place had doubled in value since we bought it, so even though we already had a HELOC on the property, there was more equity available in the property to free up. We did a cash-out refi that was double the amount of the HELOC and has a fixed interest rate compared to the variable rate with the HELOC.

Our new mortgage is a 10/6 ARM (adjustable rate mortgage) with a starting rate of 3.62%. With a 10/6 ARM, the percentage is fixed for 10 years, and then can adjust every 6 months after that. Our loan also has a provision that it can only go up or down 1% point at a time and the maximum it can go up (or down) is 5%. We plan to pay off the mortgage within 10 years anyway, so we have a nice low rate for now.

We also selected a fixed rate on our youngest’s student loan for senior year, locking in 4% for the 10-year loan.

3 – Doubling down on income possibilities

There’s a limit to how much we can save on loan interest, but no limit on how much we can earn, so most of our energy is focused on pitching for consulting projects.

A weak job market could hurt our business if companies clamp down on all spending. But it could also help our business if companies opt for consultants over permanent hires.

As a recruiter, I’ve seen both scenarios – it really depends on how the individual company is faring, and this is tough to gauge from the outside. We just keep pitching.

4 – Exploring full-time, in-house employment over consulting

In addition to pitching consulting work, I’m also talking to companies about permanent, full-time positions. While researching a contract opportunity, two interesting opportunities came on my radar (those annoying LinkedIn notifications sometimes ping you with interesting things!).

These are industries I’m interested in and roles that are a mix of what I do now. A volatile market is a great time to lock down something more permanent. If the economy takes down the company, I’ll be eligible for unemployment – which wouldn’t be the case if my own consulting business slows.

5 – Reconsidering our home base

We look at FIRE in stages. For us, stage 1 is having our home base be in the lowest cost Costa Rica, stage 2 is having our home base be the middle cost Florida, and stage 3 would also include maintaining our home base in New York City.

Right now, we have a potential base in all three of these areas, but we’re not exclusively relying on our portfolio to maintain that. If we dropped our consulting and had to draw down our retirement portfolio, I wouldn’t feel comfortable spending down our assets to support a stage 3 lifestyle.

In that scenario, more realistically, we would sell the NY base and stay exclusively in Florida – our stage 2. However, with inflation so high and potentially rising (or at least not decreasing anytime soon), I’m not confident in staying at stage 2.

This is all theoretical since we’re not relying on our portfolio, but I always like to map out our worst-case scenario. If inflation remains high and consulting dries up, it seems more prudent to wait out tough times in Costa Rica. We can rent out our Florida place, increasing our income and as a result draw down our portfolio at a slower, stage 1 pace. Renting out our Florida place would make a decision to come back easier to implement, since we could just return when the lease is up.

Despite the bad news in the market, we continue to scout for new investment opportunities

It’s not all doom and gloom because of the market. We continue to scout for new investment opportunities. If real estate prices level off, there might be more reasonable properties to buy. There are deals to be had in every market.

In fact, we recently closed on a unit in a building we’ve been looking at for a couple of years. Details to come in a future blog post!