This COVID-19 pandemic, with its widespread and uncertain fallout, is giving me flashbacks to the Great Financial Crisis of 2008, when the big banks were subject to stress tests to ensure they had enough reserves. I was doing HR consulting for a big global bank that had their stress test deadline coming up. In better times, they probably would have assumed they were too big to fail, except that Lehman had already failed so why not them. My client was weeks away from their deadline, but the employees were already freaking out because the process was not widely shared (they wouldn’t want their customers or competitors getting wind of anything prematurely).
My role with the bank was not related to the actual stress testing, except to coach the HR partners of the different business lines on how they could manage morale during this uncertain time. You see, it wasn’t that the employees suspected the bank didn’t have enough reserves (they did) or would somehow flunk the stress test (they passed). It was the not knowing that debilitated much of the workforce. Productivity was down as people gossiped about what they had heard in passing or in the news and what these crumbs of incomplete information might mean.
Similarly, this pandemic and the stress it puts on the global economy, plus the uncertain timeline of how long this will go on is a stress test for our FIRE plan. We thought we had a pretty diversified plan as we rely on a mix of four strategies to maintain our FIRE lifestyle.
For more on the four strategies and how we’ve used them, check out our free course, Making FIRE Possible.
We’re still OK, and the pandemic is a real-time stress test to see how our plan holds up – each of our four strategies is being stress tested in a different way:
Stress Test 1 – Our consulting business is hampered by social distancing and travel restrictions
Consulting is part of our work-at-what-you-love FIRE strategy. Even though we have clients to take care of and deadlines to meet, we pick projects squarely in our interest so our day-to-day doesn’t feel like a grind. Some of our consulting is continuing unabated, and we are actively nurturing the business to grow even in these slow times (see five ways we’re keeping the business going). But, a big part of my work is done live and involves travel. When will group events come back? When will borders open? It could be months or years before that income stream recovers fully.
Adjustments we’re making: I have always looked at the types of clients I serve to make sure I’m not over-reliant on any one client. Now I’m also looking at type of delivery – i.e., virtual v. live — and aggressively growing the virtual aspects of our business. We were already trying to shift more work to virtual so we could work from anywhere, but we weren’t fully there in time for the pandemic.
Stress Test 2 – Our real estate income depends on having tenants keep their jobs
Our real estate is part of our passive income FIRE strategy. Our portfolio is pretty diversified, and we have solid tenant history. We have 10 rental units in 3 locations, including international (Tamarindo, Costa Rica). We have condos, single-family and a duplex. We have both vacation and long-term. Our rentals are in middle-class neighborhoods, so our tenants aren’t living paycheck-to-paycheck but it’s also not so luxurious that our tenants might need to cut back when times get tough. Still, this economy will stress test how diversified we truly are.
Adjustments we’re making: We already made a significant adjustment last year by selling our entire portfolio in Indianapolis (5 properties). Even before the pandemic, we feared a recession (or depression if you believe Ray Dalio), and we felt our Indy properties would fare the worst. We have to wait and see how our remaining tenants will fare in the slowing economy to really know if we trimmed enough. Luckily, we don’t have much leverage on the remaining properties (~40%), and our mortgages are at low rates – not rock-bottom but not worth refinancing right now. Sometimes I think about taking some of our paper assets and using them to pay down the rental mortgages, but we haven’t done so. If we did, I already have a strategy worked out as to which mortgages to pay off first.
Stress Test 3 — Closed borders eliminate our Plan B for now
Extreme saving is a popular FIRE strategy, and we didn’t use it get to FIRE. However, we do have it as a backup strategy – setting up a FIRE Plan B in Costa Rica, where we could live at a third of what we spend in the US. Unfortunately, Costa Rica borders are closed. This hampers our vacation rental income (part of stress test 2!) but more importantly, eliminates the possibility of decamping to Costa Rica if things really take a grim turn here.
Adjustments we’re making: None right now since we really can’t make any moves – the country is in strict lock down – and it seems premature. We did get a couple of offers from locals interested in renting our now-vacant vacation rentals as long-term rentals but the numbers didn’t make sense, and we can afford to hold on – keeping our leverage low helps here too!
Stress Test 4 – The recent bear market cut our paper passive income by 33%
Our paper portfolio was our first FIRE strategy. My first job was in finance, and your Magic Number is a popular topic – that’s the amount your portfolio needs to be so that you quit your job. Even though the Magic Number strategy for achieving FIRE is the first one we learned about, it’s actually the one we’re relying on least since I don’t want to actively manage paper investments (no interest, no skill) so I wouldn’t feel comfortable relying on any amount of assets. Instead, we look at our paper as a backstop, and we hope to never have to touch it and leave it to our estate. Still, the recent 33% drop affected me more than I expected it would.
Adjustments we’re making: While we’re still not relying on our paper portfolio, we have moved into a tactical asset allocation strategy over buy-and-hold. It’s still early to report any meaningful results, except that our volatility has been cut dramatically. We’ll also be converting our traditional retirement assets to Roth plans starting this year. With all this government money flying out the door, I can’t imagine that tax rates will go anywhere but up in the next decade. Might as well convert and pay at the lower rates while they last.
All these stressors make me even more grateful that we pursued multiple FIRE strategies simultaneously
We didn’t start out with a grand, overarching plan to pursue four different FIRE strategies: Magic Number; extreme saving; passive income (real estate in our case); and work that feels like play. However, I’m so glad that it worked out this way because this pandemic is stress testing each and every one. I worry when I think about any one strategy in isolation, but knowing that we have four is somewhat of a comfort. I’m still worried that this recession/ depression will be so deep and so long that we’ll have to adjust even further. But we’ll cross that bridge as needed – and I’ll report any updates in future posts!
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How is the current economy stress testing your plans? What changes have you made?
For more on the four strategies, take our Making FIRE Possible course. It’s free.
We are Scott and Caroline, 50-somethings who spent the first 20+ years of our adult lives in New York City, working traditional careers and raising 2 kids. We left full-time work in our mid-40’s for location-independent, part-time consulting projects and real estate investing, in order to create a more flexible and travel-centric lifestyle. 
Financial independence and early retirement is not something we originally focused on, but over time realized it was possible. Our free report, 
Congrats on being able to fair these turbulent market times. What are you referring to with your paper portfolio, may I ask?
Our paper assets were mutual funds before and now ETFs. We were all different stock funds before — international, domestic, large cap, small cap, emerging markets, etc. Now we are in other asset classes such as gold, bonds of different duration. We’re still majority real estate (properties, not REITs which i would count as a paper asset).
nice move selling those indy properties while life was good. i find that to be one of the hardest things is to sell appreciating assets, even though ours are stocks. i think the biggest lesson i am learning is to do this incrementally. you don’t need to be all in or all out. that’s great you have that consulting business. one of these days i’m going to get serious about building a money advice business for retirement/fun. i forget where y’all are living now. still nyc? best of luck with your tenants being able to pay.
We’re in FL now, though we kept our apartment in NYC, and our oldest is living there. Yes, it’s hard to sell appreciating assets — we didn’t rebalance fast enough on our stock portfolio to convert the gains into other asset classes. Oh well — we’ll be more diligent in the future. Regarding real estate, we plan to hold everything for now and bank the rental income, and it’s hard to say how impacted rents will be by the economy — we’ll have a better idea in a few months.
Definitely a stress test. Having multiple strategies is huge. Glad things are working out so far. Bummer about the Costa Rica property. Hopefully, none of your tenants end up having an issue making rent.
Good luck.
Max
The tenants paid up in April but who knows how long the recession will go on. Interestingly, we got longer-term rental offers on our Costa Rica places, so we know they’re desirable places to live. It’s just that tourism is dead for everyone right now. luckily we didn’t take any debt on any of the properties and they have low holding costs so we can wait and see.
I’m glad the bull market is back though. It was looking dicy for a bit in March. That was quick!
I was thinking about trying to generate some earned income to boost my losses, but decided to give up. Our expenses should go down once the $9,000+/month night doula goes away.
It was only supposed to be for 3 months, but after losing so much in the stock market, what’s another 3 months right? Besides, it makes my wife happy 🙂
Sam
Wow, I didn’t have a doula with my 2 kids so I have no idea how expensive that can be. Our kids are 18 and 24 now, but I still remember how painful the daycare costs were! I hear you about looking at earned income to boost losses. I worked in finance briefly at the start of my career but don’t have any interest or talent to try and boost my investing numbers, so earned income is where I will focus. My specialty in career should be of interest now given this difficult job market, and it’s still something I’m passionate about, so it’s a good mix of work and play. But I have much older kids so I can focus on my work in a way that I couldn’t when they were younger. Enjoy every minute of parenthood — it goes fast.
This current pandemic situation is definitely stressing me out. It made me realized how unprepared I am to live through this kind of situation. On the lighter side, it’s also a great wake up call for me and as soon as this quarantine is over, I’ll definitely be making big change sin my financial life.
Yes, the pandemic is definitely a test of financial health, mental health, relationships, almost all areas of life. I’m glad you’re seeing it as a wake up call. For us too in terms of needing to manage our risks and stay liquid. Who knows how long this will last?