Saturday, May 02, 2020

Stress Tested Strategies

The COVID-19 pandemic and ensuing lockdowns have stress tested a number of personal finance strategies that have benefited from a strong economy and an 11 year bull market.   Some of these strategies are having their fatal flaws exposed during the Coronavirus crisis.  IMHO, here are some that I believe are being stress tested the most:

  • FIRE practitioners.   FIRE stands for Financial Independence Retire Early.   I have generally been skeptical of most practitioners.   Some "early retirees" are men that become Stay at Home Dads, while their wife continues working and covering health insurance through her company.   When I was growing up, that was called a single income family, not retiring early. (If I used that definition, my mom retired at 30 when I was born.)   Other retirees are doing freelance employment, e.g. blogging, and earning significant income to cover most of their living expenses.   I think that is great, but to me is not "retired."    Another group of retirees have saved about $1 million and plan to make that last 40+ years, probably supplementing with blogging income.  Most FIRE bloggers are putting up a strong face.  It will be interesting to see how many survive this COVID-19 stress test.
  • Retirees with health insurance but without pensions nor Social Security.  These retirees have health insurance coverage from  their previous employees, but no pension, only 401K or profit sharing plans.    In addition, they are not old enough for Social Security.  I put us in this group, although I could start taking Social Security, but have chosen not to.   Many are dependent on the growth of investments in their reitrement plans.   With the decline in the stock market, it will be a stess test of their funds.  For us, COVID-19 stress test is deja vu all over again, since the 08/09 recession happened right after I retired at 49. I learned then being 80% investing in equities was not good in a decline.   After surviving that stress test, I prepared our investments to withstand a similar decline, and the investments have done well so far.   We'll see if we survive this stress test.
  • Mortgaged real estate.  With extremely low interest rates, owning rental real estate has become an attractive opportunity, especially for Airbnb hosts.   From the real estate courses I took, the strategy was to have rent cover mortage, property taxes, and routine expense.   Let the tenant pay for the property.  That works until there aren't tenants for long periods, which is happening to a number of Airbnb hosts.  Even landlords with long term tenants are experiencing some significant percentages of non-payment of rent.  I expect a significant amount of Airbnd properties to be at risk for foreclosure duing this stress test.  Personally, we own, as part of a partnership, a commercial rental property, that fortunately is paid off and is fully rented.  We only have taxes and maintenance to cover, and tenants are still paying rent, so far.
Soon the media will be reporting the survivors and failures of the COVID-19 stress test.  I think we are prepared, but there are no guarantees we will be survivors.

For more on Reflections and Musings, check back  Saturdays for a new segment.

This is not financial, retirement, nor real estate advice. Please consult a professional advisor.

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