Should You Retire Early During a Recession?

At last, you achieved financial independence after many years of intentional living and are ready to retire. Unfortunately, retiring can be scary when a recession is looming. The future is very uncertain. Inflation, geopolitical conflicts, the pandemic, and supply chain issues make retiring a very scary proposition. Is this a good time to retire early?

*Updated for the upcoming recession.

Early retirement problems

Early retirement will be tricky during a recession. The problem is we need to fund our lifestyle differently than traditional retirement. If you retire at 65, you can rely on Social Security Benefits, pension, and retirement savings. That monthly retirement income replaces your paychecks. However, those options aren’t available when you retire early. There is no reliable monthly income. You need to set up your own passive income stream and/or live off your savings. Well, you can access your retirement savings by building a Roth IRA conversion ladder. However, that takes a lot of planning.

Financing early retirement

Every early retiree obsesses about their finance. There are many options and everyone approaches it differently. I retired from my engineering career 10 years ago, when I was 38. I still have many years left before I can access my social security benefits and a small pension. For the next 10-20 years, we will rely on the combination of our passive income, my blog income, and my wife’s income.

Right now, we are doing okay because our income is higher than our expenses. In fact, we can still save 50% of our income! That’s pretty amazing, but our saving rate will drop drastically after Mrs. RB40 retires early in a few years. That’s okay, though. We should be able to cover our cost of living, but we won’t be able to save as much. Putting off withdrawal will enable our investment to grow. That will be more than enough to fund our full retirement when we turn 65. Fortunately, we aren’t planning any big changes. Mrs. RB40 is taking a sabbatical and she’ll figure out what to do next when we get back from our long vacation.

What if she decides to retire this year? I think we’ll still be okay, but money will be tighter. The recession created a lot of problems for people who want to retire. Let’s talk about some of these problems.

Passive income reduction

This recession is very painful for workers. Investors are better off, but we are affected too. All sources of passive income are looking iffy. If you don’t have some margin in your finance, you’re probably very stressed out right now. Let’s take a look at some real-life examples.

  • Rental property – In a recession, a lot of workers will lose their job. Unemployed renters can’t pay rent so it will be a big problem for the landlord too. It will be a tough situation for everyone. Luckily, our tenants are still working so we’re okay for now.
  • Dividend income – Some companies reduced or suspended their dividend payments since 2020. Disney suspended dividends and hasn’t reinstated them yet. They really need to start paying dividends again. However, if a recession hit, they probably will keep dividends suspended.
  • Real estate crowdfunding – I’ve been an investor in real estate crowdfunding since 2017. It has been very good for us. This is how real estate crowdfunding works. Investors pool their resources and invest in apartments, office buildings, retirement homes, strip malls, storage facilities, and other big real estate projects. All these projects will be affected by a recession to various degrees. However, the timeline for these projects are quite long – 3 to 7 years. This recession should be over by then.

*Sign up with CrowdStreet for free to see what kind of projects are available.

Real estate crowdfunding is coming along very well this year.

Passive income probably will decrease in a recession, but it should recover after we get back to normal. If you can invest more, now is the time to do so.

Do you see the problem? Passive income is dropping as the recession drags on. Retirees can’t count on their passive income as in normal years. Also, this year is a great time to invest more. I picked up more shares of Disney because I’m sure they will resume paying dividends later. A retiree with little or no margin won’t be able to capitalize on that kind of opportunity this year.

Stock market volatilities

The stock market is nuts! It dropped 30% in just a few weeks in early 2020. But it came back very strong and hit a new high. The economy was great since then. However, the government printed too much money. This cause inflation and now the Fed is raising interest rate. This probably will cause a recession. Investors are scared and many of them are fleeing risky investments. Stock and crypto are down quite a bit again.

Anyway, we don’t know what the stock market will do next. The stock market might drop another 20%. We’ve seen this before in 2000 and 2008.

This is a big problem for early retirees. Many of us count on investment growth to fund our early retirement. Since we can’t access our pension and Social Security Benefits yet, we sell stocks to pay for our living expenses. Selling when the stock market is down is bad. It depletes your capital too quickly.

Most early retirees minimize this problem by having a big stash of cash. Many of them have 1-2 years of spending money in the bank as a buffer. That way, you can delay selling when the stock market crash. Ideally, the stock market would recover by the time you need to sell some stocks.

Personally, we will continue to invest. We don’t need to withdraw yet so we’ll take the opportunity to build wealth. We do have a good size cash buffer.

For retirees who plan to retire in 2022, I hope you already built up your cash savings. You didn’t sell when the stock market was down, right?

Don’t quit with nothing

Retiring early during a recession is the wrong move for most people. The next recession will be wide ranging. Everyone will be hit by the highest inflation in 40 years. This will be particularly difficult for retirees of all ages. Quitting your career right now is not a good move.

This is what I would do if I was planning to retire this year. I’d be working from home so life would be a lot better already. Then, I’d work just half a day. If my manager calls or sends emails, I’ll ignore them. I’ll skip most of the Zoom meetings and go offline every afternoon. Out of sight, out of mind, right? When I can’t avoid the manager, I would talk to him about putting me on the top of the layoff list. I might get lucky and receive a severance package. Quitting and walking away with nothing is the least optimal path forward. Even if you get fired, it’s better than quitting. At least you can file for unemployment to help ease the transition into early retirement.

Of course, this is easier to say than do. Back in 2012, I couldn’t operate at 50% on purpose for months on end. I’d feel too guilty about it. Now, I probably could do it. If you can downshift like that, go for it. It’s better than just quitting. There is no consequence. There is no need to maintain a good relationship with your employer/manager. They will forget about you as soon as you walk out the door. Don’t put any effort into maintaining a good relationship unless you plan to go back to work at some point. Make a clean cut and burn the bridges.

Bad year to retire

In summary, 2022 is a bad year to retire early. Unless you already prepare really well and have plenty of margins and backup plans, it might be better to continue working a bit longer. That way you can build up your cash savings and passive income. If you can’t stand working anymore, then just cut back and work minimally. It should be pretty easy to avoid your supervisor when you’re working from home. Once the recession is over, it will be a better time to retire early. In 2022, engineer your layoff instead of quitting. (This link goes to my review of Financial Samurai’s book.)

Okay, what do you think about retiring during a recession/pandemic? It’s bad timing, so why not put it off a bit? What do you think about my idea of working just 50% and asking for a pink slip?

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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58 thoughts on “Should You Retire Early During a Recession?”

  1. Great advice about engineering your own layoff! Next week makes fifteen years with the same company for me. In five or six more years, assuming I’m still here, I plan to have that chat with my manager (who was there when I started) about being the first against the wall when severance packages hit the table… and my wife is likely to go to 60% of full-time employment just so we can keep health benefits and pad taxable investments a bit. As you know, it’s a nice place to be.

    Reply
  2. A big consideration is that some people don’t choose to early retire but are faced with severe underemployment due to lack of opportunity or are forced to choose between elder care responsibilities and work. I see this a lot in my work as a career coach. It does make me double down on leaving a legacy for my kids, not b/c I don’t want them to work (they’re industrious and we’re encouraging that), but the reality is that there are a lot external factors that impact career longevity and asset accumulation.

    Reply
  3. I had retired in Feb this year. Now I am planning to get back to work for a couple of years, until the world gets back to order. Primarily because I am bored sitting at home. Had big travel plans, which had to be cancelled. May be will re-retire in 2022!!

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  4. I’m on the fence about retiring early during a recession. One, I think it depends upon how much of a buffer you have and how low you can cut your expenses. During a time like this where you can’t spend a whole lot on travel (well, maybe you can if you want to do a roadtrip somewhere and pay for luxury hotels) or other forms of entertainment, that could help prolong your savings. But if you’re spending more like so many of us are right now, then that’s an issue too. I don’t know. If I had a job I liked enough and could do it from home, I’d stick it out a little longer, especially if I could get away with doing things on work hours that aren’t work related, like laundry, cooking, cleaning, etc. I know people doing that right now. Others are super busy and can’t find a decent way to separate work from home. In that case, I’d struggle staying employed.

    Angela makes a great point about negotiating a part-time job through the recession, that way you at least have some income and probably benefits.

    Nice post!

    Reply
  5. I’m actually glad I retired a little over a year and half ago. I’m in that same boat as someone retiring this year, but I don’t think I would have had the confidence with how shaky things are right now. You nailed it though saying that “Every early retiree obsesses about their finance.” With solid planning (especially for the worst), I think it’s ok to pull the trigger, but I’d still be pretty anxious right now.

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  6. I’d feel a little guilty checking out while getting paid full wages but I think that’s the reality of people working at home with young kids at home who are not in daycare. There is absolutely no way you can work at home with kids. I tried making two phone calls the other day while kids were awake and it was a disaster, haha.

    Reply
    • I couldn’t do it in 2012. I’d feel guilty and stressed out. It’d be better to negotiate half time if possible.
      Good luck with work for the rest of 2020. Virtual school will start in 2 weeks for us…

      Reply
  7. Although I am bit far away from retirement but would not retire now if had a chance. For me working from already lifted half of my work burden. I am also very worried about the valuation of tech side of stocks . Once fed decide to raise interest in future, there will be a big awakening. Also this Robinhood type of platform making dumb money to flow into market. Robinhoood now have more trading than traditional brokerages. And most of them just following hype stocks.

    Reply
    • That’s great to hear. My wife likes working from home a lot more too. However, she is having a harder time focusing.
      We’ll see how the stock market turns out. It feels like the dot com boom to me. Many investors are not ignoring valuation.

      Reply
  8. Stock market is at all time high because there is absolutely no alternative for the money. Fixed income doesn’t exist anymore and retail well you all know how that is (only online now).
    Stock market is the only kid in town that can provide any returns and while that is true it will still not make sense to most of you just because you have to factor in Fed and other things in the equation to balance it out

    Reply
  9. I feel the biggest challenge to retirement is artificial low interest rates that makes it impossible to beat inflation without outsized risk. Income in safe assets are almost nonexistent and savers are punished while speculators are gifted asset appreciation due to the artificially low rates.

    Reply
  10. “I would talk to him about putting me on the top of the layoff list”

    I’ve seen this backfire.

    An old friend & coworker really wanted to quit and he begged for a layoff. They said no. The company pays severance during layoffs which is pretty large amount of money. If they know that someone actually wants to leave then they will let them leave on their own and thus save paying the severance. EIther way they write off the employee as gone.
    So in that situation at least, you’re better off being a poor employee but not being vocal about wanting to leave or stay.

    Of course YMMV, every employer / manager is different.

    Reply
    • Really? I thought most managers will try to retain the biggest headcount as they can. The more people you have, the more important you are. More workers make life easier on the project too. If you lose 2 people, that’s a big problem. Unless, the team isn’t doing anything useful, then it doesn’t matter.

      Reply
      • Yes the managers may try and build the size of their team.

        But if you ask for a layoff then thats a different matter. HR policy may dictate that and the manager may consider that you’re a ‘lost cause’ for them.

        Managers may also be measured on how well they retain talent. If people under a wants to quit then that can reflect badly on the manager.

        Of course it all depends on the individual manager and the company in quetsion. So theres lots of YMMV. But if I didn’t trust my manager a LOT then I would not tell them I’m looking to leave or ask for a layoff.

        Reply
  11. I would rather face the most challenging scenario up front. If you make it through this, then encountering setbacks in the future will be much easier. Also if you wait for the pandemic to end, it is like timing the market. When do you get in? With the market back up, it gives you the chance to pad the cash reserve. I see this as a great time to retire.

    Reply
  12. I think it is possible to retire early now, but you have to feel very, very confident in your plans. I retired in November 2019 and so this experience has actually been a good stress test of our financial plans and our mindset. It was a little nerve-wracking in Feb and Mar when the market was tanking, but it forced us to double and triple check the plans we had put in place. We also retired with more than 25 times expenses so we had so extra cushion. Plus we have 4 to 5 years in cash so we felt comfortable going through the downturn.

    I thought we would be more bored because we couldn’t travel and explore, but we have found plenty of things to do (so far) to keep us occupied.

    I like your idea on trying to get a severance if you were still working now. I was able to get one when I left last year and it has definitely helped our situation this year.

    Reply
  13. Purely from a financial standpoint, I believe retiring or quitting work during a recession is not a smart idea. Based on the past few massive economic disruption I’ve been part of, a recession presents tremendous investment opportunities.

    Having a “steady” cash flow stream such as a job will provide a level of confidence to take investment risk and make investments which can pay off handsomely once we come out of the recession and the economy is growing at a nice clip again.

    Not only do you lose the income from job by retiring during a recession, you also lose the potential investment return on great investment opportunities.

    Reply
  14. We’ll see if we flubbed things by starting the transition to early retirement in May (2020). We were planning it for a while, with the wheels already beginning to turn late in the winter.

    So far, it’s working out fine, but we also had a fairly large buffer (generally aiming to follow a 3 instead of 4% rule). We’ve also maintained our working relationships by making a smooth transition from full-time to part-time work with our existing employer/clients/agency/business. That should help keep us connected to income sources, should the need arise, while this pandemic continues to play out. We definitely avoided the “make a clean cut and burn the bridges”.

    Stil, we’re quite happy with the semi-retirement lifestyle phase on the path to early retirement we have so far. We’ve made the most of the lack of travel by planning future travel, taking a staycation, building up our giving plan, and working on our hobbies. No time like the present.

    Reply
  15. It’s definitely risky to retire early during a recession because your portfolio will get hammered due to market volatility. If I were looking to retire in 2020, instead of retiring, I’d negotiate with my employer to see if I can go from full time to part time work.

    Reply
  16. I would definitely not just work less for the same pay – but perhaps that would be the time to negotiate part time or contract work?

    If you’ve done your numbers right, you should be able to retire in a recession anyway – but I think I would be too cautious for that.

    Reply
  17. The way I see it, you aren’t retired per se, but rather have shifted to work that you enjoy (blogging and passive income).

    That is a far better strategy than just quitting outright.

    I’d be extremely hesitant to just stop working with the current financial situation the way it is, even if I had enough passive income to cover expenses. The financial conditions are just too volatile right now and make it extremely difficult to predict income from investments.

    Reply
    • I see it as mostly retired, especially now. I work on my blog just 10-15 hours/week. It’s not stressful and I enjoy it. I don’t know if I will ever stop working completely.
      I’d be scared to quit my full-time job in 2020 as well. It’s scary.

      Reply
  18. I was planning on taking a mini retirement during March of this year. Well that didn’t turn out very well. Although I really don’t have any plans to retire completely from active work, I did plan on taking a a few months off. This could have easily turned into a few years and then a full blown retirement. You never know where life takes you 🙂

    I’m glad it didn’t happen though. I would have missed a great buying opportunity.

    It will have to wait until this blows over.

    Reply
  19. I just retired early March 1. We had planned for a market meltdown anyway, and have ten years cash set aside. So while this wasn’t planned, we’re fine. We’d hoped to travel and possibly work a job in the mtns but for now I’m walking two hours a day, lowered my blood pressure immensely, am sleeping well for the first time since the 80s. I think leaving work will add ten years to my life. I didn’t realize how toxic it was.

    If a court decision kills healthcare availability we plan to move abroad and rent out the place here. That’s our main contingency plan, which we might activate anyway just for fun when borders open. For now, I’m so glad we had the courage to finally do this.

    Reply
    • Wow, 10 years of cash is huge. Good planning.
      It sounds like you’re enjoying your retirement. That’s great. I became much healthier after quitting my career as well. Work can be pretty toxic. Good luck with healthcare.

      Reply
  20. I agree. Unless you are certain of your cash flow for at least two years I would not consider retiring. Perhaps its a good time to test it out by cutting back hours to 20 per week?

    We don’t know how deep of a recession we will go. It is rather unprecedented to see the fed’s backstop to support the economy. For dividend companies, we have seen a few dividend cuts as well and support it mostly is the case of Disney for instance.

    Reply
  21. The current situation epitomizes the sequence of return risk any retiree faces. I too am shocked at the disconnect between stock market valuation and the actual economy.

    It’s also a bit frightening what the true impact of this helicopter money will have long term as the feds have created trillions of relief dollars out of thin air to support those impacted by Covid.

    Will the dollar get devalued so much in the future that all the money saved up becomes worthless like Venezuela? Lot of macro economic issues to consider.

    Reply
  22. Absolutely not the time to be retiring. Like you said, working from home is already miles better.
    I don’t think burning bridges is ever a good idea if it can be helped. Any network can be a good network!

    Reply
    • I’m serious. Nobody will even think about you when you retire. Of course, it’s better to keep a good relationship if you can. However, I don’t think it should be a high priority.

      Reply
  23. Thanks Joe, this was a very timely post for me. I am soon 40 years old and I’ve been planning to retire end of this summer. I’ve done a 10 year career in a big international corporation. It’s been great in many ways (experience, colleagues, money…), but also very demanding, especially the last years because my responsibilities have increased, and I also have a family now. My plan was to take a long break (at least a year), travel the world, relax and then find maybe something less demanding. Now, I don’t know what to do… The job is more demanding than ever, and my portfolio is still doing quite well, but traveling is out of the question and in general, I’m more nervous about the economy as well. I think I need to take a timeout and reconsider my plan…

    Reply
    • That’s a tough situation. Can you negotiate to work less? Since you can’t travel so you’ll be stuck at home anyway.
      Then you can shore up your finance and maybe travel in 2021 or 2022. Good luck!

      Reply
      • In this kind of coroprate position working less is not an option. It’s mentally tough to continue working longer than planned, but I think I’ll continue at least a bit longer. I hope the vaccine becomes available soon.

        Reply
  24. I’m glad I’m only semi-retired, and I’m not even sure we’re in a recession now by the technical definition since the market is all kinds of crazy and roaring back. But I agree with you that the cognitive dissonance of the market as to what’s happening on the ground has to rectify itself at some point. But what do I know, if I could predict that accurately I’d be famous….

    Reply
  25. Generally, I’m in agreement Joe. Retiring during a recession is probably not the best idea. Ideally you might keep working until the recession ends, committing as much capital as possible while stocks are near their bottom.

    Then, when the economy recovers, you ride the upswing and say goodbye to your job. Hopefully the economic expansion will last long enough and produce enough excess to carry you through the next recession.

    That’s sort of the ideal scenario. It’s a bit like surfing, only your riding the waves of the economy. The trick is to catch the wave at the right time.

    Reply
  26. SO glad I retired 2 years ago rather than 2020. Even though I retired at 55, rather than 40 or 30, this would be a terrible time to cut the cord, especially for people in their 30s or younger. Your advice is good. If, as you predict, the stock market tanks again, early retirees, who typically need to rely on strong markets for the first several years of retirement could be royally hosed.
    Hang in there, try to work out a severance, and retire next year or the year after.

    Reply
      • We have about a year in cash. I receive a modest defined benefit payment every year, and have been taking a relatively small amount from our taxable investments since we retired. We haven’t had to increase withdrawals, and will probably decrease them once our house purchase is done. Our portfolio has increased with the market, so we are still way ahead of where we were in May 2018. Another big key is we have continued to keep annual expenses at $40k or below.

        Reply
  27. Well I like to disagree 🙂 So I would say that has long has you have good contingency plans in place, you can still decide to retire in a recession year. This might actually be the best time to retire, because if you can manage to go through the recession, the recovery years would be easy on your nest egg. Of course, all recessions are created equal. For 2020 for instance, I think people that have heavily rely on financial investments to fund their retirement plan this year are back at where things were at back before the crash in March. I don’t understand why the market have been recovering so well (and they might fall in the future) but from a numbers stand point, things are looking good. Take PF blogger APurple life that was planning to retire (from work) post COVID19 and did actually pulled the ricker earlier tis month while having a lot of time to look at her options. But that is only my personal opinion 🙂

    Reply
      • Thank you! I was planning to retire this year before COVID. I had my cash cushion in place to reduce my sequence of returns risk.
        My plan for the first year of retirement was to cook healthy food, exercise and read. I was planning on doing some reconnaissance travel to look into moving to a LCOL area, so that has been postponed. Otherwise, so far, so good.

        Reply

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