Well, it happened. Thanks to Covid19, I was laid off last week. Chalk up a new moment in my life, something I certainly never thought would happen after giving notice from my banking career exactly one year before this layoff.
Wait? What do you mean? I thought Mr. Shirts was financially independent and retired early. The answer to the first one is, yes, we are still financially independent, but with a lot less margin than a month ago. As for the retired part, well I won’t be dodging the Internet Retirement Police anymore because I am once again without work.
Background
Shortly after I retired early, I started helping a friend’s company for free. He and his wife owned a large company and had some upcoming expansion projects along with some debt that needed to be restructured at a lower cost. I continued to help them and we both realized this could be mutually beneficial. My skill set could help save the company hundreds of thousands of dollars on their borrowing cost and improve some other things in their capital structure. In turn, their company had health insurance with a relatively young employee pool at a little better cost than our ACA options. Instead of doing the work on a consulting arrangement, it was more beneficial to set up our arrangement as a work-remote employee late last year. There was little change to my lifestyle and I planned that the extra money coming in for 2020 went entirely towards the Roth 401k and health insurance.
So What Happened?
In short, the business is predicated on large public gatherings. At first the business was only somewhat impacted, as the markets it operates in are more rural and often…less obedient areas. In the course of about three weeks, the business went through the process of:
- This really isn’t an issue, it’s like the flu, right?
- This is an issue, but we sanitize well and are talking about it!
- The authorities just shut down our business until further notice….
Feels about like the same as the rest of the country. The company employed nearly 1,000 people and almost overnight all revenue went to zero. It’s not 80% of revenue, 50% of revenue, its zero and the business is owned by an entrepreneur. There is no magic pile of money sitting around to pay all operating expenses for months at a time with zero revenue coming in. The entrepreneur was doing what we want every entrepreneur to do with equity, reinvesting it into new locations and new equipment, all of which employed more and more people while providing great experiences for the communities they operate in.
I was helping them figure out how to triage cash, but I knew pretty quickly their ability to pay me was going to vanish. The company has a full time CFO and Controller that both need their employment to take care of their families at the same time a large portion of their job vanishes since there is no revenue to account for. I was in the first round of layoffs/furloughs. There was no time to wait for potential industry/government help if the company was at risk of missing payroll while hoping congress could actually agree on something quickly.
So What Happens Next?
The good news is the business should survive. It was run conservatively enough to have enough cash to pay for critical infrastructure for a few months and the entrepreneurs were experienced enough to reduce expenses fast and grasp just how dire this situation is for their business. One of their two banks has already stepped up to help, deferring payments and committing a line of credit. This help from the bank side is some combination of being noble and rational self interest, as the bank has significant funds outstanding and would prefer to have a performing loan in six months than empty buildings. Their other lender should get to that point as well, but the gravity of the situation has not set in yet for them. This is a natural disaster and must be treated as such. Eventually the side gig may come back.
The bad news for the entrepreneur? The couple who runs it will see almost all of their wealth evaporate overnight. This is eleven years worth of effort where they could have been working for someone else and investing the money on the side in conservative assets. The best case scenario is this situation will cost them most of their company’s balance sheet equity (their invested dollars plus years of retained earnings). The bank help is nice, but it is still an additional debt load that will be a drag on the company. The business also won’t be marketable in a sale for the next few years; the most likely buyers were public companies running with too much debt. It was eleven years worth of effort evaporating overnight. It should come back, but will take years to recover all the equity they’re going to spend keeping the company alive and emergency loans they might get.
The other bad news? They have eight hundred plus employees that either were laid off or took significant salary reductions and there was no other choice. It was either pay everyone for a short period of time and file bankruptcy and no one ever gets paid, or lay off the majority of employees, keep critical staff at a lower rate, and hope/pray. If the virus and the panic/reaction created can get under control to the point where they can reopen in June or July, the business can survive. Many of these employees will have bad feelings towards the owners, thinking this move is selfish or that there is a magical pile of money that’s been hidden (Scrooge McDuck style?) that should be used to pay them. It just doesn’t exist. To compound this anger, the primary state they operate is struggling to keep its unemployment website up and the payouts may not be enough to cover the cost of COBRA. It is a sad situation all around.
What Does This Mean For FIRE?
We went into financial independence knowing about the 4% rule, having a more conservative withdrawal rate, and knowing there was budget flexibility and even having a bear market contingency plan. We have enough cash to survive for a while without having to sell any investments into the teeth of this market decline. As of this writing, we still have somewhere in the high teens in years worth of living expenses, which is a good spot to be in with no revenue coming in. We’re also really frugal, we didn’t get to financial independence without practicing both good offense and good defense with money.
Our worst case scenario would involve me either taking a temporary appointment working on distressed assets (either through an equity fund, the FDIC, or the SBA) or going and getting a job in a few years and one at a lower stress level than I previously carried. That’s not bad compared to others and what I see as a more immediate concern: My former coworkers who don’t have the same safety net and are about to decide between paying for food, rent, or transportation to their job.
The Pitch For Help:
If you have means to help, please consider donating to your local human services non-profit. These are the organizations that provide emergency assistance to bridge the long gap between an unemployment event happening and getting through to various government benefits. These are the organizations providing emergency rent assistance, the food pantry, and case workers to help people get through the red tape to get the benefits they’ve paid taxes into for years. These organizations help keep people in their home and stop the spiral of poverty that can set a family back for a decade from an unemployment event. This is where many of our charitable dollars go and I encourage you to consider the same.
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I guess I’m missing something. You were good to retire early and not work at less than a 4% withdrawal rate. You just took the work because it dropped in your lap. The stock market has recovered mostly so you should be in no worse shape than when you pulled the trigger. So it seems to me you should never have to work again except for entertainment then, right?
You’re not missing too much, other than the “mostly recovered” part. My portfolio unfortunately mirrored the small cap index (lookup VB for reference) and is still down around 20%. I haven’t done anything drastic and expect it to recover, but that’s been an unfortunate part of this pandemic. Some companies I owned that were historically recession proof got hit hard, suspended dividends, and their stock price represents today’s reality. I expect it to come back in time, but we’re about $500/mo short of where we want to be on the 4% rule for our budget at today’s balances.
Fast forward a year and half later, I think this should have recovered?
I remember some stocks, like OXY cut dividends shortly after the March 2020 bloodbath – but it recovered quite nicely a year later and I was able to lock in some sweet LTCG.
Seems like for now, the stock has recovered quite well.