If you've had your sights set on early retirement this year, you might be wondering if you can continue with your plan given the current ASX 200 bear market. The S&P/ASX 200 Index (ASX: XJO) has fallen more than 20% lower in 2020 as coronavirus concerns have shut down economies and spooked investors.
But should you let the current climate affect your plans to retire early? Here are a few tips to help you make an informed decision on your long-term future.
Can I retire early in this bear market?
It's worth noting that this is very much a personal decision. Individual circumstances will determine whether you can or cannot retire early in the current ASX 200 bear market. However, there are a few things you can do to reduce your financial stress today.
First of all, if you're in a position to consider early retirement you probably have a solid investment strategy. That's a great start, and could help you weather the current storm. Traditional theory says you should probably look at reducing the risk in your portfolio as you near retirement.
However, that's a bit tricky if you want to retire early. If we assume a 4% safe withdrawal rate per year, and you want to live on $40,000 per year, you probably need to have $1,000,000 in income-producing assets. That could be ASX dividend shares like Fortescue Metals Group Limited (ASX: FMG) or growth shares like Xero Limited (ASX: XRO).
Once you account for inflation, you probably need to be earning roughly 6% per year for the long-term. That's a bit hard to do with anything other than shares or real estate. Interest rates are at a record low of 0.25%, which means savings accounts and term deposits won't cut the mustard.
That's not to say you can't retire early in the current ASX 200 bear market. However, it's wise to have a significant cash buffer to ride this out for the next couple of years. One of the biggest risks is not having sufficient liquidity available and being forced to sell your ASX shares at a loss.
You should also be flexible in your expenditure. If you can reduce your spending while times are tough and shares are falling, you can be in a secure financial position on the other side.
Foolish takeaway
It's still possible to retire early in this ASX 200 bear market. The main thing is to keep a cool head and plan for the long-term. Markets will bounce back when COVID-19 passes, and with some extra security measures like a cash buffer, you could be sitting on a beach in no time.
