The financial independence and retire early (FIRE) movement has been the subject of much debate in recent years. FIRE movement is often criticized for portraying the American Dream as unattainable. The movement has also been criticized for not considering the consequences of withdrawing from the workforce.
If you take away all of these criticisms, what is left? Proponents of this movement claim that it is possible to earn enough income to sustain oneself through investing and achieving a certain level of income. Financial independence can be achieved by following a few simple guidelines to live below your means, save more than you spend, and invest in assets that grow faster than inflation.
Things to keep in mind before following FIRE
For all its advocates, the FIRE movement has its detractors. Some of the criticisms below are legitimate risks that you should mitigate before you retire. Others are simply a reflexive reaction against the new, the disturbing and the different.
You can run out of money
Whether you’re retiring in your 30s or 80s, you’re at risk of running out of money if you didn’t save enough while working.
Some investments, such as rental properties and dividend-paying stocks, generate ongoing income without the need to sell assets. However, because most stock returns come from price growth, retirees typically sell a certain percentage of their stock portfolio each year during retirement, causing it to decline over time.
What percentage can you sell without worrying about running out of money? The unsatisfactory answer is “It depends”, but the traditional answer is that with a 4% withdrawal rate, your portfolio will last at least 30 years.
Lower withdrawal rates leave your savings intact longer, which means if you want to retire early, you need to save more money. It’s not rocket science, but the amazing thing is that you don’t have to lower your withdrawal rate much to make your savings last indefinitely.
Based on historical stock market performance, a 3.5% withdrawal rate will allow your savings to grow forever; see this explanation of how secure withdrawal rates work for more details.
How to avoid it
Running out of money is a retirement risk in general and not unique to early retirement. No one should retire without fully understanding how much money they need to have saved and invested, regardless of their age.
You can retire with very little income
Just because you can live on $5,000 a month today doesn’t mean you can live on it next year or 30 years from now. This is due to two factors: the risk of inflation and the risk of unforeseen future expenses.
In the case of inflation, you need to take it into account when planning your savings. For example, when financial planners calculate safe withdrawal rates, they adjust for inflation each year, increasing the annual withdrawal by 2% or so.
I particularly like rental properties for ongoing income, as rents rise along with inflation. And since fixed-rate mortgage payments remain the same, your profit margin on rents grows faster than the overall rate of rent growth or inflation.
How to avoid it
Once again, future income growth and accounting for inflation are critical to overall retirement planning. Investors need to learn how to hedge against inflation, regardless of when they plan to retire.
But early retirees have a unique advantage over their older counterparts: They can go back to work if needed. A person who retires at 40 can change his mind two years later and start earning again. A person retiring at age 70 has a harder time returning to work.
You may not have enough budget for future medical expenses
Most people in their 40s have relatively low medical expenses. The same cannot be said for most people in their 80s. Adults should expect higher medical costs as they age and their health deteriorates. It’s part of retirement planning, as is making sure your savings don’t run out, regardless of your retirement age.
Keep in mind that you become eligible for Medicare at age 65, so when you reach traditional retirement age, you can still lower your health care costs with Medicare. That said, if you didn’t work long enough to qualify for Social Security, you may have to pay for Medicare.
How to avoid it
Between the day you retire and your 65th birthday, you will need to cover your own health care costs. Even after qualifying for Medicare, many people choose to purchase extended coverage, commonly known as Medicare Advantage. Budget accordingly and plan for higher medical expenses as you age.
One approach is to review healthcare options for the self-employed. You can also use an HSA through Lively to combine a high-deductible insurance policy with your own flexible health savings investments.
Some people take fun, relaxed part-time jobs that offer health insurance. And many people who achieve financial independence never fully retire. They simply switch to a dream job with a lower salary, a dream job that ideally includes health coverage.
Lose decades of compounding and wealth accumulation
When you retire, you stop earning and start relying on your investments to cover your bills. That means he stops investing fresh money in them and starts withdrawing money instead, which means no more compounding returns.
The composition is incredibly powerful, but it takes time to work its magic. Consider two people who start working at age 22 and invest $10,000 per year each year of their careers:
One of them has a traditional career of 45 years and retires at 67 years. With an average annual return of 10%, they retire with an impressive $7,907,953.
The other retires at age 42. With just 20 years of contributions and compounding, his savings are less than a tenth of the $630,025.
How to avoid it
First, not everyone wants to be rich. Some people would rather retire young with a modest lifestyle than work 25 more years for a rich lifestyle.
Second, the math in the two examples above assumes that each worker is investing the same amount each year. But that’s not how FIRE works; people who pursue FIRE intentionally budget a high savings rate to maximize their investments. They effectively exchange a high savings rate for capitalization.
Lastly, keep in mind that most people searching for FIRE don’t quit working and earning money altogether; they just change careers. In fact, they may decide to work for more years than their traditional counterparts as they are pursuing their dream job.
A better comparison would be that the FIRE seeker invests $30,000 or $40,000 per year for 20 years, in contrast to the traditional worker’s $10,000. After 20 years with a 10% compounded return, the FIRE seeker would have $1,890,075 if he invested $30,000 per year and $2,520,100 if he invested $40,000 per year. That’s still less than the 45-year career worker, but nothing to scoff at.
You live for the future, not the present
If you scrimp, save, and sacrifice today so you can have a brighter tomorrow, aren’t you living in the future and not in the present? In fact, what if you get hit by a bus and never see that better future?
We all must walk the delicate balance between planning for the future and living for the moment. But when you put so much money and energy into generating passive income for tomorrow, it can be easy to lose sight of the joys of today.
How to avoid this risk
Frugality and a high savings rate don’t necessarily mean sacrifice, nor do they mean not living in the present. Living in the present requires mindfulness, not money.
The simple fact is that if frugality makes you miserable, then FIRE probably isn’t for you. The goal of FIRE is freedom, intentionality and prioritization. If your priorities involve spending most of your income, there’s nothing wrong with that, but you’re probably not a good candidate for FIRE.
Alternatively, if you don’t mind loading up on your frugality and living a slimmer life while you’re young, you can enjoy the fruits of that frugality later in the form of financial independence. Living lean doesn’t have to mean ramen noodles every night, but it does mean spending less than you can afford so you can save and invest more money.
FIRE is only for high achievers
It’s easy to dismiss FIRE as something only other people can achieve because then you don’t have to re-evaluate your own spending and financial goals. The dismissal is something like this:
“Only people with six-figure salaries can afford to get to FIRE.”
“Only single people can reach FIRE.”
“Only married people can reach FIRE.”
“Only childless people can reach FIRE.”
“Only white millennial tech workers living in Silicon Valley who wear square ties can make it to FIRE.”
And so. They all boil down to a single justification that points to some external reason why it is unrealistic for you to go to FIRE, taking all responsibility away from you.
Is it true?
Of all the criticisms of the FIRE movement, this one contains the least truth.
Yes, the more you earn, the faster you can theoretically achieve financial independence. But spending habits are hard to break, and high-income earners get used to spending a lot. In some ways, it’s easier to earn more and keep your expenses steady than to cut them in half.
Whether you’re married, single, have children, or don’t have children, each state has its pros and cons to achieving FIRE. Having two incomes can help, but only if your spouse is equally committed to financial independence. And many families live on one income.
The same goes for race, gender, job type, and any other identifiers you might want to exchange. When you stop pointing out the external reasons why you can’t do something and accept that your own decisions determine its outcome, it’s both liberating and frightening.
You are behind the wheel and you can choose where you want to go and how fast you get there.
