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Playing with F.I.R.E.

Playing with F.I.R.E.

| April 17, 2019
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A popular daydream of the cubicle dweller is freeing themselves of the daily grind by retiring early.  A life where there’s no alarm clock and every day is a Saturday sounds divine, right?  But is retiring at 45 or 35 fathomable, or even achievable?  Enter in the FIRE movement:  Financial Independence, Retire Early.  This movement has spread like wildfire (pun intended, it was just too good to pass up) among bloggers, podcasts, and online discussion forums.  To achieve FIRE, one intentionally maximizes their savings by increasing income or reducing expenses to accumulate “enough” savings until one can live on these savings for life.  How much is “enough”?  FIRE proponents suggest that “enough” is when your net worth is 25x your annual expenses.  They also advocate the 4% rule, the amount of money you can withdraw from your portfolio annually so that you “never run out of money.”      

The logic behind FIRE - live below your means and save more - is music to every financial planners’ ears.  However, trying to forecast how much you’ll need in retirement at age 30, when you could have potentially 60+ years, in retirement is extremely difficult.  There are so many unknown expenses in retirement (e.g., health care costs, spending needs/wants, investment returns, inflation, etc.).  Can 25x your net worth or 4% withdrawal rate sustain you for the next 50 to 70 years when you don’t know what your future holds?

After reading several articles interviewing FIRE proponents, some common themes emerge.  To achieve their goal of retiring early, FIRE members are drastically changing their lifestyles before and after retirement.  Pre-retirement, they are trying to aggressively save 50-75% of their income, which means significantly reducing or not spending money on material things (e.g., clothing, furniture), entertainment (e.g., no TV – not even streaming), and other discretionary expenses.  Some are even growing their own food, banning material purchases, and abstaining from extracurricular activities (concerts, movies, etc.,) with friends (they must have serious self-discipline to resist FOMO).  I get the need for budgeting, but I want to experience life too, don’t you?    

Most of these individuals are leaving 6-figure incomes with big bonuses in high cost of living cities to move to more affordable areas with lower costs of living to live on shoe-string budgets.  One member of the FIRE movement envisions her retirement to include living in two places, purchasing a larger property, and traveling…all while living off $45,000 per year for lifeRetirement lifestyles vary, so $45,000 a year may or may not be enough to live on depending on your needs and wants.  If you imagine a retirement living among the globe-trotting jet-set and other luxuries, you may want to re-evaluate your annual retirement budget.        

FIRE members also briefly mention or flat-out omit that they’ve started blogs, written books and/or articles, and are making appearances on the speakers’ circuit while in “retirement,” all of which are providing alternative sources of income.  I’m all for keeping active in retirement, but to me, this is not retirement, it’s a career-pivot.       

I found that these articles fail to address the most crucial considerations when planning for retirement:

  • Health insurance and health care expenses now and in the future
  • How prepared they are for the unexpected (life doesn’t always go according to plan)
  • How stopping work early and giving up potentially higher future earnings affects Social Security benefits
  • The amount of savings they had before retiring
  • How their retirement savings is invested and their contingency plans for down markets
  • How much they spend a month in retirement and if this covers just needs or needs and wants
  • How much income they receive for their activities in “retirement” (aka blogs, books, speaking circuit)
  • Their other sources of income (rental income, military pensions, etc.,)
  • If one spouse continues to work while the other spouse “retires”
  • The amount of financial support from family members pre- and post-retirement
  • Children or future children’s expenses (most FIRE proponents don’t have children)
  • Existing debt and how they pay it off
  • Taxes and tax implications of taking money from retirement accounts prior to age 59½
  • How to explain a break in service to a potential employer if retirement isn’t working out and they must go back to work

This isn’t to say that retiring early can’t happen, but it’s important to plan for the uncertainties of retirement that can be costly.  If you play with FIRE, you might get burned.  But planning for FIRE by incorporating contingencies for the unexpected can help your pursue the retirement lifestyle of your dreams. 

Has FIRE sparked an interest?  Contact Anne (anne.simpson@odysseypfa.com) to schedule a realistic goal-based planning session to identify, prioritize, and plan for your own personal goals and future retirement.  

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