One of the most popular current topics of debate among financial bloggers, commentators, pundits and gurus is the Financial Independence/Retire Early (FI/RE or FIRE) movement. The debate often raises strong positions and emotions either in favor of or in criticism of FIRE but, of course, the concept is far from black and white. Let’s take a closer look at Financial Independence/Retire Early.
The mechanics of FIRE are relatively straightforward, at least in theory. The first step is to reduce current living expenses to a bare minimum, and once that level is reached, get creative and reduce them some more. Maintain the growth of expenses at only the rate of inflation. Save all other income and invest in a portfolio that will provide growth. Once the target portfolio value is reached, consider “geographic arbitrage” which involves relocating from a higher cost-of-living area to a lower one.
How to determine the savings target is a challenge but Mr. Money Mustache, an early FIRE devotee and popular blogger, uses a 5% annual “real” investment return (after inflation) and a withdrawal rate of 4% of the portfolio value per year in retirement. That means the target is 25 times the amount needed to be withdrawn annually, plus some additional amount for a “safety margin”.
The fundamental idea is to make your savings rate – the difference between what you earn and what you save – as high as possible. Based on that 5% annual real investment return, for example, saving 10% of income would require 51 years of work to reach the target while saving 35% would require only 25 years. Mr. Money Mustache also points out that cutting spending is more powerful than increasing income because lower spending not only increases the amount being saved but it permanently decreases the amount you will need for the rest of your life.
Critics note that the 4% withdrawal rate was created for accessing portfolios at a more typical retirement age and the longer time frame adds much more investment risk. Suze Orman, a personal finance commentator, is quite vocal about needing $5 million or more to retire at an early age. A recent industry publication noted that financial advisors believe FIRE “is a good idea for almost nobody” because there are too many unknowns and the basic premise is simply unrealistic. Health and health care, housing, family and changes in the social safety net are just some of the factors that can derail the best of plans.
There are a number of non-financial challenges as well. There may be an identity crisis from leaving work that has been a central part of life for years. Others may treat you like a weird misfit and it can be difficult to build new social networks. The newly-found time can be difficult to fill, requiring a constant self-starting attitude, and personal productivity may suffer. Without work as an excuse, relationships demand more attention and those choices can be difficult. The many years of aggressive saving and the austere years spent in retirement can lead to “lifestyle fatigue”. And while early retirement is great, it doesn’t solve everything; some life problems may persist and you may revert to your “natural state of being”.
The FIRE rebuttal is that many of these criticisms are sour grapes from those who are unwilling or unable to do the hard work to take control of their financial lives. Financial professionals are threatened by the high degree of personal control of FIRE and FIRE is really just an extreme application of the “life planning” that many advisors provide. Health issues, housing and the like are things that cost money and the skills and experience that FIRE provides will make these problems more manageable. Many of the challenges of transitioning into retirement apply at any age and dealing with them is no different if retiring earlier. In essence, there is nothing to fear about FIRE but fear itself.
Perhaps the strongest criticism of FIRE is that it is grossly misleading since most people don’t retire in the traditional sense, they simply transition to a different type of work or career. FIRE advocates concede that financial independence is always the primary goal and “retirement” is more flexible. But as Mr. Money Mustache puts it, that’s the point; FIRE is not about early retirement – it means “complete freedom to be the best, most powerful, energetic, happiest and most generous version you can possibly be”. And who wouldn’t want that?