FIRE Financial Independence Retire Early
FIRE Financial Independence Retire Early
Financial Independence Retire Early (FIRE) is a movement dedicated to extreme savings and frugal lifestyle choices with the goal of retiring very early, as young as late 30’s or early 40’s. In essence, it’s a simple savings plan that requires its followers to cut-out all extraneous spending, so as much as 70% of their annual income can be put into investments (mutual funds, ETF’s etc.).
The idea really is simple. If an average married couple starts working in their early 20’s, but is willing to make massive sacrifices to their spending, they could potentially save $1,500,000 or more by their late 30’s. The idea would then be to reach financial independence at a young age and live only off a modest 4% withdrawal each year, which still allows for some investment growth as you get older. The idea was borne out of the 1992 book “Your Money or Your Life” and has been popularized by millennials (roughly ages 24-39) in the past ten years. The movement really started to culminate with the documentary “Playing With Fire” released just last year and the corresponding book of the same name.
There are variations of the approach, with “Fat FIRE” requiring an individual to live a normal lifestyle, but still save much more than the average retirement investor. “Lean Fire” however, refers to the extreme adherence to minimalist living and extreme savings, and requires a restricted lifestyle to reach the recommended savings goals.
The key to both plans is financial independence. This phrase just means “I’m rich enough to quit my job”. I think most people can easily see the allure of ignoring the daily grind of working for a living, and instead pursuing your passions. At a minimum, reaching financial independence allows a person to only work if they want too, which is an exciting prospect for most people. But is it worth the enormous sacrifices that are required?
What I like about FIRE plans
I like that FIRE plans get people thinking about retirement, how to build a savings plan, and thinking about concepts like withdrawal rates. Many people tend to ignore these things until their late 50’s when it becomes really apparent their investments aren’t where they should be. FIRE adherents (and financial planners!) will often cite a target of 25x your annual living expenses as a target to reach financial independence. If your living expenses are $3,000/month, that means you can target a savings portfolio of $36,000 x25 = $900,000. If you maintain a 4% withdrawal rate after retirement, adjusted for inflation, that money *should* last forever. But as everyone knows, poor investment choices, inflation and the unpredictability of the stock market might ruin this plan.
I really like that this movement gets young people thinking about how to save, budget, and prepare for the future. But unfortunately, I think many of the ideas are unsustainable, poorly thought out, and ultimately set people up for failure.
What I don’t like about FIRE plans
I think the more broad “Fat Fire” approach is better for most people, because it allows them to still maintain a reasonable lifestyle. The “Lean Fire” approach is more like a crash or fad diet, where extreme calorie restriction is required. It might work over the short-term, but over the long-term, its likely not going to be sustainable. Good financial plans are sustainable and approachable. People need to build for the future while also living in the present, and my concern is that the “extreme” savings model sets people on a path where they become disillusioned towards saving and investing. This is particularly true for married couples, where their viewpoints on vacations, cars, and household purchases might be vastly different. Consider a scenario where one spouse gets cancer, becomes disabled, or tragically dies young. I think many people would regret delaying major trips and creating memories because they were waiting to live their life until later. I think balance is the key, and some of these approaches lack lifestyle balance.
Another reason I don’t like the “Lean Fire” approach is requires investors to take more risk than they might be comfortable with. Most of these plans push a 100% stock allocation, which in my experience, is far too volatile for most people. Many people overestimate their ability to handle losses and tend to panic when things get rough in the market. This is another way this plan sets you up for failure. Back in March, online forums and blogs were loaded with FIRE adherents talking about selling their stock and jumping back in when things recovered. These people panicked and missed the massive upward movement that took place April through July. If their portfolio was constructed for their personal risk tolerance and appropriately diversified, they would have been more likely to withstand the swings and stay invested.
Finally, I think FIRE plans place too much importance on cutting costs, and not enough emphasis on increasing income. For most people, your primary income is where most of your wealth comes from. Additional sources of income (rentals, side businesses, overtime etc.) are a fantastic way to reach financial independence quicker, while also maintaining a lifestyle that is comfortable and sustainable.