Ready, Aim, FIRE!

The Millennials are at it again, they’re off trying to change the whole world at once and this time they’ve figured out a better way to do retirement. Figures…

There’s a growing movement amongst the young’uns called FIRE which stands for Financial Independence and Retire Early. And it’s basically the idea that you can retire somewhere around age 30 to 40 rather than the traditional 55 to 65 with some lifestyle changes. As a retirement planner the first time I read this I was extremely skeptical of this approach. Turns out, from a planning perspective, FIRE does have some good ideas baked in, but ignores some key concepts of retirement planning that could have these retirements burn out earlier than expected. (ß I made a joke!)

The believers in FIRE do adhere to some principles that make sense.

What FIRE gets right:

  1. Spending Less is Good. One of the most effective things a person can do to extend how long their retirement savings will last is spend less. This is proven in many studies and is one of the first things we look at to get a retirement on the edge back on track. The primary focus of the FIRE movement is to live in a way that allows you to spend less than half of what you earn. This serves the purpose of saving up quickly, but it also good training for how to keep spending in check during retirement.
  2. Addresses the changing definition of retirement. With people living longer, one thing we’re seeing across the board is that retirement is starting to look different these days. People are staying partially employed and more active to help enjoy longer retirement. FIRE embraces this concept, basically looking at the definition of retirement as just living life how you want to, not necessarily not working. It’s still a stop of the normal 9-5, but FIRE retirees expect to keep doing some sort of work.
  3. Addresses Changing Work Environment. The FIRE plan also plainly calls out that company loyalty doesn’t buy you what it used to. Without the pensions and benefits of old, staying with a big employer for a whole career is looking more and more like a raw deal. In fact, on an extreme end, a Forbes article claims that staying in jobs for more than two years could cost people 50% in lifetime earnings. FIRE retirement completely throws out the loyalist approach from the start, so job-hop away.

What FIRE Misses:

  1. The Studies Behind the Numbers. One article about FIRE retirement referenced the 4% rule as a good target for how much to save before you call it quits. This literally made me cringe to think people were listening to this. The 4% rule came from a study done in the 80’s about what withdrawal rate would have lasted you 30 years for any 30 years in history. Key word 30! Not 60! Which is how long these people are talking about being retired for. This grossly under simplifies the issues of being retired for that long and would lead to a very bad ending if that’s all you considered when planning for this approach.
  2. Health Care! Leaving the safety of company healthcare early could be an extreme risk with how massive the price changes for individual care have been. Projected inflation of health care costs are between 5.5% and 6.5% per year. That’s compared to general inflation around 3%.
  3. Inflation. Piggybacking off the last point, inflation over a 50 to 60 year retirement could be absolutely devastating. Even a historically low 2.5% inflation rate going forward would mean that in 50 years prices would be 3.44x higher. This eats up roughly 75% of your purchasing power over that period. So if these guys are running calculations for how much they’ll have down the road, it’ll only feel like ¼ of that money by the time they get there. That could really sneak up on you.
  4. Human Capital. Human capital addresses a person’s ability to work to meet lifestyle needs and this decreases on average over time. A big drawback to the FIRE plan is that it relies on your human capital (something that is known to decrease with time) to overcome a lot of these other variables that are nearly impossible to predict and cause more problems with time. The worry here is that if this stuff doesn’t go as planned early on, you’ll have less human capital to get the plan back on track as you get older.  

Altogether, FIRE is a very interesting concept, but the reality of actually doing this would require an immense amount of restraint and planning that honestly probably wouldn’t be worth it to most people.

It’s also worth noting that you didn’t see this strategy pop up during a bear market. The age group looking to do this mostly hasn’t experienced any real market turmoil and has been in an 8-year bull market, so stashing your money in an index fund and making 8-10% a year seems all too easy. A true downturn could have a lot of these young retirees looking to get back in the job market at a time when jobs may be scarce.

If anyone does succeed at retiring at 30, more power to them, but this isn’t a strategy I’d likely recommend any time soon. It is much more a lifestyle than a retirement plan.