5 Reasons It’s Not for Everyone
In 1992, the book “Your Money or Your Life” was published by Vicki Robin and Joe Dominguez. Readers were urged to reconsider the traditional approach to working and saving for the future and asked what, exactly, they were willing to give up in the pursuit of more money.
Inspired by the book, a new approach to extreme saving emerged over the following decades. Referred to as the FIRE movement (financial independence, retire early), followers seek to aggressively save and invest between 50% and 70% of their monthly income in their 20s and 30s, with the ultimate goal of retiring at a young age. With such an extreme approach to saving, some FIRE practitioners are able to retire in their 40s, decades before the average American.
However, the FIRE movement isn’t right for everyone, and there are several questions you should ask yourself before going down this path.
Question #1 – Am I committed to the tenets of FIRE?
FIRE is based on three key tenets:
- Save and invest as much of your income as possible, typically between 50% and 70%.
- Commit to living an extremely frugal lifestyle. The goal of FIRE isn’t to grow wealth but rather to achieve a level of financial independence that allows one to live their lifestyle without the necessity of working a traditional job.
- Retire from the workforce early in life, and live off your savings.
Question #2 – Can I live off limited savings?
A general guideline for FIRE practitioners is to save approximately 30 times their annual expenses, or approximately $1 million. Once they achieve this savings threshold, they retire from the workforce and make small annual withdrawals from their accumulated savings, typically between 3% and 4% per year. Many may recognize the “4% rule” as another commonly accepted concept — the theoretically “safe” withdrawal rate. Most FIRE practitioners must carefully monitor and manage their spending to help ensure they don’t exceed these withdrawal limits, as overspending has the potential to erode their future financial security.
Question #3 – What are my future goals?
If your long-term goals are to retire early and maintain your current level of spending for the rest of your life, FIRE may be a good fit for you. However, if you forecast your lifestyle changing over time or endeavor to accumulate wealth, adopting a FIRE approach may not make sense.
Similarly, if your life goals include providing financial support for others, such as children or aging parents, FIRE may not work for you, as it requires a strong commitment to frugal spending and leaves little flexibility to cover life’s unexpected expenses.
Question #4 –Am I better suited for a variation of FIRE?
Several variations to the FIRE movement have evolved since its introduction in the 90s. If you’re interested in FIRE, you may find that one of the following approaches better suits your needs and lifestyle goals.
- Fat FIRE involves both earning and saving as much as possible in order to afford a more luxurious lifestyle in retirement. The goal of this approach is to earn, save and invest in an aggressive manner in order to live more comfortably in retirement.
- Lean FIRE is a strategy best suited for minimalists who plan to live a frugal lifestyle both before and throughout their retirement years. It involves spending as little as possible throughout life.
- Barista FIRE is best suited for those who wish to maximize their savings today in order to work less later in life. These individuals typically continue to work either in part-time positions or in less demanding jobs, serving in roles that offer supplemental pay and benefits (for example, as a barista).
- Coast FIRE is the strategy of saving and investing enough so that your portfolio can continue growing to support your retirement expenses. This strategy typically involves front-loading your retirement savings with as much money as possible early in your career. You would then let those accounts continue to accumulate over time, taking advantage of the benefit of compound interest. The idea is that, by the time you’re ready to leave your full-time job, you can work in a less demanding role to cover your current expenses while letting your savings “coast” into retirement.
Question #5 – Am I comfortable with FIRE’s risks?
While saving aggressively in order to retire early may sound like a dream, there are some risks associated with adopting a FIRE approach, including:
- Depletion of Funds – Even those who retire in their 60s and 70s face a risk of running out of money in retirement depending on their lifestyle. If you retire at age 40, your savings may need to last 40-50 years or more. You never know when you may experience a large unexpected expense, such as a medical emergency or chronic health condition that can quickly drain your retirement savings. Even the best savers in the world can’t predict the future.
- Sequence of Returns Risk – Even though one can’t time the market, timing matters when it comes to stepping out of the workforce and deciding to live off your portfolio. A major drop in the markets (and, thus, in portfolio value) could have a major impact on the lifestyle one may be able to live. Should one step out of the workforce during a “bad” market environment, the negative impact on their plan could be more profound than for one who leaves the workforce during “good” market conditions and experiences a “bad” market years into retirement.
- Being unsatisfied with your lifestyle – One of the primary downsides to FIRE is its dependence on a frugal lifestyle. Saving 70% of your income can leave very little flexibility to enjoy your life and hobbies. In addition, your interests, passions and hobbies may change multiple times over the course of life. Should these change and require more funds than planned for, it may impact your savings and spending goals. While making certain sacrifices in the present can help you achieve more financial freedom in the future, it’s important to find a balance that allows you to enjoy life today while also planning for tomorrow.
- Overspending – Another common risk of adopting a FIRE approach to retirement is the potential to overspend. Once you’re no longer working, you may be tempted to spend more on activities, such as travel, hobbies and eating out, than you previously had. Left unchecked, this increase in spending on the front end of retirement could erode your savings, leaving a shortfall on the back end of life.
- Finding fulfillment and purpose – When you’re in the midst of a challenging career, it can be tempting to want to leave it all behind. However, many people struggle to find fulfillment and purpose after they retire. How will you fill your days after you leave the workforce? Will you be proud of your post-career self? What activities will provide you with satisfaction and fulfillment? What do you envision your legacy being? These are all important questions to ask yourself before you commit to a FIRE lifestyle.
The bottom line
Before adopting a FIRE lifestyle, it’s important to consult a fiduciary wealth advisor to create a comprehensive financial plan. Your advisor will look at all aspects of your finances to help you determine whether early retirement makes sense and can help you maximize your long-term savings while also helping you live a comfortable lifestyle along the way.
