SHOULD YOU PLAY WITH FIRE?
The web is abuzz with subtweets and subreddits about a new phenomenon called the “Financial Independence, Retire Early (FIRE) Movement” The ideas that underpin this movement aren’t exactly new: the initial stirrings were prompted by the publication of a book in 1992 titled Your Money or Your Life by Vicki Robin and Joe Dominguez, and more recently by the call-to-arms Early Retirement Extreme by Jacob Lund Fisker in 2010. Lately, however, the movement has been gathering steam – to the point where the New York Times, Forbes, and Vice are running articles about its members and Investopedia has deemed it legitimate and cohesive enough to warrant an entry in its hallowed pages.
So what it is it? “Financial Independence” has a nice ring to it, and retiring early sounds like a dream – but how does this movement propose to turn these buzzwords into reality?
Here’s the gist of it:
NOT ALL ROSES
What are those weaknesses? What could possibly be wrong with the idea of financial independence before the age of 70?
The first weakness of FIRE is in its maths – not that its calculations are wrong, rather it’s the assumptions FIRE proponents make behind the scenes that may raise some eyebrows. This is a common complaint, and one that has been well received. It relates in particular to the “magic number” noted in the above info-graphic: when you have 25 times your annual expenses in savings, you are said to be ready to retire. But note what is inside the brackets, beside the magic number. The magic number could be 25, or it could be 35 or even 50 times your annual expenses. The figure of 25 is taking for granted an investment growth rate of 4% after inflation during your retirement period (however long that might be), so that you can safely withdraw that 4% growth without touching your savings.
The problem with this, of course, is that 4% growth (7% before inflation, say) may very well be unduly optimistic. Those who have acknowledged the point but still insist on a 4% safe withdrawal rate look to historical data to back up their case: after two World Wars, the Great Depression, raging inflation, and some more wars, a 4% rate of withdrawal during retirement still emerges as a very safe bet. All true. But then history might not repeat itself. In other words, a pessimist might say that 4% is not safe at all and the magic number ought to be much higher – at, say, 40 times your annual expenses. The FIRE method will be considered weak to the extent that one doubts that history will repeat itself, at least when it comes to economic growth.
The second weakness of FIRE is that it is mostly a rich man’s game. The reality is that many people simply cannot afford to put away twenty or thirty or forty percent of their income towards retirement. One 2017 survey found that nearly 80% of American workers were living paycheque-to-paycheque, saving nothing for the future.
The FIRE philosophy emphasises as core to its ethos a rejection of wasteful consumerism – certainly a disease that plagues much of the Western world. But can the low savings rate in the West be due entirely to rampant consumerism? It seems unlikely. The cost of living in, say, Dublin does not allow the average income-earner to save 25% of their income, let alone 70%. Rent is sky high, owning a car (often a necessity) brings many to the edge of bankruptcy – it’s tough out there. So it’s hard to preach FIRE at people who are just scraping by.
The FIRE philosophy and method are not, however, irrelevant to people of lower incomes, because FIRE is firstly about reducing living expenses. Financial literacy rates are low in Ireland, and those with less to spend often spend what they do have unwisely. Lifestyle changes can be made, a move to areas where living is cheaper ought to be considered, and bills can be reduced.
A final weakness of the FIRE philosophy is how it can be taken to extremes. For instance, one FIRE enthusiast recently recounted on the forums how he and his fiancée, both early twenty-somethings, were quickly paying down debt and investing at the same time, all the while living on less than a third of their combined income. It sounds great, doesn’t it? But this same young man also mentioned that he and his fiancée had decided to have a childless marriage. Given the context, it seemed as though this was in part a financial consideration – another trick to reduce living expenses. If that is the case, then the FIRE philosophy has been stretched too far. Neither financial independence nor early retirement are absolute ends in themselves, they are means to help us live well. If one starts sacrificing those things that are genuinely good, such as children in a marriage, then one has lost sight of the true end.
The FIRE movement, at its best, is no more about “living large” than it is about “living cheap” – it is about living well, and the FIRE method can help to achieve that. Most of us can cut our spending on frivolities and increase our savings for the future. We might even throw those savings in an investment account that will earn us an income in retirement. These are the baby steps we all can take.