Thanks to recent coverage by major networks, most people have heard all about the FIRE movement by now. If not, you should know that FIRE stands for “financial independence, retire early,” and that the major tenets of the movement involve saving a large percentage of your income so you can retire as soon as you can.
Many FIRE enthusiasts strive to save 70 percent of their income or more so they can retire in their 40’s or even their 30’s. That might sound pretty drastic, and it is, but for those who are able to make it work, early retirement definitely has its perks.
5 Reasons the FIRE Movement Is Overrated
As a financial advisor, I believe it’s incredibly smart to work hard and save a large percentage of your income, and of course to invest that extra money so you can retire when you want. However, I do believe the story surrounding the FIRE movement has some major holes in it, and that there are myriad pitfalls to watch out for.
Here’s why I think the FIRE movement isn’t always worth it, and what you may want to spend your time on instead.
Most FIRE Enthusiasts are High Earners
First off, proponents of the FIRE movement aren’t always honest about the income it takes to truly retire in your 30’s or 40’s. Instead, they’ll tell you that anyone can retire early if they work hard and save enough, and that if you only do X-Y-Z, you’ll eventually get there with nothing more than the magic of compound interest and a little luck.
But if you learn more about most people pursuing FIRE, you’ll find that many work in high-income jobs like engineering, law or medicine. That’s because saving half of your income or more is infinitely easier when you earn a lot to begin with, and because those who earn an average income have to spend their wages on essentials like food and shelter.
Think of it this way: It’s just not that hard to save 70 percent of your income if you and your spouse earn $300,000 per year. If your household earns the median annual income, or $61,937 according to the US. Census Bureau, on the other hand, then living on 30 percent of your wages (or $18,581) could be impossible.
Early Retirement “Rules” Come with Risk
Here’s another problem with retiring in your prime: How do you know how much you really need to save?
To figure out how much in assets to build up for early retirement, most members of this movement rely on one of two rules. They either plan to invest enough so they can live off of 4 percent of their portfolio each year (the 4 percent rule), or they plan to save 25x their annual expenses so they can retire decades early.
Both rules basically lead to the same result and the same “retirement number” to shoot for, yet they also come with the same major problem. Like it or not, it’s not safe to assume that any investment strategy can produce ample returns to make the 4 percent rule work for decades of retirement.
Not only that, but the 4 percent rule put into place over decades can’t possibly take lifestyle changes into account, nor does it consider how much the tax code could potentially change over that time period.
In other words, saving 25x your income is a good rule of thumb for early retirement, but it may or may not work in real life.
Hard to Plan Spending and Lifestyles Decades in Advance
Here’s another major issue: No matter how excited you are about retiring early, it is basically impossible to know how you’ll be feeling about life in 15, or 20, or even 30 years. You may be gung-ho about retiring early when you’re 35 and absolutely sick of your current work environment, but by the time you’re 50 or 60, you may want something entirely different.
You may even wish you had worked harder and longer so you would have the cash to truly follow your current dreams, whether that means traveling the world or spending your time on a hobby that’s expensive but worth it in your eyes. But once you retire early and reach the age where you want your life to change, it will be far too late.
Healthcare is an Ongoing Issue
The Patient Protection and Affordable Care Act (PPACA), or Obamacare, made it possible to buy health insurance regardless of pre-existing conditions, which is a good thing. Meanwhile, the health law also made healthcare more affordable for some thanks to subsidies for families who earn less than 400 percent of the Federal Poverty Limit (FPL).
Unfortunately, healthcare can still be a problem while you’re pursuing early retirement and once you get there. First off, plans can be prohibitively expensive as you save for early retirement if your family earns more than the cutoff for subsidies, which is $104,800 in 2020 for a family of four. If you don’t get health insurance through an employer and you have to buy it on your own with a high income, purchasing a plan can make it infinitely harder to save.
Once you reach early retirement, you may also find that buying health insurance is pricier than you think — even if you do qualify for subsidies.
Also remember that you can’t currently qualify for Medicare until the age of 65. If you plan to retire at 30 or 40 or even 50-years-old, you’ll be dealing with the issue of healthcare for an incredibly long time.
Real Benefits Can Come from Work
Finally, there’s a reason many “early retirees” continue working in some capacity, whether it’s with a side gig, a part-time job, or a passion project they care about. It may sound good to do whatever you want day after day, but many find they miss having a purpose in life, and that they need to continue working in order to feel happy and productive.
For a lot of people, the FIRE movement is less about retiring and more about doing work you like or love. After all, that’s a lot better than being stuck in a soul-sucking, 9-5 job in the corporate world.
Considering FIRE? Here’s What You Should Focus On
If you’re wondering if early retirement is for you, then it’s smart to start planning ahead. Figure out how much money you might need to live in your future retirement years (accounting for inflation), as well as how much you would have to save and invest each year to reach that goal. From there, work with a fee-only financial advisor or hatch a plan yourself to reach your “retirement number” without giving up too much along the way.
With that being said, I don’t always think it pays to focus on early retirement alone. In fact, I believe you could benefit from thinking less about ditching work and more about building a life where you have plenty of options.
If you save and invest like your future depends on it, you’ll have the option to retire early if you want. However, you don’t have to be tied down to the prospect of quitting your job on a specific date or in a certain year.
Life is unpredictable, and it’s hard for any of us to know what we might want a year from now, let alone in 10 or 20 years. My advice is to focus on the “financial independence” side of FIRE now, because that’s the part that matters. Becoming financially independent gives you the chance to decide, and you can always retire early when you’re ready.