Last week I wrote about FIRE, the “financial independence,
retire early” philosophy embraced by tens of thousands of people in a type of
financial subculture. I enumerated a
handful of commendable methods and aims of its adherents, including living
simply and below one’s means, saving, and investing reasonably instead of
pursuing quirky or suspect get-rich-quick schemes. But I have a couple of problems with FIRE.
Money magazine,
which ran a feature on the movement this month, pointed out that many of its
followers are young, mostly millennials, the majority of whom have never
weathered a real recession or bear market during their adult years, or at least
during their investing years. They are
probably getting giddy over the heights to which they’re riding with the stock
market soaring. Hopefully they are
sticking to the advice to invest simply and are not chasing too-risky
investments. But even if they stay in
low-cost stock index funds, what goes up must come down. The stock market will come back down
eventually, account balances will fall, and it may become harder to live on the
proceeds of investments without touching the principle amount.
That, in fact, is what I perceive to be the fundamental
weakness of FIRE. Vicki Robin, who wrote
the FIRE “textbook”, Your Money or Your
Life, says the magic moment for “FIRE walkers” comes when they can live on what
their investments earn (interest, dividends, growth in value). At that point they can fulfill the “retire
early” part of the dream because then they are financially secure.
But are they? If
companies start reducing or skipping dividend payments, income drops. Ditto if interest rates take a dive during a
recession or corporations—or even municipalities—start failing and default on
their bonds, a supposedly safer investment for retirees that generates regular
income. If a retiree has to dip into
principle to meet his income needs, there is that much less principle to
generate income the next year, meaning he will have to withdraw more.
There is nothing wrong with drawing down principle. I expect to do that most years during my
retirement because I doubt stock growth will outpace my spending, especially in
the down-market years I expect after I retire.
But then, I am not retiring early.
The 3% to 4% annual savings withdrawal rate (regularly adjusted for
inflation) that is recommended by many retirement planners has been shown to be
a pretty safe way to make savings last 30 years or more.
But what if a FIRE walker retired at 35? Touching the principle amount becomes a risky
proposition for him. He needs his
savings to last beyond age 65, maybe to age 95 or older. Can investment earnings and principle keep
pace with market fluctuations and inflation for sixty years? Yeah, inflation is another stranger to
millennials. The earnings that
investments brought the investor this year to cover expenses might not be
enough in five years. FIRE, as a
practical philosophy of investing/saving/living, has not been thoroughly tested
by the whole range of market conditions over a long period of time.
I would point out, too, that some of the strongest
proponents of FIRE are not themselves good examples of how FIRE can work
long-term. These folks, in their forties
and fifties and long after they supposedly retired, are out there promoting the
philosophy and telling how they did it at seminars that cost hundreds of
dollars to attend. These FIRE teachers,
then, are not really retired early at all, but are making money off the people
who do want to retire early.
Finally, I am not comfortable with the notion of early
retirement—not in the sense of retiring in one’s thirties, or even forties. Being healthy and having loads of free time
usually adds up to spending more money, whether for hobbies, traveling, eating
out….whatever. It would take a great
deal of discipline to hold that in check for several decades. Even more fundamentally, though, I think
people can too easily lose their direction and purpose in retirement. Employment, for all its hassles and stress,
does tend to give us direction, meaning, and goals to which to work. It also provides a social outlet of
sorts. These are things that actually
contribute to a longer and healthier life, assuming the employment is not
dangerous or dangerously stressful. Can
a 40-year-old retiree maintain anything other than a hedonistic purpose in
life? If he can retire and devote his
life to a higher purpose than himself, that is commendable and, in my opinion, the
only good reason to retire early.
I am not a FIRE walker.
I want to enjoy now the things I like—in moderation. So living on an extreme budget for the
purpose of retiring early does not appeal to me. I save, I give, but I also spend, and not
always grudgingly and for just the essentials of life. I will retire—not early but hopefully while
healthy enough to enjoy the time and be able to devote some energy to higher
causes.
“I know the best
thing we can do is to always enjoy life, because God’s gift to us is the
happiness we get from our food and drink and from the work we do.” Proverbs
3:12, 13 CEV
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