Sunday, September 16, 2018

Torching the FIRE Philosophy

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.
 
Choose wisely, and be careful what you wish for.

 
Until next time,

 
Roger

 
“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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