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Early Retirement: What You Need to Know about the FIRE Movement

Early Retirement: What You Need to Know about the FIRE Movement

The FIRE (Financial Independence Retire Early) movement has gained a lot of traction in recent years. The FIRE movement encourages people to embrace extreme frugality at the beginning of their career, save the majority of their income, and then retire early, usually in their 30s or 40s. FIRE has obvious appeal for many people. While they need to sacrifice early on in their lives, they will be able to enjoy financial independence and retirement for much longer than most people, which makes the tradeoff worthwhile. At the same time, people intrigued by FIRE often overlook a few crucial pieces of information. In the end, retiring early sounds great to a lot of people, but the extreme frugality associated with FIRE is just not feasible for many of them. Before turning to FIRE, you should possess a clear understanding of the following pitfalls and shortcomings:

Most people cannot save the majority of their income.

FIRE requires that you save between 50 and 70 percent of your income in order to achieve financial independence in your 30s or 40s. For some people, this is possible. Many FIRE advocates are engineers, financial experts, or software developers with high-paying jobs. In addition to making six figures, these people have generous 401(k) matches and employee stock options. People in this situation may be able to get by, as they can save a lot of money while still having a decent amount to cover their monthly expenses. However, the median household income in the United States in 2019 was just under $69,000, and families would have less than $35,000 per year before taxes to make ends meet. For most families, this is not feasible, even with extreme frugality.

Many of the early FIRE retirees are not actually retired.

While the reports of early retirement coming from the FIRE movement are intriguing, you should also note that many of these people are not actually retired. Rather, these individuals have made a career out of being early retirees. By monetizing blogs, YouTube channels, and other outlets, they have earned many followers and a significant income. Even the people who do not monetize their social media continue to work. If you have a skill that you can capitalize on by working on a freelance basis from anywhere with an Internet connection, then you may be able to make FIRE work and gain access to income when you need that extra boost. However, not everyone is in this situation. Other FIRE retirees have investment property that produces passive income streams. The point is that many of the people in this movement still work, even if they do not have traditional jobs.

The FIRE retirees have not weathered the market for long.

Most of the proponents for FIRE are still decades away from retirement age. While this is the point of the program, the problem is that professionals still do not know how this strategy works in the long term. For example, does the savings hold up after multiple bear markets? In a bear market, it can prove necessary to cash in on your investments at a loss, which could create serious problems for these early retirees. Another major issue involves healthcare. While you may be able to afford premiums on your own in your 30s and 40s, the costs only continue to climb and you will not be eligible for Medicare until you reach your 60s. Out-of-pocket costs can prove extremely high and quickly consume your savings. If you leave the workforce early, then you will also have a fairly small Social Security benefit, so that will no longer provide you with a lifeline in your 60s.

Many FIRE retirees do not have a sufficient financial safety net.

If you retire and no longer have substantial income from a job, then you need to have a decent financial cushion in the event of an emergency. A medical crisis could prove to be financially devastating for people. Even a divorce can prove extremely expensive, and the amount saved by a couple is often insufficient to support two households. Due to the abbreviated savings period, some FIRE retirees quit their jobs without a substantial amount of money saved to deal with these unexpected occurrences in their lives. Without an emergency fund, you may end up going into debt and getting stuck in a financially impossible place. Retiring early means that there are more years for things to go wrong, so you need to create a much bigger safety net than you would normally have in retirement, which is already several times larger than the recommended safety net for working individuals.

FIRE is based on outdated retirement savings guidelines.

A linchpin for the FIRE movement is the 4% rule. The rule holds that people will not run out of money provided that they withdraw only 4% of their retirement savings per year. Unfortunately, the fine print of this rule is that it only guarantees returns for 30 years, but FIRE retirees will likely spend much more than that time not working. The 4% rule is also based on post-inflation returns for a portfolio that is half stocks and half bonds between 1926 and 1992, which means that it is very outdated. Today, bonds have near-zero interest rates and barely add to growth, so most retirees will end up taking on more risk by shifting their portfolios toward stocks.

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