An Introduction to the Fire Movement
A prior Due article explained that FIRE stands for Financial Independence Retire Early. This concept combines extreme frugality, savings, and investment.“The idea is to achieve financial independence, be free from financial commitments and retire early so you don’t ever have to work again if you don’t want to,” says Elizabeth Buko, (quoted on Stylist) a financial mentor and founder of Wealth from Little. “And anyone can do it, no matter how much money they earn.”
Those who embrace this movement are ambitious and middle-income earners who follow these steps:
A high savings rate (50–70 percent of income) is encouraged, as is a frugal way of life (minimalism), and the use of low-cost stock index funds (following Warren Buffett’s standard investment advice).
The average time it takes to achieve this goal is around ten years. However, it’s not surprising that FIRE has sometimes been called the ultimate life hack.
Although this might seem like a very recent concept, it is the result of the best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez, which was published in 1992. As opposed to working 9–5 to make ends meet, the authors focused on financial independence.
FIRE retirement has become increasingly popular among young people, especially millennials. Many people who live an extreme-saving lifestyle stay in the workplace for several years, saving up to 70 percent of their income each year. After saving about 30 times their annual expenses, or about $1 million, they might quit their day jobs.
A Large Income and a Willingness to Make Sacrifices Are Required
What is the biggest disadvantage of following the FIRE movement? Earning a lot of money.It doesn’t matter how much you cut back on your lifestyle and minimize your expenses, you’re going to need a substantial income. I’m talking six figures here. Why? By the time you reach 35 or 40, you should be able to save enough money to retire. Taking even more drastic measures—or raising your income—may be necessary if you plan to retire even earlier.
A Missouri IT professional, Gwen Merz, discovered this hard way when she went all-in on FIRE.
Merz realized that earning and saving the same amounts as her married, dual-income friends was mathematically impossible after five years of FIRE. Additionally, she was exhausting herself by working multiple side gigs.
“I became really disenchanted with FIRE when I realized that it was difficult for one single person to retire incredibly early at a high-to-above-average salary,” Merz told CNET.
It Requires a High Savings Rate
In order to retire early, you must save a large portion of your income. Typically, the FIRE community recommends saving 25 percent or more. Students with student loans, credit card debt, or other financial obligations may find this challenging.Those who criticize the FIRE movement say that most Americans can’t afford the lifestyle required to retire early. There are many Americans who simply don’t save enough for retirement at 65 let alone retire early.
You Are Assuming That Your Investments Will Perform Well
The FIRE method relies on steady growth from your investments. However, this is not guaranteed.Rule of 25
If you want to retire early, you can calculate how much you need to save by using the Rule of 25, explains Jessica Martel in Time . It basically involves estimating your retirement needs per year and multiplying that by 25. For retirement, let’s say you need $80,000 a year.After determining that Social Security and other sources will cover $30,000, you need to fund $50,000 every year, she adds. Taking $50,000 and multiplying it by 25 leads to $1,250,000. For a 4 percent withdrawal a year and capital preservation, you need to save this much.
Remember that the Rule of 25 is meant to last you 30 years. In other words, it covers you until 95 if you retire at 65. If you plan to retire for 40 or 50 years, you’ll need more money.
There’s a problem with the Rule of 25, though: it doesn’t take inflation into account. Over time, goods and services rise in price. Inflation is aimed at 2 percent by the Federal Reserve, but it can fluctuate.
Unexpected Expenses Are Not Included
As I just mentioned, life is filled with unexpected expenses, like car repairs, medical bills, and job losses. Expenses like these are not considered when using the FIRE method. As a such, a sudden event could lead to a lack of money in retirement.In fact, according to Suze Orman, a big problem with the FIRE movement is that most people who want to retire early will have too little money for subsistence throughout their lives. Even if you’ve got plenty of money and think you’re well-prepared, it’s still true.
When you retire very early, you have a lot more time to lose your nest egg if something goes wrong. Once that happens, you will have to support yourself for a long time, but getting back into the workforce after a long break might be challenging.
It Can Be Boring and Isolating
It’s possible to spend decades without doing very much if you exit the workforce too early. It’s not uncommon for people to retire early only to discover that they have become incredibly bored. You may begin overspending to alleviate boredom, putting your retirement savings at risk and overspending to alleviate boredom.Fire Isn’t the Answer Just So You Can Leave That Job You Hate
Those who hate their jobs may find the FIRE movement appealing. Only 34 percent of Americans say they are actively engaged in their jobs. So, it’s no wonder many young workers dream of leaving the workforce.In reality, there’s a much deeper problem going on, and F.I.R.E. isn’t going to fix it. In that case, FIRE is not what you need. Rather, you need a career change.
Ken Coleman, America’s Career Coach, refers to this as “finding your sweet spot.” This is the area on your career path where your greatest talents and passions overlap.
You May Outlive Your Retirement Savings
Almost half of Americans (48 percent) say they won’t have enough money to retire comfortably. Also, according to Americans, there is a 45 percent chance they will outlive their savings. And, that’s for folks who aren’t a part of the FIRE movement!We can’t predict how long we’ll live or what our lives will look like in decades to come. You can face a lot of health-related expenses later in life, for instance. In retirement alone, Fidelity estimates that the average retired couple will need approximately $315,000 in savings for medical expenses by 2023. Another huge risk that current retirees are facing is the unpredictable nature of inflation.
It May Be Difficult to Reenter the Workforce After a Long Absence
A few years ago, you retired but realized you didn’t want to live the FIRE lifestyle. What should you do?Reentering the workforce can be difficult if your resume has large gaps. It may be difficult to find a similar position to where you left off due to the needs of your industry and technological advancements.
Other Drawbacks to the Fire Movement
- Skipping retirement contributions. Most workers can’t save at a FIRE rate—regardless of their frugality. But, they can contribute to a FIRE-inspired 401(k) plan. Additionally, you may be missing out on an employer match.
- You’ll be in medical coverage limbo. If you leave a job that offers health insurance, you’ll need to find your own coverage—which can be pricey. Plus, you’re not eligible for Medicare until 65.
- Less Social Security income. Benefits from Social Security are calculated based on your 35 highest earning years as a worker. At age 40, for example, you will not have 35 years of income to report to Social Security. In other words, your retirement benefits formula will incorporate a number of years with no earnings.
