Ready, Aim, FIRE! How Early Can You Retire?

Many people think about retiring early and just enjoying themselves. This is the 100-mile view of the FIRE (Financial Independence, Retire Early) movement, which focuses on a goal of retiring very early—in your 30s or 40s. Financial blogs, podcasts and internet message boards have sprung up to educate wannabes about this movement.

Over the past five years, Google searches for “Financial Independence Retire Early” have increased by 94 percent.

Retiring so early sounds fantastic, but this approach isn’t something most people can achieve. We want to present both the pros and cons of this approach here. We strongly advise that you meet with a financial planner as you plan your retirement—at whatever age you retire.

What it Takes to Use the FIRE Approach to Retiring

Those seeking to attain FIRE intentionally maximize their savings rate by finding ways to increase their income or decrease their expenses. The objective is to accumulate assets until the resulting passive income provides enough money for living expenses in perpetuity.

Proponents of the FIRE movement suggest a withdrawal rate of 3 to 4 percent as a guide. Based on this guideline, you must save 25 to 33 times your anticipated living expense. Upon reaching financial independence, paid work becomes optional, and you can retire from traditional work decades earlier than the standard retirement age.

According to MarketWatch, “Many of the FIRE movement’s vocal advocates either earn substantial incomes from blogging, writing books and other endeavors, or they have a spouse who still works full time. In other words, they really aren’t living off the savings they amassed during extraordinarily brief working careers.”

There is a debate raging in the FIRE community about how much a person needs to have set aside before quitting his or her 9-to-5 job:

  • One side, known as Fat FIRE, believes retirees should have enough saved so they have a $75,000 annual budget in retirement.
  • The other side, Lean FIRE, maintains that a $40,000-per-year budget will do. To generate $75,000 per year with a 3 percent withdrawal rate, someone would have to save $2.5 million—something that is not easy to do by the age of 30 or 40. To have $40,000 per year available, someone would need to save $1,333,000. To do so with other current obligations takes a very frugal lifestyle with most normal earnings. Then, once you “retire” living on $40,000 per year, that doesn’t leave much money for emergencies or many luxuries.

We believe there is a balance to enjoying life both while we are working and then when we retire. Those who are a part of the FIRE movement often maintain austere lifestyles to save for very early retirement and then to be able to live.

Some FIRE proponents use public assistance such as food stamps, Medicaid and other welfare programs to live on. We do not believe that using welfare is a great standard of living. Even those who do manage to save enough to retire early and live today, might not have enough money to live on in the future.

The Downsides of the FIRE Approach

Although the FIRE approach is a godsend for those people who can make it happen, most people cannot do so.

One MarketWatch senior analyst believes FIRE proponents are doing pre-retirees a disservice by even offering it as an option. He says, “Only a very small minority of individuals have sufficient assets to retire early at more than a subsistence level. And when they realize how much smaller their 401(k)s are from what would be needed, they may very well decide to incur far riskier strategies than they would have otherwise — and end up worse off than they would have been had the movement never existed.”

This analyst notes that, according to Vanguard figures, investors in the 35-to-44 age group have, on average, just $68,935. The median account size—the level for which half have larger balances and half smaller—is $25,800. And some pre-retirees have no 401(k) account at all. He concludes, “An investor who retired with a 401(k) balance this size and who used the so-called 4 percent spending rule would therefore have to retire on a yearly income between $1,032 and $2,757. Good luck with that.”

A 2018 TD Ameritrade study revealed that the “RE” in the “FIRE” acronym — retire early — isn’t really what most people intend to do. They do want financial independence — the “FI” portion of the acronym — but they don’t have visions of lying on a beach, doing nothing, for the rest of their lives. They want to stay active and productive, even in retirement.

The survey revealed that three-quarters of financially independent respondents claimed that achieving that independence was more important than actually bowing out permanently from the workforce. In fact, more than 4 in 10 of both the financially independent and non-independent respondents plan to continue working after they “retire,” both because they enjoy what they do and because they don’t want to live frugally in retirement.

Don’t Forget to Consider Cost-of-Living Increases

We don’t want to take the fun out of considering FIRE as an option for your future, but we want you to weigh all the factors wisely. Cost-of-living increases can erode your nest egg faster than many people realize.

If you have a portfolio of relatively passive investments and draw 3 to 4 percent today, you would need the portfolio to grow significantly so that your income can keep up with inflation. Those who decide to have children or have larger medical expenses will likely see their cost of living go up substantially.

If we assume a relatively low increase in cost of living, such as 4 percent per year, then your cost of living will double every 18 years. This might not sound like much, but if you retire at age 35 and live to be 90, then your cost of living will be more than eight times what it is today! If you save $1 million and draw 4 percent per year, you would have $40,000 (before tax) to live on. That isn’t much in today’s world. By the time you are 60, your cost of living will be $87,303 per year.

Enjoy Your Life Now and Later

We believe you can enjoy your life today and have the retirement you dream of. This takes good planning, a little balance and knowing what is important to you. We can help you live the life you want now and enjoy the retirement you dream of in the future. Contact us without cost or obligation to discuss your personal vision and how we can help you achieve it.

This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected.