Headline: If you play with FIRE, Might You Get Burned?
Date: 11/23/2020
Body: I was scanning Yahoo Finance, and I found an article on investing for retirement. So, I began to read the article below:
Why Savers Pursuing Early Retirement Should Consider Limiting 401(k), IRA Contributions | Barron’s
I have a Graduate Certificate in Gerontology, and I started working for the IRS in 2008, just after obtaining my CPA license. In my spare time, I love reading about investing for retirement. But, 20 seconds into this article by Barron’s, and I ran into a term I had never run across. The author casually mentions FIRE and really doesn’t take time to define it.
FIRE is an acronym that stands for, “Financial Independence, Retire Early.” In basic terms, FIRE is an idea that you might put aside as much money as you could toward retirement (up to 70%!!). The FIRE movement appears to be aimed at millennials, as a result to their sparse savings. (Per the National Institute on Retirement Security, 66% of millennials have saved nothing toward retirement.) This movement also encourages a person to consider many different types of investing, beyond retirement accounts. Particularly, they advocate owning rental real estate and starting your own business. At first blush, this might seem like a good idea, as most do not have enough savings to provide for a comfortable retirement, and many more worry about outliving their savings.
How did all this start?
This all started with a 1992 book entitled, “Your Money or Your Life by Vicki Robin and Joe Dominguez. In this book, one theme they seemed to emphasize is the importance of always considering the tradeoff between your time and your money. Now, there are several blogs and podcasts in the US and UK.
Are there variations on a theme and levels to FIRE?
In a word, yes, there are levels. There’s “Fat FIRE” which seems to indicate a more conventional lifestyle, emphasizing saving for retirement. There’s “Lean FIRE” which seems to be a very strict sticking to the dogma of FIRE. There’s “Barista FIRE” which seems to be people who stick to FIRE principles, but once they achieve financial independence, they continue with at least a part-time job. Finally, there is “Coast FIRE” which seems to apply to folks who PLAN on having a part-time job in retirement.
Objection(s)!!
Let’s face it, some people are not cut out to be business owners, and I have difficulty turning a wrench the right direction, so, owning rental real estate appears to be a mistake for me. I do not think myself unique in this attribute. I remember a really inspiring show with Suze Orman, where she was encouraging a young woman to continue renting an apartment instead of buying, and congratulated her for “standing in the light of her own truth. I really think Ms. Orman was on to something important here. If this movement encourages people to do things like own a business, have rental properties and other types of activities not suited to their disposition or interest, failure will likely follow. (In fact, some mistakenly think that to rush through work they hate is central to FIRE principles. In fact, the idea is to engage in work that is meaningful to you.)
Some claim that only the rich can afford to be frugal in this manner. I know that I set aside 15% for my retirement, but that feels like a lot, and I am not married and have no children. Adherents, once they do retire from full-tome work, are encouraged to act as retirees and only draw down 3-4% per year. This is likely possible over a 20-year retirement but, if one retires at 40, will the savings last until age 90? Not likely. In a related criticism, some claim that the ascetic lifestyle encouraged by FIRE is not sustainable. “It seems to me like the extreme version of the Atkins diet” explained a financial planner in London.
The Verdict
In point of fact, one promoter, as he reached his goal, said, “A lot of this stuff is emotional and psychological.” If seen as a goal, and realization of behavioral economics, this idea may make some sense. But, it seems to be largely aspirational to most.
REFERENCES
Financial Independence, Retire Early (FIRE) Definition (investopedia.com)
How to Turn Your Retirement Plan Into an Early-Retirement Plan – NerdWallet
11 Steps to Retire at 50 According to FIRE Retirement Pros | Investing 101 | US News
Does FIRE Early Retirement Make Sense for You? (thebalance.com)
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.