While the FIRE movement has lost momentum, financial independence is still very much alive.
By Julie Pinkerton | Edited by Jordan Schultz
If you cannot define it properly, you cannot live it successfully.
A movement called FIRE – Financial Independence, Retire Early – gained popularity during the COVID-19 pandemic. FIRE redefines wealth as a means to align with your values. The premise is widely attributed to a 1992 book, "Your Money or Your Life," by Vicki Robin and Joe Dominguez.
FIRE represented freedom from long commutes, endless cubicles, mindless meetings and office politics. College graduates were frustrated about an inability to get ahead. The pandemic was the catalyst that enabled remote workers to squeeze in additional gig work, making the FIRE lifestyle promising. When restrictions were lifted and employers started forcing workers to return to centralized offices amidst a rocky economy, many FIRE members found the financial discipline to be far more complicated than expected.
Some believe that the FIRE movement has burned out. Others recognize that early financial independence is still attainable by crafting a plan that addresses these 11 key questions:
- What will retirement look like?
- How much are you spending each month right now?
- How will your expenses change in retirement?
- Do you have additional sources of income?
- How will you invest for growth?
- How will taxes affect your goals?
- How much can you safely withdraw each month in retirement?
- How does your health play a role?
- What about stock market shocks, elderly parents and other unexpected expenses?
- How will you stay informed of changes that can positively and negatively affect your plans?
- What is your backup plan?
What Will Retirement Look Like?
An important difference between financial independence and traditional retirement is that you define your time, no matter if it is Monday morning or Saturday night. You may rely solely upon your investments, but you also may desire to become an entrepreneur. You may select to completely change careers and go from being a doctor to becoming an artist. You may choose luxury travel or seek obscure hideaways in remote locales. Your desires may change frequently over a 30-, 40- or even 50-year period.
How Much Are You Spending Each Month Right Now?
Many people do not have an accurate pulse on their current expenditures and don't realize that their lifestyle is supported by debt. To save 50% to 70% of your income, you have to be able to align your current lifestyle with your ultimate savings goal, which FIRE calculates as 25 times your annual expenses.
How Will Your Expenses Change in Retirement?
The modern workplace has eliminated the need for many traditional expenses such as dry cleaning. Therefore, it is more accurate to expect that your retirement expenses will not decrease, but change. Talking with people currently living the lifestyle you desire will give you realistic insights and help you avoid expensive surprises. For example, while being a travel blog writer may sound glamorous, you may need pricey and hard-to-maintain equipment that is a challenge to travel with internationally.
Renting abroad is a wonderful way to minimize daily expenses. Being an expatriate on a visa allows you to stay in another country for a set period before being required to exit. Golden passports, while expensive, offer the ability to live in your desired country as a citizen, opening up significant benefits such as public health insurance.
Many believe that Social Security will soon be defunct, but it can be an important income source even if it looks very different than it does today. However, benefits will be reduced if you are work for less than 35 years or stop working before retirement age and low-earning years are not replaced by later, high-earning years in your benefit calculation.
The lack of an active income source can make getting mortgage, auto and other consumer loans more challenging.
Do You Have Additional Sources of Income?
The most important way to increase your available income is to pay off debt, especially credit cards. Every dollar that you charge is working against your goals, along with the penalty for use (i.e., interest).
Many people will work a second job. This work may be part time in the hours around their primary job, or they may create a small gig business. This is an excellent way to gain expertise to leverage into a promotion or learn the new skills they plan to use in retirement.
FIRE investors were often proponents of multifamily property ownership. This enabled them to live in one unit and generate passive income while renting out the remaining units. Many people were caught unprepared when they overpaid for hot properties; couldn't cover the mortgage when the market cooled; and failed to factor in maintenance costs, unpaid rent, and damaged or destroyed properties.
How Will You Invest for Growth?
Early retirees have about 15 fewer years to reach their goals, so it is important to avoid costly investment mistakes. Qualified retirement plans – such as 401(k)s, individual retirement accounts and health savings accounts – require assets to remain invested until age 59 1/2 to avoid IRS taxes and significant penalties. Many FIRE participants chose to invest their funds in low-fee index funds. While these funds have excelled over actively managed funds, their success was often primarily due to the lower cost structure than being superior investments. A financial planner can help you find suitable growth investments with low cost structures.
How Will Taxes Affect Your Goals?
Your advisors will also help you learn how taxes can affect your goals. These include taxes incurred before, during and after converting the investment to income. You can learn how to sequence your investments to minimize taxes further. A professional tax and legal advisor is important if you have a business entity, especially if you are living abroad.
How Much Can You Safely Withdraw Each Month in Retirement?
FIRE advocates stipulated that you can safely withdraw 4% per year, based on a long-held planning premise created by William P. Bengen in the early 1990s. A lot has changed since his advice was adopted by the financial community. Back then, men's life expectancy was about age 80, and women's was 85. But expected lifespans have increased, and the U.S. Census showed in 2020 that more than 75,000 people were still living at age 100. Bengen also included full Social Security benefits, but he wildly underestimated health care costs. Bengen's methodology used actual market results, including the stock market crash of 1929. However, the results would change considerably if the events occurred in a different order over the same time frame.
A financial advisor can help you determine a reasonable withdrawal rate appropriate to your unique situation and, most importantly, your risk tolerance.
How Does Your Health Play a Role?
When you are in your 20s, it is truly hard to imagine how your health will change over a lifetime.
The biggest potential expenditure in your lifetime is predicated on employment. If you are not working and are under age 65, with few exceptions, you will struggle to find quality health insurance, even with the Affordable Care Act. If you go abroad, few of your normal insurance options are available. But, even the best health insurance does little to cover the impact of longevity.
According to the Department of Health and Human Services, more than half of Americans over age 65 will require long-term care. And that can get expensive: According to Genworth's 2020 Cost of Care Survey, 14% will require nursing home care for at least five years with a median cost of at least $465,360. Even in the lowest-cost states, assisted care is financially consuming.
What About Stock Market Shocks, Elderly Parents and Other Unexpected Expenses?
We cannot perfectly plan for unexpected challenges. FIRE advocates had never experienced anything but ideal investing conditions due to an extended bull market. Our current economy reflects three major market shocks: historic inflation, an uncertain market and ongoing military conflict. All of this before Mom breaks a hip and the AC unit finally goes out. Sometimes an emergency fund will close the gap, but for early retirees, these financial shocks can create greater headwinds.
Early retirement requires you to be financially capable of caring for yourself for the rest of your life without another dollar coming into your bank account.
The longer you are away from your career, the harder it will be to return to it and be rehired. You will either have to invest in new education and training, accept a lower-paid job or possibly be unemployable.
If you dial back all of the assumptions in your plan, you are less likely to be blindsided when it is harder to correct. Your financial advisor can also help you stress-test your portfolio.
How Will You Stay Informed of Changes That Can Positively and Negatively Affect Your Plans?
No financial plan of this importance should ever be a one-and-done. Over 50 years, it is impossible for things to remain the same. Staying apprised of both local and world events is an overlooked need.
What Is Your Backup Plan?
According to the Bureau of Labor Statistics, only 25% of new businesses make it 15 years or more. Most businesses fail because the founders didn't do enough homework, didn't build an enduring plan or didn't have enough funds. You are seeking an endeavor that may span more than 50 years.
Having a backup plan is not admitting to failure before you begin; rather, it is a way to ensure that you will have options. You may decide that living abroad sounded better on paper than in real life. You may realize that you miss a certain kind of food or favorite relative. Perhaps the extensive experience you gained in the corporate world did not translate to the gig economy. This isn't a failure. It's an acknowledgment of learning more about yourself.
Your backup plan needs to give you a runway toward reintegrating into the workforce. Maintaining your professional network is free and your connections will be vital if you choose to restart.
Senior workers are growing in numbers, too. AARP cited data by Washington, D.C.-based investment company United Income that found about 20% of people either working or looking for work are now over age 65. Over 70? About 15% of workers are in this age category, according to Quartz.
When considering early retirement, remember that "early" does not necessarily mean "forever." You may find yourself enjoying a series of careers over your lifetime. As long as they bring purpose, yield resources and align with your dreams, your retirement plan can look any way that you would like.