What a difference a year makes. I remember interviewing for a job in NYC in 2007: swanky hotel, catered lunches, and cocktails at a private bar. We had no idea that the door was about to swing shut on such corporate extravagance in the wake of the 2008 recession. Cut to a year later and a friend of mine with similar experience couldn’t get a call back from any NY firms and had to move to rural Pennsylvania for a job.
The feeling of corporate disenfranchisement after the Great Recession spurred many young workers to create their own financial stability and independence: cue the Financial Independence, Retire Early (FIRE) movement. By aggressively saving and cutting costs to the bone, some Gen Xers and Millennials were able to rid themselves of the dependence on institutions and corporations to provide for their current and future lifestyles.
The FIRE movement emphasizes several important behaviors — like focusing on your saving and spending rates — but be mindful of the long-term sacrifices needed to achieve FIRE.
Financial Independence, Retire Early (FIRE) Explained
The FIRE movement represents a pushback against established lifestyle and corporate philosophies. With the fragility of the system exposed by the ’08 financial crisis, younger, well-educated, and hardworking individuals took back responsibility for their own financial stability. These individuals applied their skillsets and work ethics to find high-paying jobs in order to aggressively safe and build a nest egg that could support an early retirement (in some cases, in their 30s and 40s).
So how did they do it? How does FIRE work? The FI in FIRE — financial independence — assumes that aggressive savings during working years will accelerate the accumulation phase, pushing the timetable from the sacred 65 to the early 40s (or even late 30s). While standard saving rate recommendations start at ~15%, FIRE advocates push for up to 70% savings rates.
By aggressively saving and commensurately cutting costs, the RE — retire early — in FIRE can be achieved. “Retire Early” doesn’t have to mean days of no work. In fact, many FIRE advocates recommend working hard in your 20s and 30s to then be able to build a life of experiences and personal challenges. “Retire Early” can include part-time work or passive income opportunities.
Pros of FIRE Movement
Sounds pretty nice, doesn’t it? The FIRE movement does have some very strong pros. First, the FIRE movement emphasizes focusing on your passions and what is important and fulfilling to you. Rather than bartering your time for money over a 30- or 40-year career, you fast forward that timeframe so you can live your own terms, earlier.
The FIRE movement also emphasizes the importance of multiple income streams. This is a valuable life lesson. If you are solely dependent on a single job to support your family, your lifestyle can be seriously upended by job loss. However, if you have ample savings, and diversified income streams, you create considerable flexibility for both time and lifestyle management.
Finally, the singular (and, in some cases, draconian) focus on controlling costs clearly avoids the problem of lifestyle creep, the hedonic treadmill, or the proverbial keeping up with the Joneses. This can be a good thing! It’s much easier to control and manage expenses than it is income, so by reducing unnecessary slippage, you can maximize your savings for the things in your life you genuinely enjoy.
Cons of FIRE Movement
There are thorns on the FIRE rose, however. The first major con is that the frugal lifestyle espoused by advocates must continue indefinitely. The math simply doesn’t work otherwise (unless you have a seven-figure salary). You may be motivated today for a future of freedom, but are you sure you want to mow your own lawn, never eat out at a nice restaurant, or forego the occasional splurge on a dress for the rest of your life?
Another negative about FIRE is that even flexible, part-time, “fun” jobs you might take up during retirement, like travel blogging, can be hard work. It may seem glamorous, but blogging still requires deadlines and workstreams. You are still bound to work structure, but without corporate perks like health benefits and a stable salary.
Finally, FIRE advocates don’t have an answer for large life curveballs. Sure, you can try to bank 25x or 30x your average annual expenses, but what about those years that aren’t average? What will you do if you need a new roof, but the replacement cost is below your deductible? Or your child or parent gets sick and needs more out-of-pocket medical care? Some risks are insurable, while others aren’t. An unexpected, large outlay can seriously derail your carefully crafted FIRE plan.
FIRE and Recession
Will a recession douse FIRE (cue groan at bad dad joke)? Not necessarily. An important part of the FIRE movement is, in effect, becoming your own, well-informed financial advisor. That means being up to speed on, and implementing, concepts like emergency funds, low-cost, long-term investments, bucketing strategies, tax saving strategies, etc.
That said, the FIRE movement grew out of an incredibly stable decade for market returns — the 2010s. After the extreme volatility of the financial crisis, the stock market in the 2010s moved higher in a mostly orderly fashion. This likely created complacency for some FIRE implementers, who had not truly experienced market volatility or drawn-out bear markets. If your plan was too rosy on market return assumptions, then you may experience sequence-of-return risk, which can render retirement plans inadequate or obsolete.
Lessons from FIRE Movement
There’s a lot to learn from the FIRE movement, even if you don’t want to implement it. First, take back your agency and focus on what you can control. It’s impossible to control the market and, to a lesser extent, your salary, but you are in complete control of how much you spend and save. Expenses do not need to increase commensurately with salary. If you live a life you enjoy today, why should that change if you get that next promotion or bonus? Banking that money as savings only helps you fund your “future you.”
Another important takeaway from FIRE is that retirement doesn’t need to mean no work. You can pick up part-time work or create passive income opportunities that you enjoy. Want to write a book, own rental real estate, or teach part-time? These are all valid options, even for a “traditional” retirement in your later years.
Finally, FIRE can teach us to enjoy life today as opposed to age 65. While you may not be able to retire in your 40s, don’t forget to enjoy the journey, for yourself and your family.
Financial Planning with Harbor Crest Wealth Advisors
Whether or not the FIRE movement is right for you, there are important lessons to learn from and implement in your financial life today. If you would like additional advice on how your finances can help you build a life of meaning, sign up for our newsletter.