Hey everyone, it’s Finance Fridays again. Today we’re going to talk about “Playing with FIRE” in regards to the Financial Independence Retire Early (FIRE) movement.
Playing with FIRE?
First of all, I want to clarify that I am all for the FIRE movement. I think the concept of trying to achieve Financial Independence and Retire Early (FIRE) is a good one. However, my concerns is that there are some who are planning for the best possible scenario only instead of hoping for the best, but planning for the worst. It’s kind of like when someone looks at a desk from IKEA and tries to put it together with just the pictures instead of reading the instructions.
I’ve talked about this a little in my prior post:
You may want to read that post before continuing on.
What do you mean?
I think the FIRE movement as it stands now has something similar to a survivorship bias (or selection bias). By this I mean you only hear the success stories about people who retired on $1 million in their 30s and run a lucrative blog or other form of passive income and net $200k a year or something like that.
What you don’t hear about are the people who tried to FIRE and didn’t make it, at least not as commonly. There was a recent article on MarketWatch which I think everyone should read or at least skim over:
The FIRE movement, while not new, has only recently caught on. Unfortunately, I feel as if some have not planned well, perhaps more people than we think. However, we probably won’t know hear a lot of the stories of failure until probably 10-15 years from now.
So, what do you think?
FIRE in general is a pretty simple concept on its surface. Live frugally, save a lot of money early in life, and have enough to live off of.
However, it becomes much more difficult once you start to answer the question of “How much do I need?”.
This question is different for everyone because of differences in lifestyle and retirement age. For example, $1 million may seem like a lot of money, but is that enough for a 25 year old to retire and live off of until they die in their 90s? However, take the same $1 million and that may be enough to a mid 50s person who owns their own house outright.
When you FIRE, you are planning for an unknown future, so that requires you to make a lot of assumptions.
The stock market will be stable enough to allow your expected withdrawal rate without a problem.
This may or may not be true. In your early retirement you may see 1 or 2 stock market downturns. You may even see a 5 or 10 year bear market. The chances of this happening increases the earlier you retire. For this reason, the earlier you retire, the more conservative you should be.
You will spend significantly less money in retirement.
For those trying to FIRE, the idea of frugality is common. However, I think the idea of spending significantly less money in retirement may be overestimated. You can’t squeeze water from a stone. If you’re already being very frugal before retirement, can you be that much more frugal after?
Unless you already have a plan in place and list of expenditures, I don’t think you can with good faith say you will spend less in retirement. There are a few exceptions to this, such as the idea of downsizing a house or plan to live in a Winnebago or something like that. Obviously, those kinds of things will significantly decrease costs.
However, you must also take into account what you plan to do in retirement. Do you want to travel? Jetski? Rock-climb? Go on cruises? With more free time, you may do more of the things you like, which may cost you more than you think. Additionally, while you may not eat out much now, this may change in retirement, especially if you are traveling a lot.
What would a typical year of retirement expenses be for you?
Inflation will stay the same.
Inflation hurts, and it hurts even more the longer you have to deal with it. From the CPI Inflation Calculator:
$100,000 December 2018 today was worth:
$47,963.44 – December 1988
$26,947.10 – December 1978
$14,130.31 – December 1968
You need to account for inflation in your retirement plan. In general, it has been around 2% or so, but it has gone up to 3 or 4% in recent years. If you factor this in your expected rate of return on your retirement funds, this may alter your plans.
You will be healthy and your medical bills won’t increase significantly.
If you retire early, you will need to provide your own health insurance without any employer help. This isn’t a huge deal in your 20s or 30s for those who are trying to retire very early. However, you have to take into consideration that in your 50s or early 60s before Medicare kicks in you will be paying for yourself.
There is also the very real possibility that become hurt or develop a chronic illness and require continued medical care. This possibility should be in your plan. Once again, if you retire really early, you may not have considered that you could develop a chronic illness.
You won’t be come disabled.
I’ve talked about disability insurance over and over again. I think it’s extremely important and try to get all my colleagues to get their own coverage. That said, the chances of becoming disabled do not go down just because you’re retired. For some, the chances may go up as you go out and do more fun (and dangerous) things.
Additionally, I doubt there are any insurance companies that will give you disability insurance if you can’t provide a source of income. I could be wrong of course, and maybe they don’t care if you’re no longer drawing a salary as long as you can pay your premium. However, I would be wary of any fine print. To me, it would be very weird for an insurance company to still provide a $150,000/yr benefit when you no longer make anywhere close to that.
As with #2, if you become disabled you may incur significant medical bills and require in-home help. These things will be very costly and drain your savings quickly.
You will generate passive income easily.
I’ve talked about it before, but passive income doesn’t start passively. Saving a bare minimum amount of money with a plan to start a passive income business in retirement is not a sound business plan.
It’s one thing to have an already profitable form of passive income to include in your FIRE calculations, it’s another to assume you can create one and it will generate X dollars a year.
For example, if you already have 10 rental properties which have been profitable for the past 10 years, that’s probably reasonably to include in your calculations. However, if you plan to start a blog about your something with the expectation it will make $100k a year — that’s not something you can include in your calculations.
You will not be needed be anyone.
Let’s say you’re a single guy or girl and all you’ve ever wanted is to FIRE. You don’t plan to get married or have children. All your FIRE plans are based around just you and you alone. That’s all well and good, if it’s just you.
Except that life comes at you fast. Out of nowhere, let’s say you meet the love of your life in your early retirement and decide to get married. Then you both decide it would be great to have children, so you have 1 or 2 or 3. Your plan for FIRE for you may have worked for you, but will it work for your spouse and kids? Will you have to go back to work again? How long has it been since you did your job?
Or let’s say someone in your family, like your mom or dad or brother or sister, gets hurt or sick and needs help, both socially and financially. Will you be able to help them out, or would your FIRE plans not allow for that?
Just because no one needs you now, that doesn’t mean it will stay that way forever.
You won’t ever want to go back to work.
This sounds kind of weird since everyone in the FIRE movement wants to retire as early as possible to “do what they really want”. However, sometimes your job becomes a part of who you are. When you take that away, you need to replace it with something else that you can wholeheartedly dedicate yourself to instead. This is not as easy as it seems… and I think it is especially true for physicians.
You dedicate most of your life to becoming a physician and gaining the necessary skills and knowledge. For this reason, leaving medicine may not be as easy as you think, even if you don’t have to it anymore.
For this reason, I think no matter what your job is, if you decide to FIRE, I think it’s a good idea to still do some part-time work or freelance work for at least the first 3 years or so. Otherwise, if you quit cold-turkey, you open up huge gaps in your resume that will make employers wary to hire you. Of course, this is especially true for physicians who need to keep up CME and Board Certifications.
I see, but some of these things you can’t plan for?
Yes, and that’s kind of my point.
Doing FIRE too early without a backup plan is a recipe for failure. The earlier you FIRE, the longer you have to hit a speed bump. While none of these things may happen to you, some or all of them can.
While you can’t plan for everything, you should try to plan for the best and prepare for the worst. Make sure whatever your calculation is has a generous money cushion, and this generous cushion should increase the earlier you plan to retire. Also, this includes making sure you keep your skills at whatever your job was in case you need to re-enter the workforce. Don’t leave large gaps in your resume so that employers would be hesitant to hire you, despite any great prior experience.
What about you?
I’m not sure if my 20 Year Career Plan fits into the FIRE movement. I guess technically I would be financially independent and retiring early. However, I don’t think it’s quite the same.
To be honest, the likelihood that I will retire early completely is probably pretty low. I think I would still like to do my job at least part-time to keep my mind in shape. Something like a partial retirement in my 50s where I worked 8-10 days a month sounds pretty nice before I was to hit full retirement in my 60s. However, we’ll see if that’s in the cards or not.
Make sure you have a sound plan, otherwise you’re just Playing with FIRE.
While you can’t account for all the curveballs life throws you, you can do your best to plan for them.
The earlier you retire, the longer you have to hit more speedbumps.
Keep your job skills fresh, and maybe go part-time for the first few years before settling into full blown retirement.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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