Playing with FIRE
A few months back in a conversation with a Client, I learned of the acronym FIRE - Financially Independent Retire Early. Previous to that conversation, I had never heard of it. On the face of it, the concept is pretty simple...save a bunch of money when you are young, accumulate enough so you don't have to work anymore, and then live out your years in "leisure". Turns out, there is a bit more to it than that.
By my reading, the FIRE movement was popularized some time ago by a person known as "Mr. Money Mustache". You can read more about his approach to managing money here. A few of his tenets I gleaned from perusing a bit of the available literature about him are the following:
- Live on very little money - his then family of three lived their life on (in 2014) $25,000 per year
- Your nest egg can be relied upon to produce a 4% return "most" of the time with a good chance of it never running out
- His pre-retirement mantra was "$600,000 in investments with a paid-off house", which would generate $24,000 per year with which to live your life
- He does not budget
- Your time to reach retirement is dependent upon your savings rate as a percentage of your take-home pay
- He does not believe in an Emergency Fund
What is Financial Independence?
Clearly, there is not a universal answer to this question. For example, someone subsisting on $25,000 per year while not working for "the man" can claim Financial Independence. Similarly, a woman earning a reliable $250,000 as an Internal Medicine Physician who enjoys 4-weeks vacation per year can make a similar claim.
So, suffice it to say, Financial Independence means different things to different people. For you, if Financial Independence is a goal, then it is obviously vital to define it for yourself, and more importantly, how you intend to achieve it.
FIRE Done the Wrong Way
The following is a summary of an article you can read here.
Ms. Gwen Merz - now 28 - decided in her early 20s that she wanted to retire from full-time work at 35. Working diligently, she accumulated the following by age 27 (source: Here):
- $130,000 in her 401(k)
- $25,000 in a Roth IRA
- $10,000 in a Health Savings Account (HSA)
- $5,000 in a Taxable Brokerage Account
- $20,000 in Cash (presumably an Emergency Fund)
- a Defined Benefit Pensions Plan benefit of an unknown amount (presumably through her employer)
- She had also purchased real estate of some sort (details not provided)
By ANY objective standard, Ms. Merz had made Herculean strides by age 27. Had she walked in my office and shown me this financial resume, I would have wanted her as a Client in a heartbeat. Most Financial Planners - I'd imagine - would agree.
As it turns out, I wish Gwen had walked into my office as this was her plan going forward at Age 27:
- Quit her job and “Retire” to work flexibly
- Move to Minneapolis to be with her boyfriend
- Rent-out the property she had purchased
- Co-host a podcast
- Freelance doing content management
- Sell craft items on Etsy
I am confident no reputable Financial Planner advising Ms. Merz would have crafted this sort of Financial Plan. As it turned out, the consequences of these choices were as follows:
- a rental property that was difficult to manage remotely
- freelancing didn't workout so well
- Etsy crafts that were not selling; and sadly
- a break-up with her boyfriend
Now, according to this source, Gwen lives with her parents and has returned to full-time work...you can she "where she is now" here. Looking at what she posts on her BLOG, I would still take her as a Client any day of the week - Ms. Gwen Merz is going to be just fine. My only suggestion to Gwen: don't do very many Winters in Minneapolis - I speak from experience.
Things for the FIRE Community to Consider
Regardless of how you define Financial Independence, the comfortable way to look at one's life situation, particularly when young, is to project that the future is going to look much like the present. Meaning, if I can live on $25,000 per year today, I will be able to subsist on this amount for the rest of my life. The financial deck is severely stacked against that reasoning. Here are some examples of why:
- Children: along with the joys of parenthood comes a stack of bills...anyone who tells you different is misinformed. And while obvious expenses like diapers and formula can be anticipated, other potential costs - for example, specialist services for a special needs child - are not typically budgeted while Junior is still in utero.
- Health Care: most Americans - well over 70% - receive medical insurance coverage through their employer. If you don't believe me, read this. Furthermore, the ballooning "max out of pocket" and deductibles can cripple a $25,000 per year budget. And we haven't even had teeth cleaned or braces yet.
- Home Maintenance: the cost to maintain a house - HVAC Replacement, new Water Heater, new Dishwasher, new Roof...the list goes on-and-on and is collectively breathtaking. For specifics, read this. Whether you like it or not, your house is "dying" a little bit every day. While its value may increase, the structure itself knows nothing about price per square foot...skylights will eventually leak no matter what zip code they're in.
- Disability Insurance: the chances of becoming disabled exceed the chances of dying for most of our lives. Thus, the cost of Disability Insurance is - seemingly - very expensive. In reality, the ability to work is typically a person's most valuable asset, making Disability Insurance something you can't afford not to have. Indeed, financially speaking, the worst outcome you can have is a traumatic event where you don't die AND you can no longer work...think about it. And if you decide to leave the workforce in your early 30s, you may be uninsurable for Disability Insurance as you have no earned income to insure.
There are many more concerns...some not applicable to all people. Whatever one's unique list, as a Financial Planner, one of the most value-adding services I provide is shedding light on my Clients' blind spots. Disability Insurance is a common one - Umbrella Insurance is another. For some, continuity and succession planning for their business is essential. Indeed, bringing Blind Spots into the light is one of the best services a Financial Planner can deliver to Clients.
With personal finances, an utter disaster lies in wait if you assume today's environment will persist with no future unpleasant surprises. At 30 - or any age - calamities of one stripe or another are almost assured to happen. And sadly, most carry a price tag that will decimate Mr. Money Mustache's recommended $600,000 portfolio, whether it earns 4% or not.
FIRE Done the VERY Right Way
The following is a somewhat modified example of a Client Couple of mine pursuing Financial Independence in a fundamentally different way than the method popularized in social media circles. Here are some details:
- Ages: mid-30s
- Combined Income: ~ $100,000
- Taxable Account Balance: ~ $400,000
- Retirement Account Balances: ~ $175,000
- Emergency Fund: $30,000
- One of the two is covered by a Defined Benefit Pension Plan
- Health Care is Employer-Provided and included as a Retirement Benefit
- Disability Insurance is Employer-Provided for one of the two
- Monthly Savings Rate is ~ $2,000
To me, these two are doing it the right way financially, FIRE or otherwise. Their account balances are large for their age, though not ridiculously so. They have ample liquidity in an Emergency Fund such that practically any curveball life throws at them will be more of a pothole than driving off a financial cliff.
And these two do not sit at home eating Ramen every night counting pennies. Rather, they travel frequently and to exotic places when they do, typically leveraging credit card perks to do it. They are not absorbed by material things...you would chuckle at some of discretionary expenses we discuss.
Generally speaking, they are as happy as can be and don't fret about anything they don't have. And finally, they hold out no grand vision that they are going to make a ton of money hustling on the side. They have hobbies; however, there is no talk of hobbies dropping any profit to the bottom line.
Financially, the best part about this couple is that while they both feel very financially independent - and they undoubtedly are - neither is entertaining ANY thought of leaving their present employers. They realize that while work does present some challenges, they are coming out ahead in the long game.
In time, they surely will leave work, though it will be on their own terms and with granite-like Financial Independence. When they go, the pension income and lifetime medical benefits will go with them and continue for the rest of each of their lives. Indeed, this is the way to do FIRE.
By reading my description, deductive readers would conclude that perhaps one of these two is in the United States Military. It's true! Even better, similar benefits are available to anyone who signs up to serve his/her country. And after a mere 20 years, a bevy of opportunity is earned. This collective deal makes any U.S. Military Servicemember ideally suited to the FIRE movement.
Some Thoughts on Financial Independence
Whatever age you decide to transition out of regular employment, there are a few things you should keep in mind.
1) Don't Ignore the 7 Cornerstones of a Basic Financial Plan
I cannot over-emphasize the importance of an Emergency Fund. While unprovable, I submit the world is more affordable when your Emergency Fund is firmly established. Recently, Clients of mine were hit with several financial body blows totaling a good part of their Emergency Reserves...some of the funding was not chargeable to a credit card. While they had to grit their teeth, they also went about their business the following day since they had the cash on hand to meet their out-of-the-blue requirements. Without the cash, it would have been back to square negative one.
2) Don't Underestimate the Non-Salary Benefits of Your Job
Whenever I onboard a Client, one of the documents I request is a statement of employee benefits. Simply put, some employer benefits are amazing. For example, Amazon (right, that Amazon) provides basic and supplemental life insurance equal to 5 times base salary. Moreover, Short and Long Term Disability is also provided. Replicating these benefits on your own can easily run more than $5,000 per year, which is probably a low estimate. These types of benefits are not uncommon. In my view, Long Term Disability is the employer-provided benefit least appreciated...Group Rates are a fraction of individual coverage.
An ancillary benefit to working is simply the experience you garner while you are employed. More skills, more experience, better expertise, and deserved trust typically equal more pay, more matching 401(k) Funds, and more opportunities - it's a virtuous cycle. Additionally, you are inoculating yourself from professional extinction...I would imagine re-entering the workforce after flaming out testing the FIRE lifestyle for a few years would be difficult for both the employer and the employee.
In short, working for "the man" is not the tortuous experience described by some. True, there are speed bumps, though that's life...you have to take the bitter with the sour.
3) Life is Expensive, Particularly in Old Age
Much is written about the high costs of old age: Medical Expenses, Prescription Costs, Long-Term Care Expenses...the list is pretty lengthy. True, some lucky individuals will side-step some of the costs. However, as you age, your options for working your way out of financial predicaments becomes increasingly compromised. For some, the ability to work is taken away whether they like it or not. For others, employers are developing new recruits. Some turn to Social Security, which indeed is a major factor in retirement income. However, if you leave the workforce in your 30s, your Social Security benefit will be severely less than if you have many years of employment.
My suggestion - simple: have a plan for the percentage contingencies. If you don't have an executable Long-Term Care strategy, keep working on your Financial Plan. If you have not accounted for increasing Medicare Premiums and out-of-pocket medical costs in your later years, re-work your plan. Bottom Line: Retirement is an interesting ride for most...very few underestimate the costs.
4) Don't count on the Laptop Lifestyle
The internet is peppered with articles of the YouTube Superstars who earn millions per month playing video games or Bloggers who travel the world writing about their experiences for a living. While there are success stories, I would imagine the average internet-centric endeavor never earns a dime. Note, about 300 hours of content per minute is uploaded to YouTube (Source)- how valuable can any one hour of content be? The problem is the ubiquitous content...take my profession of financial planning for example - the more Financial Planning Blogs there are, the more the Financial Planning content - in aggregate - is diminished. For as wonderful and informative as I may think my Blog is, the reality is that if I tried to live off of it, I would be dead broke.
So, if part of your income generation plan involves ANYTHING around producing content on the Internet for profit, have a few other income streams to pay the bills while your content is incubating on the Net.
5) Cultivate Multiple Income Streams
A famous Warren Buffett quote is as follows: "If you don't figure out a way to make money while you sleep, you will work until you die."
It's true, very true. This is why saving some of what you earn is so emphasized by Financial Planners...your investments can grow while you sleep. This is a happy result for which you should strive. If you throw in some home equity and overall debt reduction, you get real net worth accumulation. And if you are fortunate to develop a profitable side gig of some sort - an AIRbnb or other Rental Real Estate venture for example - all the better.
Multiple income streams fortify your overall financial posture, which makes events like the Financial Crisis of 2007 much more survivable.
Financial Independence is a wonderful thing. In my opinion, it is rarely achievable in your 20s or 30s. True, you can attain very high levels of Net Worth at a very young age. However, with Life Expectancies increasing, medical and all other costs on the rise, and a whole host of financial uncertainties, it is extremely unlikely that one can accumulate enough in the first 10-20 years of work to fund the rest of life. Therefore, I suggest defining the Financial Independence you are trying to achieve and constructing a roadmap to get there. Then, saddle up and get to it...it can be one hell of a ride.
Comments, criticism, and suggestions are always welcome. If you would like to provide any or would like to discuss your personal situation with Resilient Asset Management, please contact us here.