The F.I.R.E. movement has become the latest trend in personal finance. There have been countless articles written (here, here, and here) about it, and there is a documentary coming soon as well. So, what exactly is F.I.R.E.? Should you join it? Will it work? Those are just a few questions people have been wondering and I’m here to help answer them.
First off, F.I.R.E. stands for “Financial Independence, Retire Early.” Quite frankly this sounds awesome, doesn’t it? Who wouldn’t want either of those?
Peter Adeney, who goes by the pseudonym “Mr. Money Mustache,” is regarded as the one who has taken the movement mainstream and runs a website of the same name. He and his wife were able to retire at the age of 30 by living a frugal lifestyle and investing the majority of their income.
Proponents of F.I.R.E. claim you can retire early by living well below your means, saving as much as you can from your day job, and starting a side hustle to earn some money during your retirement. They also say the movement is less about retiring and more about setting your life up in a way to pursue what you are passionate about. I agree that this is a great concept, and I would love for people to embrace it. As the saying goes, “. . . the borrower is slave to the lender.” When you think about it that way, it’s not that far off from what Dave Ramsey teaches.
What Do I Think About F.I.R.E. In Real Life?
One of the largest aspects of financial planning is managing risk. There is no way to completely eliminate risk from one’s finances. Some of the largest risks to one’s retirement are inflation, spending (personal, healthcare, long-term care), and declines in the stock market. Some of these you can control and some of these you cannot. Strictly speaking, the longer your retirement, the more you are exposing yourself to those risks. If you’re retiring at age 30 or 40, you are introducing a lot of unnecessary risk to your finances.
The reality is, the lifestyle one needs for F.I.R.E. to work is not realistic for most people. Saving 50%-75% of your income on top of paying down your mortgage and student loans, is an almost impossibly high burden to place on yourself. And the more people who depend on you, the harder F.I.R.E. will be. I also do not think it is wise to stop working before you reach and maintain one’s peak earning years. Unless you are a professional athlete when your peak earning years are in your 20s and 30s, it will be next to impossible to save the total amount needed to retire early when you are still working entry-level jobs and entering middle management. For the F.I.R.E. numbers to work (for most people), you would need to be an incredibly high income earner.
Suze Orman caused a stir when she said you needed $5,000,000 to retire early. Before you fall out of your chair, I do agree with her in that there are some people who would need $5,000,000 to retire. Where you live has a huge impact on retirement needs. Someplace like New York or San Francisco will have a much higher cost of living than Nashville, Memphis, or Knoxville. I also agree with many of the larger points she made. But, I would say the vast majority of people would be fine retiring with less than $5,000,000. Also, many people cannot make it on personal spending for a family of $25,000 a year like Peter Adeney has either. The final number is somewhere in the middle.
Before jumping into F.I.R.E., you need to take account on what sort of toll this lifestyle will have on you and your relationships - because it will have a toll. You need to decide if it is worth it or not. While F.I.R.E. may not be for everyone, I do think there are aspects of F.I.R.E. that people should incorporate into their life. Perhaps the most important takeaway is living below your means. I’m not saying you need to act like a broke college student, but not living paycheck to paycheck and putting more money away towards savings is something you should fully embrace. There is a middle ground you should try to reach. I also like the mentality of making some sort of income from a side-hustle doing something that you’re passionate about. I am a huge believer that embracing the mentality of an entrepreneur, even if it doesn’t mean you are completely self-employed, will have the greatest impact on personal finances.
What You Need To Do To Retire Early
Early retirement is something many should strive for whether you actually want it or not. This is because it gives you options for how you want to live your life. It means you are taking control of your finances rather than just hoping things work out. Down the road, having the choice to go into the office because you want to versus having to go into the office because you need the paycheck is what this all boils down to. The reality is early retirement for most isn’t when you are 30 or 40, but closer to 55 or 60 years old. The goal should be to have enough money to retire at that point if you choose to, but you also have the choice to keep working in a way you find fulfilling.
Let’s say you want to live off $75,000 of your investments during retirement. You want to leave the equivalent of $500,000 to your two children ($1,000,000 total) when you pass away. You’re 35 years old, want to retire when you’re 55 and are anticipating living to age 90 based on your family medical history. You’ve already saved $200,000. You are expecting an annual return of 8% before inflation on your investments during working years and 4% during retirement. You expect inflation to be 2.5% per year. What do you need to save each year to reach your goal of retiring at 55?
Using time value of money calculations, in this scenario you would need to save $62,838 per year for 20 years to reach your goal. You would need $2,728,870 in today’s dollars to retire at age 55 given your post-retirement goals and expectations.
If you changed your goals to $250,000 per child and reduced expenses to $50,000 in retirement, then you would need $1,713,560 at age 55. You can achieve this by savings $33,300 per year for 20 years. And if you decided on not planning for leaving an inheritance to your kids, but retire at 50, you would need to save $1,548,987 by 50 and could reach that with $50,082 annual savings over the next 15 years.
Going Forward
If you’re making $100,000 a year, those annual savings numbers are going to be daunting if not flat out impossible. Don’t lose hope. There are so many variables to play with when making these types of retirement calculations and this is what I specialize in. We can come up with an actionable and realistic plan to help you reach your goals. If this article has piqued your interest and you want to learn more on how you can achieve your retirement goals, you can schedule an initial consultation meeting by clicking the button below.
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About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN. Melby Wealth Management serves clients as a fiduciary and never earns a commission of any kind. Shaun has over 10 years of experience as a financial advisor in Nashville.