Firstly, we are advocates of the FIRE movement but it’s proponents often think it is the be all and end all which might not be the case. FIRE stands for financial independence retire early, the idea is that you can follow the ‘FIRE method’ to save up and invest enough money to be able to live off your investment and retire early, whatever age that may be. We discuss some drawbacks of the FIRE movement which often aren’t discussed enough.
FIRE Only Works if you Earn a Lot
It’s easy to sit there and say that you can downsize your home, your car, and your $5 mocha choca latte but living frugally will only get you so far when it comes to FIRE. If you’re not earning enough to save 30, 40 or even 50% of your income to invest then you won’t be retiring as early as you think anyway. If you invested $500 per month for 20 years in something like the S&P 500, you’d only have around $330,000 based on long term historical returns. Whilst it’s a great sum of money it’s probably not enough to quit your job and live off and besides it takes 20 years to get there, If you start your FIRE journey at 30 you’d be 50 by the time you could put the feet up anyway. It’s still retiring early but not exactly what we all have in mind when we think about FIRE.
The 4% Rule isn’t Full Proof
The famous 4% rule associated with FIRE states that you should be able to withdraw 4% from your investments each year to avoid them depleting over time. There are obvious problems with this, the first is you’ll need to live very frugally once you retire and you have to save a huge retirement pot (which we’ve already discussed is hard for most people). If you had $1,000,000 you could only take $40,000 out per year to ensure your retirement plot isn’t depleting. The second issue with the 4% rule and probably the biggest is that no one knows what the market is going to do, if you decide to retire and the market crashes you could lose 40-50% of your portfolio. The Dow Jones Industrial Average fell 54% from 2007 to 2009, if you chose to retire around this time the 4% you could withdraw from your portfolio was effectively halved.
Trading Your Youth for Old Age
Bit of a controversial one but hear me out, if you’re putting all your spare cash away or even working overtime or a second job to increase your savings rate it could be argued that you’re forgoing enjoying your youth. Don’t get me wrong you can still save and invest, go on holiday and hang out with your friends whilst trying to achieve FIRE it’s just that if you’re too focused on living frugally you may be cutting out expenses that would otherwise go to making you happy and creating great memories with family or friends.
Too Focused on Cost Saving
FIRE is all about saving money, it’s the old adage of it’s not what you earn it’s what you save. The inconvenient truth is earning more is important and it’s not talked about enough. Sure, learning to save $10,000 when you earn $45,000 is great but think of how much you could save if you bumped your earnings up to $80,000. Retraining or starting your own business is rarely discussed in the FIRE movement and it’s probably just as important as increasing your savings in most cases.
Good Things About the FIRE Movement
The concept of living below your means and saving and investing what’s left is probably the biggest step towards financial independence whether this means retiring early or not. Financial independence is incredible for obvious reasons and whilst some people might get lost in being ‘over frugal’ or feel lost after they retire it’s hard to argue with something that encourages wealth building, especially nowadays where materialism has taken over. According to a study by shiftprocessing, 80% of Americans have some form of consumer debt which is pretty insane when you think about it.
Other branches of FIRE, such as Barista FIRE (working as a barista?) or Lean FIRE allow you to partly retire and work less hours or a less stressful (also less paying job). This is probably the most realistic scenario for most of us to shoot for and it still sounds really good to be fair.
Whilst we have discussed some of the drawbacks of the FIRE movement, we are still proponents of it in most cases. That’s not to say there are not issues; the 4% rule, focusing on saving not increasing revenue and often forgoing your youth are some of the problems. Barista FIRE and Lean FIRE are two great alternatives to FIRE which suggest saving enough to at least cover part of your expenses to let you work part time or a less stressful job.
If you want to learn more about financial independence JL Collins – The Simple Path to Wealth is a great start, you can find it on Amazon here.
The views expressed in this post are the authors and should not be construed as financial advice
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