The FIRE Movement: A Financial Planner’s Perspective

by Sophia Bera on January 23, 2019

More and more, I work with clients who are interested in the FIRE movement (which, if you haven’t heard of it, stands for Financial Independence, Retire Early). Countless blogs, websites, and podcasts are dedicated to FIRE, sharing the stories of how people penny-pinched their way to freedom from The Man.

My friend Paula Pant interviewed Suze Orman and asked for her opinion of the FIRE movement. Orman stated she hated it and went into great detail about why, but later amended her opinion when she looked more deeply into the movement and learned that, for many people, it doesn’t mean they save up $1 million by 30 and then stop working completely for the next 60 years.

One of my roles as a financial planner is to help clients envision their ideal retirement scenario and then help them simplify, streamline, and automate their finances in order to get there. And with careful planning and aggressive saving, retiring early becomes possible. But just because it’s possible, does it mean it’s also a good idea?

Spend five minutes Googling the FIRE movement and you’ll find articles passionately defending it, and just as many telling you why retiring early is a horrible idea. I prefer to look into the possibility of early retirement on a person-by-person basis, because what’s right for you isn’t necessarily what’s right for your friends, siblings, parents, or coworkers. What should you do? Before you decide anything, it helps to understand what the FIRE movement is about.

Why FIRE? Why now?

Unlike our parents’ generation, today’s 20- and 30-somethings don’t expect to (or don’t want to) work for the same company for their entire careers. Frankly, many companies aren’t loyal to their employees. The worker-friendly benefits and union protections enjoyed by previous generations have been dramatically reduced. While many newer companies are adopting progressive benefits like free health insurance, unlimited vacation time, and long parental leave, those benefits often aren’t extended to contractors or part-time employees.

What we have here is a combination of social and economic issues that are making many of today’s younger workers reconsider a traditional career path. Sometimes that means leaving a full-time job to start your own company, switching to freelancing for one or more clients, or figuring out a way to no longer need a job to support yourself.

So … people just stop working? How does that work?

Not exactly. Some of the most well-known FIRE movement proponents often have income coming in. Some of them have a spouse who still works, or they’ve found a way to monetize their blogs, podcasts, or other business ventures. They may have passive investments like real estate that are cash-flow positive.

Point being, they generally don’t clear out their cubicles before their 40th birthday and then do literally nothing for the rest of their lives. Humans are designed to work. I heard Joshua Becker speak at a minimalist conference and he said something that stuck with me: “There is this myth that leisure is the goal.” Most people get bored of a life of leisure and what we really desire is meaningful work.

Instead, think of the FIRE movement this way

Proponents of FIRE prefer to emphasize the “financial independence” part of the movement. It’s not so much about the stereotypical image of retirement, where you spend all day on the golf course. Rather, you spend your working years saving enough so that you don’t have to rely on a steady paycheck to support yourself. This frees up your time to pursue things that interest you — and that can include things that earn income.

Transitioning into more meaningful work is key. I have a handful of clients who are in their 30s with net worths around $1 million. Although they could quit their jobs, take their money and retire on a low cost-of-living island and live off of $25,000 per year, most of them enjoy living in a big city in the U.S., are active in their communities, and want to be near their friends and family. They are not looking to check out of their lives completely, but they do want to get out of the rat-race sooner rather than later so they can focus on projects and ventures that are important to them.

What does it take to reach financial independence?

Whenever I work with someone who is interested in FIRE, here’s what I suggest:

Eliminate your debt and start aggressively saving!

Keeping up with the Joneses is expensive. New cars, big houses, private school tuition for the kids, and annual ski trips are awesome if you want and can afford them, but they’re going to make it tough to save, especially if you don’t earn enough. Even high earners can end up living paycheck to paycheck just to support the outward appearance of success.

If you want to attain financial independence, you are going to have to pick and choose so you can save more aggressively. Often this means saving 25-50% of your income. We’re talking about living well below your means, not just saving 10% off your income.

That could mean driving older cars or trying to get by with one or no car. It could mean living in a smaller home, or maybe even renting a home if that makes more sense for you. It could mean prioritizing your retirement savings over saving for your kids’ college educations because they can borrow for school, but you can’t borrow for retirement.

Maximize your tax advantaged accounts

Invest in a 401(k) (take advantage of that employer match!) as well as in a traditional or Roth IRA (if you qualify). If you make too much money to contribute to a Roth IRA, here’s a post for you. If you’re self-employed or have a side-hustle, consider setting up a SEP-IRA or Solo 401(k). Once you’ve set these accounts up, work to max them out.

If you have a High Deductible Health Plan (HDHP) that qualifies for a Health Savings Account (HSA), max this out as well. This is one of the only types of accounts that has a triple tax benefit. Learn more about hacking your HSA here.

Don’t just save. Invest!

A savings account earning at least 2% interest is a safe place to deposit money you’ll need in the short term and you’re going to need emergency savings of at least 3-6 months of expenses. After paying off debt, building up emergency savings, and maximizing your retirement accounts, you’ll be ready to open a taxable brokerage account.

If you really want to retire early, you’re going to need start investing every month in a taxable brokerage account so that you’re building up assets outside of your retirement accounts. Many retirement accounts cannot be accessed without penalty until age 59½, which is why having this type of investment account will give you money to tap into before you reach an age where you can withdraw from retirement accounts.

What could throw off a plan to retire early?

Factors beyond your control can eat into your savings:

Health issues: Unfortunately, getting seriously ill is expensive. It can be really hard if you’re on a high-cost, high-deductible insurance plan because you no longer have insurance subsidized through an employer. What can you do to prepare as best as you can?

  • Consider a high-deductible plan with a Health Savings Account, or HSA, if you’re eligible. This will allow you to set aside pre-tax income and withdraw it tax-free later on for qualified medical expenses.
  • Practice preventative health care. See your doctors regularly, exercise, eat well, and quit smoking. Exercise, meditation, and yoga can also help reduce stress, which can cause or exacerbate health issues. Living an active lifestyle will save you thousands of dollars in avoided medical issues in the future.

Family emergencies: Sometimes, a loved one goes through a difficult time and needs significant financial help. If you’re in a position to assist, here are some ways to do that without compromising your financial security or your relationship with that person:

  • Give gifts, not loans. It’s better for your relationship to just gift money you can afford to live without, rather than expect repayment and never receive it.
  • Know when to say no. If you genuinely can’t afford to help, or giving money just enables a bad situation like a drug or gambling addiction, it’s okay to turn down the request for money. (I give my clients permission to “throw me under the bus.” Tell your family member it’s your financial planner who says that they have to stop giving you money, not you.)

Market uncertainty: The stock market is volatile right now and we may see an increase in volatility over the coming years. Should you sell everything and hide? No! Here’s why:

  • A long investing time horizon smooths out short-term market highs and lows. That makes investing a more appropriate choice for money you don’t need for at least five years.
  • You can dollar cost average into the market if you continue to invest, regardless of whether or not stock or bond prices decrease or increase.
  • Timing the market and making frequent trades will actually lower your investment returns. So will making investment choices based on fear.
  • If all of this investing talk still scares you, I highly recommend this podcast episode in which Tim Ferriss interviewed Terry Mallouk of Creative Planning. In it, he explained the importance of staying in the market as opposed to trying to time the market, by basically saying that he hasn’t seen anyone time the market successfully.

I’m sold on FIRE. How do I begin to plan?

One thing I notice about people who aspire to retire early is that they tend to be extreme savers. If saving 10% of your income sounds like a lot of money to you, you’re probably not ready for FIRE. But if you’re already saving 25-50% of your income, you’re likely on your way to FIRE. However, you should think about hiring a fee-only financial planner who can help you select low-cost index funds that appropriately match your investment goals.

You don’t need to be a millionaire to get professional financial help! If you’re interested in early retirement and would like some guidance when it comes to your investments, apply to become a client of Gen Y Planning today! We’d love to help you use your money to match your values and retire early!