With the fate of Social Security still up in the air, millennials are feeling the squeeze on their finances. Several mainstream strategies are coming out as a result, including reductions in eating out, traveling, and even premium cable. One of these strategies, called the FIRE movement (Financial Independence, Retire Early), has gained significant momentum with the youngest generation for the ability to save for retirement, have financial independence, and to have the peace of mind that you are not a slave to material things.
Saving money has always existed, but American Capitalism is a construct that survives on a system of earning some, and spending more. Bucking the trend is what the FIRE method aims to do. If the FIRE movement sounds appealing to you, here are the pros and cons you should know:
The basic principle is that retirement isn’t an age, but rather the financial number you must achieve to live out your golden years, with reasonable means to travel, indulge a little, and support family members if needed.
As usual, DaveRamsey has an excellent explanation for the general idea: “In order to be able to sock away that much money toward investing, folks who are on F.I.R.E. are always looking to do two things: keep their expenses extremely low and raise their income. The general idea is that the higher your income is and the lower your expenses are, the faster you can reach financial independence. Think gazelle intensity—except the gazelle is literally on fire.”
Investopedia does an excellent job of recapping how the concept came to life: “Borne out of the 1992 best-selling book “Your Money or Your Life” by Vicki Robin and Joe Dominguez, FIRE came to embody a core premise of the book: juxtaposing expenses and time spent at work against hours of your life. Every expense is compared to the time spent at work in order to earn the purchase.
You must save up to 70 percent of your yearly income. The easiest way to do this is to work a normal desk job, or in some cases, work in construction or another high-yield but demanding industry. At this point, you are not investing, but only saving while eliminating frivolous spending (movies, dinners out, cable, cell phone data, etc).
Once savings equal roughly 30 times a year’s wage or expenses (oftentimes more than $1 million saved), it is time to quit the day job or retire from full-time work permanently. Daily commodities and expenses are covered by withdrawing 3 or 4 percent from savings on a yearly basis. During this time, aggressive investing is carried out, either in the stock market or in a form or start-up business venture. The latter of these options can sometimes be more solid when diversified, but can also be riskier than simply buying and selling the stock while predicting stock market trends. Also during this time, stockbrokers and advisors are often hired to consult, maximizing return on investment.
Is $1 million really enough to live on for up to 60 years after the age of 40? Mark Hulbert from MarketWatch is skeptical that a number that low will cover things like market change and inflation, not to mention living a more comfortable life that includes travel and comfortable amenities. He says the problem is more fundamental, aside from the hard numbers being tough to visualize: “This more fundamental problem is that the FIRE movement is irrelevant to almost all individuals, and as a consequence is dangerous. Only a very small minority of individuals have sufficient assets to retire early at more than a subsistence level.”
Further down in his write-up, Mark breaks down the numbers, and they are difficult to argue with: “An investor who retired with a 401(k) balance this size and who utilized the so-called 4% spending rule would, therefore, have to retire on yearly income between $1,032 and $2,757. Good luck with that.” The article includes some very nice visuals to detail this issue and is well worth the read.
Secondly, the investment portion of this plan requires meticulous attention to detail, and while the idea of living responsibility-free looks great in a vacuum or pipe dream, you are still technically working by managing your savings and investments to make sure you don’t run dry.
The Bottom Line
The FIRE strategy IS risky; it requires meticulous dedication to financial detail from a young age, something many millennials struggle with while fighting temptation. Media and advertising in the digital age bombard the youngest generation with constant material ideals, so someone adhering to the FIRE movement must re-program their brain. This is a long-haul strategy, meaning if you have the dedication to it over several early years, you may be able to actually reap the reward.
Retiring at age 40 doesn’t mean your days will be filled with nothing but the sound of splashing waves and all the margaritas you can drink. You will need to continue to manage an investment portfolio. However, if sitting at a desk and taking orders from multiple bosses all day really isn’t for you, and you realize that at a young age, you might want to give FIRE a shot.
If you are in your early-to-mid 20s and already struggling with debt, it doesn’t mean you can’t start the FIRE program a few years later than others. It simply means you need some help to clear your slate. Start by calculating your debt, then compare that debt to your budget, and finally get moving aggressively on the Debt Snowball Payment method.
It’s not too late to put money toward retirement, but it may be time to come up with a better strategy for going about it. The hardest part is knowing where to start, and that’s what we are here for at Golden Financial Services. Free up your cash flow, hold onto it, and start saving!