Playing with FIRE

As children we were warned, don’t play with fire. If you see it, put it out. Today though, young savers are running towards it. FIRE is an acronym for Financially Independent Retire Early. FIRE followers splatter their posts across message boards with religious fervor. Reading these posts, it’s hard not to get excited about kicking the day job and living off your portfolio.

The message boards are filled with typically younger people who share how they live on a fraction of their salary and invest the rest. They minimize all their financial obligations and aim to carry no debt. Many embrace the extreme frugality the way a person might train for a marathon. By living off very little, they are able to rapidly build nest eggs. On the back end, having trained to live on such little income, the nest egg required to maintain that lifestyle becomes much smaller. Once this tipping point has been hit, you may enter retirement. Many success stories tout young couples retiring in their 30’s and 40’s.

One of my favorite things to do after reading a success story is to see what the trolls in the comments section have to say. Often they are quick to point out that the people still have jobs and aren’t really retired. What many of the FIRE acolytes find is they like working but on their own terms, and they could go without the paycheck if need be. There is also the comment that these people are ill-prepared for a catastrophic event like a major illness. Perhaps some are, but everyone is always at risk for these unlikely events. Often, it seems most of these critics are ill-prepared for their own retirement.

I am not without my own critiques of the FIRE movement; however, I am also supportive. The success stories can give a false sense of security in how much it does take to retire. I often see little discussion around emergency funds, insurance needs, inflation, and market volatility. These factors can upset any retirement plan at any time. Someone who overlooks these variables can find their FIRE plan on fire real quickly.

What I love about the FIRE movement is the excitement around saving and investing. For years we have heard we are a consumer society funded on debt. It seems we are catching on as a society that assets provide freedom and choices. Also, it rarely hurts to see where you can spend less to save more. At a minimum it can relieve some stress that the next catastrophe is around the corner.

There are two phases to any retirement plan, not just for FIRE followers. There is the accumulation and spenddown phase. Once you enter the spenddown phase, you need to think about income generating assets. This often will include interest and dividends. Once you stop reinvesting dividends and interest, your portfolio will stop compounding on itself. If you only live off portfolio income, you will likely never need to dip into your principle, and it will last a lifetime. It is okay to dip into your principle in retirement, but you will be limiting the length your portfolio will last and run the risk of outliving your money.

The decision on when to retire and what your income stream will look like is very complicated. Simply comparing your portfolio’s dividends and interest against your expenses is not enough. Working with a CERTIFIED FINANCIAL PLANNERTM professional can help model some of the more complex variables. They can also help build a strategy to minimize debt faster without ignoring asset growth.

If you aren’t planning to retire in your 30’s, there are still lessons to be learned from the FIRE movement. Minimize debt, maximize savings, and live within your means. This is time tested advice for any person in any market to find success.

Happy Investing