The FIRE movement continues to rapidly gain popularity. If you aren’t familiar with it yet, get familiar. FIRE stands for Financially Independent, Retire Early.
This concept first became popular from Vicki Robbin’s book Your Money or Your Life. This book talks about how people sacrifice time in the endless pursuit of money. This explains the title – you pick either your money or your life.
This really resonated with me because we live in a society where success is usually measured by money. The more money you have, the more successful your life is. But at what cost? Your time.
I’d argue that we should start focusing on time wealth, rather than money wealth. Time wealth is the ability to spend your precious time in a way that is most aligned with your values. That could be spending time with family, doing work you love, volunteering, traveling, etc. Time is our most precious, finite resource and we often sacrifice it to earn money on things we don’t really need – a huge house, fancy cars or funding a certain lifestyle we think we need in “retirement”.
With the FIRE movement, you focus more on maximizing the value of your time as opposed to the amount of money you have. People that buy into the FIRE philosophy won’t be the ones that appear to be externally wealthy, rather they are the ones who have more time wealth.
The FIRE movement continued to gain traction following the financial crisis in 2008. People like Mr. Money Mustache started writing and speaking about how they achieved financial independence and quit their jobs in their 30’s. How did they do it?
Here’s the basic idea:
- Drastically cut your expenses
- Save between 50 – 70% of your income each year
- Build enough savings so your money is 25 times the amount of your yearly expenses
The 25x number comes from the idea that a 4% withdrawal rate from your investment portfolio has proved to be a sustainable spending rate across all different market cycles.
Assuming a $1,000,000 beginning investment portfolio value with an investment allocation of 60% equity and 40% fixed income, the worst portfolio value at the end of the 30 years was $290,231 with a 4% withdrawal rate. In other words, a 60/40 portfolio with a 4% withdrawal rate still had money at the end of the 30-year cycle.
Sounds pretty simple right? While I love the idea of FIRE, I do have some critiques. Let’s start with what I love.
What I love about FIRE
Challenging traditional retirement
Traditional retirement is outdated. The idea of working at 100% capacity until 65, collecting your pension and social security is not what people want anymore.
Have you ever thought about why 65 was the right retirement age? We’ve been told to retire at 65, but why? Well, this was the specified retirement age for people to start collecting their full benefits when Social Security was enacted in 1935. But guess what? The average life expectancy in 1935 was 61!
In addition, people typically stopped working in their 60’s because the majority of jobs in the 1930’s were blue collar jobs that required physical labor. Well, that makes sense – if you’re physically unable to work, then you need to retire.
With the rise of the internet and gig economy, the overwhelming majority of jobs are white collar jobs that do not have the same physical requirements. People can now work longer than ever before and do it when they want, where they want, and how they want.
Age 65 doesn’t make sense anymore which requires a different approach to financial decisions. Pensions, social security, Medicare, IRS rules – they are all based upon this retire-at-65-concept which shouldn’t dictate how we spend our precious time.
Cut ties with work you don’t love
You’ve probably had this conversation with friends or coworkers before – “what would you do if you won the lottery”? The first thing is probably – “I’d quit my job tomorrow!”.
I always find this answer disheartening. Think about the amount of time you spend at work:
- There are 168 hours in a week
- Sleeping 8 hours/night = 56 hours per week which means you really have 112 hours of time awake
- If you work 9 – 5 with an assumed 30-minute commute each way, it means you are spending 45 hours/week dedicated to work. 45 work hours/112 hours of time awake = 40%.
At least 40% of your time spent awake is dedicated to working every week – this is a huge amount!
Financial independence means the ability to spend your time in a way that is independent of your need to earn income. This is why those who achieve financial independence often quit their jobs – working at that current job is now a choice, not a necessity.
The ability to choose how you spend your time is priceless and it allows you to maximize your time wealth.
Remove the fluff from your spending
If you are trying to save between 50 – 70% of your income, it means you really need to take a hard, close look at how you are spending money. We often fall victim to spending money on things we don’t really need – cable, monthly subscriptions, cars, etc.
I love how this forces you to ask yourself – what can I stop spending money on that I don’t truly value? That exercise alone will likely bring awareness to your current spending habits which is extremely valuable. This is why I believe budgeting is not a punishment, but rather the opportunity to increase awareness.
Awareness of two things:
- How much does it cost for you to live? This alone is extremely important because it’s a crucial component to determine how much money you need.
- Is your spending aligned with your values?
The FIRE community religiously tracks their spending to answer these two questions, which makes them much smarter consumers.
What I don’t love about FIRE
Sacrificing meaningful experiences in your 20’s and 30’s
Saving between 50 – 70% of your income is really challenging. It likely means that you need to sacrifice meaningful experiences during some of the most exciting times of your life. It’s difficult to save between 50 – 70% of your income if you are paying off student loans, going to grad school or traveling the world.
Some people can do this, but I don’t think it’s realistic for most. Our philosophy is that you never want to live your life wondering “what if”. What if you took that risky job, what if you took a mini-retirement to travel, what if you started a business?
Personally, my wife and I could have saved way more of our money if we wanted to. We could have lived in a cheap apartment outside of Boston, but we lived in a nice apartment right next to Fenway Park. We could have decided to aggressively pay off student loans, but we decided to travel around the world instead.
Those were the experiences that we truly valued and wanted to spend our money on. Would we ever trade those experiences in exchange for being in a better financial spot now? Hell no.
The ability to accurately project your living expenses in your 30’s and 40’s
FIRE is essentially a mathematical equation – take your living expenses and multiply it by 25. That’s the total amount of money you need to reach your “FI number”.
As we learned growing up – an equation is only as good as its inputs and I don’t think it’s realistic to accurately project what your living expenses will be over the next 5, 10, 15 years when you are in your 20’s or 30’s.
Can you do this for just you? Sure.
But then add marriage… and then kids… things start getting much more complex and expensive.
What you spend in your 20’s and early 30’s will not be what you spend in your late 30’s and 40’s if you get married and have kids. If you don’t plan on getting married or having kids, then I think this can work. But if you do, it’s incredibly difficult for you to properly predict what your living expenses will be in the future.
The “RE” part of FIRE
The Retire Early component of FIRE is my biggest critique because people need the mental stimulation, social interaction and sense of purpose that comes from work. While it would be nice to sit on a beach for a certain amount of time, you would probably lose your mind if you did that every day.
Rather than “retiring”, you should pursue work you love that allows you to work when you want, where you want, and how you want in a way that is aligned with your ideal lifestyle. In other words, if you want to work 25 hours a week, go for it. If you want to travel with your kids and work remotely, go for it.
If you can’t find an employer who will support this, then work for yourself. The work force continues to shift as more people are self-employed or work as independent contractors, especially when you want to ditch the work-until-you’re-65-mentality.
The result of earning income is that it reduces your “FI number”. For example, let’s say your ideal spending amount is $100,000/year (more realistic when you have kids). If you plan on “retiring early”, then you need $100,000 * 25 = $2,500,000 saved.
However, let’s say you could earn $50,000 per year doing work you love and still living your ideal lifestyle. Then, you would only need to withdraw $100,000 – $50,000 = $50,000 from your investment portfolio which means you need $50,000 * 25 = $1,250,000 saved.
The difference of saving $1,250,000 and $2,500,000 could be several years!
Our version of FIRE
I tried to come up with a new catchy acronym, but I can’t beat FIRE 🤷♂️. Here’s how I believe FIRE works in practice.
Take guesses at what your ideal lifestyle looks like
There are two important components of this:
- What does your ideal lifestyle cost?
- How much could you earn working a job you love when you want, where you want and how you want?
Now, you won’t be right. The only thing we know is that this will probably be wrong. However, this exercise sets some direction about where you want your money to take you.
Think of it like a flight plan – you will put a lot of thought into how to get from point A to point B, but there will be turbulence and adjustments along the way. You might even want to change what point B looks like all together.
Life does not follow a straight path which is why financial planning is a continuous process and not a one-time thing.
Experience your life and save as much as you reasonably can
It’s probably unrealistic to save 50 – 70% of your money every year without sacrificing meaningful experiences. I don’t even like putting a percentage on how much you should save. Rather, try to save as much as you reasonably can, while also trying to maximize your time wealth.
Saving money should be an annual goal with the flexibility to increase or decrease based upon what you expect for the upcoming year.
Determine income guardrails
I help clients determine “income guardrails” – in other words, how much money you need to earn at certain stages of your life. This will change depending on your stage of life – assuming you have kids, it may be lower when your kids are young, and it may increase when your kids are in school.
It’s helpful to have these guardrails so you can then fill that income gap doing something you love. This allows you to start living your ideal lifestyle much earlier in comparison to the traditional FIRE method where you don’t earn income.
- Start thinking about success as time wealth as opposed to money wealth. I’d argue someone that has $500,000 and experiences their money is wealthier than someone with $5 million but doesn’t have the opportunity to experience it.
- Put some thought into your ideal lifestyle. Before I ever provide financial advice, I walk my clients through a values discovery exercise to help them articulate what an ideal lifestyle would look like. Before you can answer how, you need to answer why.
- Adopt the FIRE mentality in a way that fits your situation. Everyone has their own journey and there isn’t a rule book for accomplishing what financial independence means to you.
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