The Real Truth About the FIRE Method for Early Retirement

fire method for early retirement

The FIRE method for early retirement has taken off in popularity in recent years. But are the risks well understood by its adopters?

Retiring as early as possible then living life on one’s own’s terms is a concept that really appeals to people.

Nevertheless, the FIRE method for early retirement as a concept speaks mostly to people who have no realistic hope of experiencing it.

As a result, like extreme fasting diets and ultra-sports training, FIRE can be a dangerous idea for those attempting to pull it off.

The “FIRE” part of the FIRE method stands for “Financial Independence, Retire Early.”

Though there is a lot of online hype and talk about the concept, most Americans don’t know much about the movement. This fact was recently bolstered by a TD Ameritrade survey.

“Despite its buzz-worthiness and recent media coverage, two-thirds of Americans surveyed have never heard of FIRE. So we think it’s important to help consumers understand what it is, and more importantly, what it isn’t,” said JJ Kinahan, chief market strategist for TD Ameritrade.

While the FIRE movement sounds appealing, it is a concept that is ultimately available to people who have access to millions of dollars in their youth.

Or, possibly, to people willing to save very large percentages of their salaries for years just to retire a decade or two earlier than, say, 65.

But retirement isn’t a fad, it’s a lifestyle strategy. It’s a about calculating how long savings amassed over a lifetime will last post-retirement.

For the ill-advised, unprepared, and overly optimistic, chasing a FIRE retirement dream could be an exercise in misguided wish-fulfillment.

Misguided aspirations

Unless you can afford to retire in your 20s, 30s, 40s, or 50s, the FIRE method for early retirement is a hard road. You have to make sure your savings will last for a lifetime.

In addition, a working life is an identity, one that is developed in youth. There is nothing more tragic that realizing you missed your calling in life when it is too late to do anything about it.

Also, unless all of your friends are fellow FIRE retirees, you risk alienating everyone you know who won’t be able to relate.

Most of all, the FIRE method for early retirement is dangerous for people chasing a financial fad. One financial emergency could wipe out their savings and force them to reenter the workforce in middle age.

After all, the cost of living don’t decrease with time. It usually increases.

To better explain why most of those intrigued by the FIRE movement probably can’t afford to live it, let’s explain how it works.

The FIRE method for early retirement

The FIRE movement is truly a club of financial privilege. Adherents of the FIRE movement are dedicated to saving 50% to 80% of their annual income every year.

The invest wisely and have diversified stock portfolios. Then they pledge to withdraw 4% of their savings, or as little as possible, every year to satisfy their standard of living obligations.

Many FIRE method for early retirement followers stress that it more about having the financial freedom to do what one wants than retiring early.

The fact of the matter is that most people stress the idea of retiring as early as possible when it comes to FIRE. But that can be a financially irresponsible choice for people without a budget, plan, or life purpose during retirement.

Realities of FIRE budgeting

Retirement is about calculating how long your savings will last you throughout retirement. People usually retire when they voluntarily or involuntarily leave the workforce with a pension and appreciable savings.

The FIRE method for early retirement is championed by young, wealthy professionals who can afford to drop out of the rat race early. As long as you have accumulated enough wealth in your youth to last a lifetime, that shouldn’t be a problem.

The problem is that only about 5% of all millionaires are below the age of 45. Only about 1% of all millionaires are under the age of 35.

About 43% of all millionaires are over the age 64. The notion of the self-made millionaire is a bit of a myth.

About 60% of millionaires inherited their fortunes. The point here is that there is only a select few of self-made wealthy people who can truly take advantage of the FIRE movement.

The reason why the FIRE method for early retirement is such a small club is the need for savings to last for decades. Such aspirations are out of the reach of most young workers unless they have unusually high incomes and very low living expenses.

The average retiree needs at least $44,000 a year to meet their standard of living expenses. A retired couple needs at least $280,000 to satisfy all of their medical care costs throughout retirement.

That estimate doesn’t even cover long-term care costs. More than 38% of Americans have less than $10,000 saved for their retirement.

By that measure, a 30-year old would need at least $2 million to make that money last for 40 years and cover living and medical costs.

This 30-year-old couldn’t withdraw any amount over $44,000 a year. Any serious financial emergency over a 40-year period that would cause them to dip into their savings, in return reducing income.

The average American worker and the FIRE lifestyle

The FIRE movement can be fiscally irresponsible for the average American worker to attempt.

The typical American worker between 20 and 24 makes $27,000 a year. Those aged 25 to 34 make about $40,000 a year. It may be unwise, and impractical, for non-wealthy young people to save 50% to 80% of their income and live as frugally as possible just for bragging rights.

It doesn’t make sense to desperately save throughout your 20s and 30s to retire in your 40s or 50s. One financial emergency can force you to reenter the workforce in middle age.

Rather, it makes more sense to use that time to secure your old age by investing and improving one’s income.

Also, unless you have a purpose beyond taking it easy for decades, it’s inevitable that people become bored and lonely. People who live check-to-check, such as your friends and relatives, won’t be able to relate to early-age retirement living.

It is important to have a purpose in life, to have a drive for something and to have life goals. More than 36% of millionaires still work full-time, after all.

If you retire early in life you need to be strong enough to withstand an avalanche of criticism from peers and family. One FIRE adherent, Mr. Tako, who retired at age 38 and blogs about it, can attest to that.

“The ability to withstand significant criticism of your life should not be understated when a person retires early…Expect your friends, family, and online peeps to criticize this choice, especially if you’re younger,” said Mr. Tako.

FIRE method for early retirement calculations

Unless you have $2 million to $5 million or you are able to save up to 80% of your income for the foreseeable future while living frugally, the FIRE movement may not be for you.

If you want to retire as young as possible, prepare appropriately. Pay off all of your debts. Have more money in your savings and investments than you need for your calculated retirement needs.

Calculate how much money you need for healthcare. Make sure you can compensate for the loss of a pension in old age.

Confer with a financial advisor if you aren’t sure you can do it on your own. Retiring early should not be about joining a fad. It’s about securing your financial future for multiple decades to come.

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