Updated: Mar 3
What is fire? F.I.R.E is Financial Independence Retire Early. It started with a book that came out 1992 written by two financial gurus called Your Money or Your Life and this is about living in extreme frugality to achieve retirement by somewhere in your 30’s or 40’s.
So from all my reading because it's an actual ideal that people have jumped onto, It's anywhere between 35 and 50. There's no rule per se; however, the earlier the better is the whole premise of being able to do this.
I’ve actually read that some 20-year old's have tried to deploy this strategy by the end of their 20’s.
So to achieve this you need to save between 50-70% of your income. Think about it. Let's say that someone makes $1,000 and they get taxed 30%. The take home pay is $700. So on the low end at 50%, that means he/she has to sock away $350 of every paycheck or up to 70%. So that's crazy.
So that means that you are living off nothing.
All right let's think about this before we go any further. It's fair to say that some people can achieve this or have achieved it; however, we should say this: The goals of saving aggressively and paying down your standard and credit card debt so that you can retire or work a part-time job or giving up the old 9-5 type of job is fantastic. That's a financial planner’s dream when they come to you and say, I have all my financial debts paid off.
What it seems like is that people are coming out of college and in their 20’s they are looking to retire by 35 meaning they are not establishing debt.
Well that's not true because they can move out of the house. They could have student loans, a mortgage and a car. They might have kids and a spouse, life insurance, groceries and utility bills etc. We don’t exactly know, but either way if they are out of the house, they have to have a normal course of bills. For example, going back to saying that someone makes $1,000 and their take-home pay is $700 and they have to take at least $350 of that; where's the money coming from to pay the bills down?
In addition, this talks about raising your income to a very high level at a very early age, while putting away and living frugal at the same time. If you look at statistics, 20% of the population makes a household income $100,000.
The median household income as of 2019 is $68,703.
Now someone might be in the field where they can get more than that $68,000 in income; however, we're talking about joint income so you could have one person working or two but it is the collective income between everybody that lives in the house . . . because at a younger age people usually do not command a large salary of $100,000, but for sake of this discussion why don't we say our household does have $100,000 and they are going to do this for 15 years.
That’s not a lot of money if you think about it in order to pay down a house and a car etc. Okay let's do this. What are really important items in terms of cost in a budget.
If you're not in a city that has mass transit which most places don't then you will need to have a car or possibly two of them if you have two people working in the home, Then we have a grocery bill.
Often it is the biggest bill in the house.
Here's another one. Now I'm thinking about this in a weird way but human beings are very expensive so part of what I'm thinking is because kids are expensive, they have to go to school, they need clothes, they have sports and they need money for birthday parties.
Every time we turned around we were like the walking ATM to our kids. Especially girls. They have so many friends. It was like every other week Haley had a birthday party to go to.
Yeah, I got to a point like dude you got to put a cap in it. So what does it cost to raise our lovely offspring?
In our Podcast 29 Why You Need Life Insurance, we talked about having money for your beneficiaries for college. So if you want to do this as a F.I.R.E person, then you need to factor in that the average cost for a public college which is $23,200 a year and for a private college it is $51,000.
Okay, I want to do one more. Here's a hidden caveat that I don't think it's thought about in this whole plan and that is health insurance, because once you are retired per se, even if you work a part-time job, you're not getting health insurance through an employer. A lot of these people who work part-time gigs in this second part of the F.I.R.E movement are doing the side hustle or working in a restaurant serving or behind a bar or whatever it may, but part-time means part-time which is only going to be so many hours and only command so much money.
So getting back to the health insurance side of things, I went and looked up some numbers and for a family of four going through the health exchange or Obamacare it's $1,200 a month on the low end. That is just the premium.
Exactly, so anything beyond that, you're going to pay if the health insurance coverage isn’t adequate. You would owe the doctor or the hospital. What about dental, what about eyes? You have blood work. You have prescriptions.
Here is the other thing. Many people don't know this but oftentimes premiums for health insurance that are covered through your employer have better plans overall than what the health exchange might actually command. We've heard this from friends and people that we know in the industries, that if people want to retire early and then go out and get their own plans, sometimes they run into a major health issue like a surgery or cancer or something like that.
Those plans don't always have the adequate coverage needed even though they think that it might.
I remember when I left my former job and came on to my current job; there was a three-month time frame when we didn't have insurance. I was covering for the family and I said please no one get hurt because the cobra alone was over $2,000 for the five of us and that it would cost $6,000 for 90 days to have health insurance.
We chose to sit back and just wait it out.
We had money to pay for things but something catastrophic could have happened and we probably would have got nailed; however, by the time we got insurance your coverage would have come in anyway so we just we just hoped that nothing would happen.
I said kids! Stay off your skateboard; don't write a bike; don't walk into traffic; don't take chances!
So why don't we lay down a scenario so that we can get some context of how this would work. Let's say someone is 40 years old and they're ready to flip over meaning he’s been frugal, he’s saved somewhere between 50 to 70% of their income and they go to the second part where he wants to start withdrawing from their nest egg.
So the first thing is the 4% rule which is what you take off that nest egg every year to live right?
Yes. The general rule is 4%. That you should take no more than 4%.
However, there are studies that show if you take 3% of your nest egg, it will last a lot longer.
Absolutely that 1% annually can be significant with compound interest over time. So the studies show that those that took 4%, it was a disaster. For example, let's assume our F.I.R.E seeker needs an income of $50,000 a year in retirement. At 4%, they would need to save 25 times this amount or $1.25 million dollars, but at a 3% withdrawal in retirement, they must save 33 times this amount or $1.65 million dollars.
The reason that it is $1.65 million is that you need a bigger nest egg in order to get that $50,000 out every year hence, the 1.65 million. If you break this down and just stuck with $1.25 million and say that our F.I.R.E seeker was at 25 when they got into the working world and they worked for fifteen years, that means that they would have to save a net income $83,333 dollars per year.
To be honest I just don't see how this is possible. I mean honestly. Based on the average income and maybe you have a job that you're making a six-figure income or a very large paying job, the reality is . . . that's not always the reality.
In almost every scenario one could never save enough money based on this theory in order to pay everything off and save at the same time to have the nest egg to just live a normal lifestyle.
We are talking about the average individual coming out of college that is going into regular jobs that want to retire early. I love the premise of this because the whole big picture is that you've got someone coming out of college who is actually thinking about retirement. That's a dream for someone who educates on this subject matter specifically.
We said earlier if we could make a clay mold of an investor, this is exactly the kind of thought process and goals that you want someone to have; however, this is the biggest problem in my opinion with the F.I.R.E process; or why don't you look at it this way? So let's say this forty-year-old is doing what we just said and he’s earned $1.25 million. So that is only going to last a little bit over 22 years based on $50,000 yearly.
That’s not a lot of money! What if your kids are still in school and you have a spouse and that whole scenario? I hate to debunk this but I think we need to lay out the scenario for those who might be considering this.
If you knew that you have money for 22 years and I'm also assuming that the money is going to be in conservative type of investments; 22 years is not a long time and that means this individual will only be 62 years old when the money runs out.
This whole set up relies on consistent income people in which people would need 3 to 4% withdrawals; so you're living off this and as these articles alluded to; it's the unexpected scenario that hits like the Coronavirus. So now your portfolio drops anywhere from 20 to 40% and if you have your money allocated appropriately like we always talk about; while having enough downside risk protection and cash to support your next one to two years of income then this is great.
The advice would be turn your head. Take your emotions out of it and hold on, but most of these couples are self-managing their portfolios and therefore, were overexposed to the stock market because right now fixed income rates are nothing; and it's the blue chip stocks that are paying that solid dividend right now which is what the F.I.R.E seekers are relying on which is the income and the opportunity for growth.
I think the real thing that you have to think about is that these folks are taking a big risk with their life and money because if you hit by Coronavirus pandemic or may have hit the financial crisis in 2008 / 2009 and you're farther into your nest egg; maybe you're at that 15 -16 year mark in our 22-year example, you could be screwing yourself because the whole point is that when you retire is that you're supposed to be very conservative with your money and these people aren't choosing to do that.
Another point I need to make though is about this investment strategy is that a truly balanced portfolio also takes into account opportunities to save in tax-deferred accounts like traditional IRA’s or 401(k)’s, so if you're building that F.I.R.E retirement nest egg for your mid-thirties or mid-forties remember, you can't touch that money penalty-free until you're 59.5 years old without incurring that 10% IRS penalty.
That's the hidden piece in that people in this country are living to an average age of 80 now. I'm 50 right and now factoring technology in the world of medicine, I could live to a 100! I could live to 125! Who knows? Someone who is 25; who knows how long that they may live?
Right now the average life expectancy rate now is 81 years old. Like you said to your point; 20 years from now . . . I mean they just changed the required minimum distribution rule from the IRA that normally in the past forced people to begin taking distributions at age 70.5 years and now it just got bumped to 72 because seniors are getting to retirement age and they don't have enough saved to live for the rest of their life; and life expectancy rates are getting longer which has many seniors being forced to work well into their sixties and seventies.
That's a whole another topic I want to talk about. What are those people going to do all of those years to keep themselves busy and have the money to sustain themselves for what could be decades?
Well they say that people usually have a side hustle which we were referring to back earlier in the podcast.
Well then you're not retired.
There’s a handful of categories within this; there’s not a bulleted list that has to be followed; however, there are those that don't work at all and there are those that just work part-time. From all the research that I have done it seems in some shape or form almost everybody's working some sort of job to bring in extra income.
So I did look into the statistics behind this and the people who actually tried to deploy this strategy. So means that you're retiring from your day job meaning, you're not going into the office anymore or working that nine-to-five job or working for somebody; you’re actually finding ways to be creative and make money or be entrepreneurial and start businesses for yourself.
Now that leads me into the second part of the process and this is when you've built up the money and you are no longer going to be working the 9-5 gig.
So we have done a lot of research on this and we have looked into several blogs, articles, websites whatever it may be, and there is one that stood out to us that came from marketwatch.com and they actually took the story from MadMoney Monster.com. So the article is titled why we ditched the F.I.R.E movement and we couldn't be happier written by Lisa. I think that what stood out the most to me is that she said our net worth climbed but our happiness was in a free-fall.
So to paraphrase, in order for them to save all of this money to live the F.I.R.E movement in retirement, they had to work extra jobs during their normal jobs while building up for the F.I.R.E movement at the same time.
I mean they were doing whatever it took to make it work. She grew up watching her parents struggle so they counted every penny and they didn't live a great lifestyle so she wanted to make sure that she was never going to be in that position; and so she proposed this idea to her husband and they implemented a strategy.
Now what I found most intriguing about the story is they lived an extremely frugal lifestyle by cutting out almost everything they ever enjoyed such as their cable, their mobile data plan and they stopped going out for dinner; and they even put an end to their Sunday coffee dates which are important. So you name it; they cut it out. So they thought that this process was great; they were going to retire early so they didn't mind making sacrifices to reach the finish line.
So after a few years of living in extreme frugality they basically described it as a self-imposed deprivation. So they said we’re sacrificing all the things that we used to love and it started to weigh on them. It totally makes sense to me. So the article goes on further to say that they started to experience age-related health issues and health insurance is expensive; and in this goes back to what we talked about earlier in the podcast about sufficient health insurance coverage.
Her eyesight started to wane and she begrudgingly gave into glasses and then she was also told that if she wanted another child that they would likely have to face fertility treatments and they could be very expensive.
There's another piece to that on top of that. Her mother was in need of financial support from them for her basic living expenses. So this is another component; and we even talked about this again in Podcast 29 Why You Need Life Insurance, that you might have an elderly parent that needs assistance.
So getting back to the article, she stated that she was looking forward to having the option to pay for her daughter's wedding or her daughter's college and even travel the world in style.
So here's the thing; you can never account for the unforeseen things which always talk about with reference to an emergency fund and a rainy day fund. Nobody can.
Life throws you so many curveballs that you're not anticipating or budgeting for; and again I'm not trying to discredit what anybody's trying to do in this case. I'm just trying to say we know at 50 and 54 years of age all the things that have come up along the way that we didn't anticipate.
As a matter of fact Cindy got hit by a car 18 months ago.
She was out of work for several months. I had nearly $200,000 in medical bills.
Well the old saying is that shit happens!
Okay so we went on a bit of a tangent there but getting back to the article, we highlighted the frugality, unforeseen medical bills or things like wanting to pay for her daughter's wedding. So these are some of the things that started to weigh on this couple; and so this is the point that I wanted to get to earlier . . . is that we are the richest country in the world and when you're used to having certain things and have to give them up; even if it's for a health issue; even if it's from a job loss or even extreme frugality like this couple chose, it doesn't make you feel good.
This is the kind of thing that we say all the time from all the couples that we know that are at certain ages. We always say the same thing which is that the last thing you want to do is have certain debts or not being able to live the same way in retirement as you do in your last day of work; and when this occurs which happens to about 75% of our population, they are killing their retirement, is when they're into their golden years, they get depressed. They're not living the same life that they've been used to for their entire life and those golden years may not be as great as it sounds.
Okay so why don't we talk about us in this regard meaning we've had experience and we’re older. We make a nice living and we didn't choose the path of the F.I.R.E movement
I think that we are a great example in that we've chosen to save aggressively. We are not quitting the day job. Ultimately we are choosing to also live a current-day lifestyle that doesn't cut out that we enjoy. I think this goes back to that article of the extreme savings that cut out their happiness and I think we have the best of both worlds.
We're going to get into retirement having that replacement income because we have aggressively saved and cut back in certain areas of our life.
However, by the same token we are going to be able to retire early.
Yes, that's also our goal. I mean again I'm 54 and your 50 and our aspirations are to retire earlier than 65 and we will achieve that based on our aggressive savings pattern.
So getting back to the couple's story. In the end they bailed on the idea in exchange for reaching financial Independence at a leisurely and more enjoyable pace, but the good thing is that they will be able to retire before the traditional age of 65.
To finish this up, I love what she said; which was that those fluorescent lights over her cubicle don't bother her anymore and she said yes, cable TV, pizza nights and their coffee dates on Sundays have all been reinstated. So good for them.
Okay so this has been about 20 minutes of conversation in it after all of this. Are you ready to retire?
I don't know. I just can't imagine that at 54 at this point retiring. I don't know what I do with myself.
Uh,. we have a podcast. You know what we have 1,178 downloads in Iran and is the number one country in the Middle East for downloads.
Thank you Iran!
Let's Do the Recap
F.I.R.E movement is where you save 50-70% of your income, while living a life of frugality with the goal to retire as early as 35 years old.
F.I.R.E is not a surefire plan and extremely high rates of savings at the expense of current quality of lifestyle should truly be considered.
As a F.I.R.E participant has built up their nest egg, take a note of caution that if interest rates are low or the market is down for a significant period of time, the F.I.R.E plan may fall short of your expectations.
If you plan to retire in your 30’s or 40’s, keep in mind life expectancy rate is moved up to 81 years old. The odds are that you may not have enough money to sustain with all the life’s financial curveballs coming at you. This is why those that subscribe to the F.I.R.E movement do find other creative ways to make money or take part time jobs.
I think this is a great point that if you try the F.I.R.E lifestyle and it doesn't work out, it does not mean that you have failed; because someone chooses frugality and a high investment rate over the income that you make if someone chooses to go back to a normal job and lifestyle the great thing is that he/she has already built up a great nest egg and this is exactly what this couple did.
With proper discipline, even with living a less frugal lifestyle there is a great chance that you should be able to retire at a very nice age. I think the whole take away from this is that if you incorporate the F.I.R.E movement, you are exercising great discipline and if you do these things you have not hurt yourself and in terms of your finances.
It is important that you prepare for this to your best ability because the hidden peace to all of this is that you don't know what things are going to be like until you get there; because what happens when you choose frugality it takes away from the things that you like to do even though you didn't want to work all of your life to make the money to get there.
So it's very critical that if you give up the things that you like to do it can hurt you mentally, socially, even with your family. Therefore, you have to find some balance in your life. If you choose frugality and it's not working out for you then make some modifications to what you're doing so that you can find peace and happiness.