Updated: Mar 5
-The four types of FIRE seekers -FIRE should be called FISH -How much of a nest egg is needed to retire on -Factoring in Social Security taxation -Sacrificing leisure activities due to the frugal lifestyle
Once savings reach approximately 30 times yearly expenses, often roughly $1 million, they may quit their day jobs or completely retire from any form of employment altogether. To cover their living expenses after retiring at a young age, FIRE devotees make small withdrawals from their savings, typically around 3% to 4% yearly.
Types of FIRE Seekers
Lean FIRE: One who chooses to live a frugal lifestyle in coordination with extreme savings.
Fat FIRE: One who has a more traditional lifestyle and saves more than the average retirement investor.
Barista FIRE: One who quits their traditional day job but works a part-time job / side hustle to cover expenses without taking from their retirement fund.
Coast FIRE: One who chooses to have a part-time job / side hustle yet has enough of a nest egg to be fully retired.
The definition of FIRE has become much broader and more expansive over the years. Nowadays, many people place more emphasis on the “financial independence” aspect of FIRE, vs. the “ retiring early.” FIRE involves a paradigm shift in the thought of financial freedom when decisions are not dictated by the need to earn money.
FIRE Should be called FISH
Financial Independence Retire Early should be changed to Financial Independence Side Hustle or FISH. The reason is that the amount of people that actually achieve true independence at a young age is close to negligible. There simply is not enough time to make enough money and save at the same time to fully retire at 35 - 40 years of age. So we will see if this new financial acronym will stick.
The FIRE Nest Egg Needed
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/she has been frugal and saved somewhere between 50 to 70% of their income. Then they go to the second part which is to start withdrawing from the 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.
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 FIRE seeker needs an income of $50,000 a year in retirement. At 4%, he/she would need to save 25 times this amount or $1.25 million dollars, but at a 3% withdrawal in retirement, 33 times this amount must be saved equaling $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 FIRE seeker was at 25 and worked for fifteen years, that means a net income of $83,333 would need to be saved on a yearly basis.
Factoring Social Security
Keep in mind that you are not paying into social security once you start withdrawing from your investment income. This means that when you hit 62 which is the earliest age to take it as of 5/2021, the amount of money that you would receive will be much lower.
The median household income as of 2019 is $68,703.
Social Security takes the top 35 years of income to determine your monthly benefit. Also, if you don’t have 35 years worth of earnings, those that are missing will be counted as zero for earnings. Hence, the benefit amount will decrease.
Factoring Medical Insurance
While the average medical premiums dropped in both 2019 and 2020, they are up, overall, since 2016. The average monthly premium for a benchmark plan (the second-lowest-cost silver plan) in 2020 is $388 for a 27-year-old enrollee and $1,520 for a family of four.
Keep in mind that these are monthly plans. So to put this in perspective, absent of copays, prescriptions and deductibles, the 27-year old person would pay $4,656 a year and the person with a family of four, which is very common in this country, would pay $18,240.
Also leads into raising children
The cost to raise a child from being a baby to age 17 is an average of $233,610. Plus, that doesn't include college. There are needs for food, kids programs, sports, clothes and other extracurricular activities. What about saving for college?
Sacrificing Due to Frugality
-How much are you willing to give up?
-Your budget essentially prohibits you from doing enjoyable things and this severely inhibits spontaneity? Can you go out for a nice dinner? Can you go to a concert? Can you go to the casino or sporting event when you feel like it.
-You have to determine if being frugal is more important than the effect on family and friends.
Let’s Do the Recap
What is FIRE? That is to save 50 - 70% of your income to pay off debts and save at least $1 million dollars. The goal is to do this by 40 years of age.
The FIRE movement has one benefit which is a financial planner's dream: that is to become debt free and build a retirement nest egg.
The odds of achieving true financial independence is nominal at best because there is simply not enough time to make a large enough yearly salary, then save money and invest it at such an early age. In addition, FIRE may be better off labeled as FISH: financial independence side hustle because most people still have to work after they reach their financial goal.
#4 FIRE comes with many caveats that simply can’t be avoided in life; namely, the cost to raise children, the cost for medical needs and life insurance, paying for college or wedding. Don't forget pet insurance and auto insurance and maintenance and cost to maintain a home. The list is endless. #5
When it comes to the financial aspect the retirement money is continuously invested while living off it rather than treating it as capital preservation. Secondly, when one decides to live off of the nest egg, the social security benefit suffers greatly due to having no taxes paid to the government.
#6 Ironically, frugality comes at a cost. You have to decide is it worth giving up many of the things that you like to do just to save money You may miss out on weddings, family events, concerts, sports, hobbies and just simple leisure.
Can you buy a coffee/latte or lunch at work when you feel like it? and you may be limited on travel plans or having drinks and dinner with friends. This also highlights the importance of buying quality products that have long durability. If you are designed to handle this then good for you! #7
We know that achieving FIRE is a monumental task and if you don’t, this does not mean you have failed. You’ve already exercised discipline to live simply, become debt free and invest. If you have to make adjustments, you are still ahead of most people.