The biggest flaw with F.I.R.E

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Playing with F.I.R.E.

The concept of financial independence and early retirement has existed for a long time, but the modern FIRE movement began to take shape in the early 1990s.

The seminal book "Your Money or Your Life" by Vicki Robin and Joe Dominguez, published in 1992, is widely considered to be a foundational text for the FIRE movement.

In it, Robin and Dominguez encourage readers to reassess their relationship with money and work, and advocate for a lifestyle that prioritizes financial independence over continuous work.

From there, the FIRE movement gained significant momentum in the early 2000s with the advent of personal finance blogs.? Some of the most prominent are still in existence today, including:?

“Early Retirement Extreme” - ?Jacob Lund Fisker started this blog in 2007, which is considered one of the first modern-day FIRE blogs. Fisker discussed radical ideas like living on less than $8,000 a year to achieve financial independence.

“Financial Samurai” – Sam Dogan started this blog in July 2009 with the motto "achieving financial independence sooner, rather than later." He established the first rule of FIRE: to be financially independent, one must have sufficient investments to generate passive income covering basic living expenses.

“Mr. Money Mustache” - Peter Adeney, writing under this pseudonym, started his blog in the early 2010s. He retired at age 30 in 2005 and has become one of the most recognizable faces of the FIRE movement.

Different kinds of FIRE

At their root, all FIRE strategies revolve around our relationship with our time and our money.

We trade our time for money.

Eventually, we use money to buy back our time.

The FIRE movement emphasizes saving over consumption in the earlier years so that you can buy your time back sooner.?

Traditional FIRE advocates for aggressive saving (often 50%+ of income) to retire very early.? The general thesis is to buy your time back earlier while it’s still valuable.? ??

This extreme view emphasizes frugality and sacrifice for the payoff of financial independence and early retirement in your 30s or 40s.

This radical approach to saving is not for everyone, and thus different flavors of FIRE have emerged as alternatives.

A few include:??

Lean FIRE: For those planning to have lower-than-average expenses in retirement, often adopting a minimalist lifestyle.? Some even go as far as planning to move to another country where cost of living is significantly lower than it is in the U.S.?

Coast FIRE: Saving enough early on to stop making contributions, thus freeing up disposable income but still allowing investments to grow until traditional retirement age.?

Fat FIRE: Saving aggressively to support a more lavish retirement lifestyle with higher annual expenditures.

Barista FIRE: Saving now to work part-time or in more relaxed jobs later, often replacing a traditional full-time job with part-time work.

When compared to the traditional view of retirement, working a 30-40 year career and retiring in your 60s, all of the FIRE strategies hinge on a few basic principles:

• Requires significant early savings and investments.
• Success depends on consistent market returns over time.
• Having a disciplined approach to saving and consumption
• Not a guarantee of early retirement but provides more financial freedom.

The biggest flaw with FIRE

The FIRE movement runs counter to most economic theory.

Consumption smoothing is a widely embraced economic concept that states individuals prefer to maintain a relatively stable standard of living over time, rather than experiencing significant fluctuations in their consumption patterns.?

Milton Freeman’s Permanent Income Hypothesis suggests that people base their consumption on their long-term expected income rather than their current income.

The Life-Cycle Model, proposed by Modigliani and Brumberg in 1954, argues that individuals plan their consumption and savings behavior over their lifetime.

And Robert Hall formalized these ideas in 1978, showing that rational agents would expect to achieve the same consumption in every period, i.e., we like when our spending remains flat vs. significant changes.?

Think about this in terms of your golf game:

If someone asks you what you typically shoot, your answer might be something like “somewhere in the mid-80s.”? That doesn't mean every round is going to be an 84 or an 85.? You might have a 91 one week and then touch 82 the next.? This is the general premise behind consumption smoothing.

The FIRE movement would have you believe that you can spend the first few decades of your golf life shooting in the 100s and then suddenly start carding 60s when you stop working.? ?

Golf doesn't work like that, and neither do our normal spending patterns.

Failing on FIRE

Try this example. “Mark” ?was a high-performing director at a biotech startup who was about to receive a fairly large windfall.?

He had stock options valued at $200,000.? His company was about to IPO and the initial estimates were for the value of the stock to 10x.?

He was about to have a $2,000,000 windfall.? After taxes, he would have about $1,500,000 in the bank.? It was a dream scenario for anyone in their 30s.

We started talking about his plans for the money.?

After 5 years of 70-hour work weeks, he was ready for financial independence.? He was in the “barista FIRE” camp.? He wanted to move to the beach and start a small business taking tourists on fishing trips.?

He estimated that after expenses and taxes he would net $40,000 of income from his venture.? This could be supplemented by another $60,000 of income from his portfolio, which was a reasonable 4% distribution rate.

There was one problem.?

Mark had been earning $200,000 for several years and hadn’t been saving a whole lot.? He was taking advantage of the company match to his 401(k) and relying on his stock options as the primary vehicle for his savings.?

We created a financial plan for Mark and when we highlighted that living off $100,000 would actually require him to cut his spending his tone started to shift.

“You know, I think I might want to hold on to some of the stock.?I really believe in this company.?We’ve got some big-name investors, and I think it’s going to take off.”

This was a problem.?

He struggled to wrap his head around how he’d adjust to a decrease in his spending and instead of turning his windfall into a diversified, income producing portfolio, he wanted to stay aggressive.?

This put the long-term success of his financial independence at risk.?

The Trinity study, lauded by FIRE advocates, used historical data to test withdrawal rates on various portfolios.? The most successful, i.e., those that sustained the largest withdrawal rates for the longest periods of time included a diversified mix of stocks and bonds.?

Mark’s new plan of keeping a majority of his windfall invested in his newly IPO’ed company did not fit this profile.?

This is just one example, but it’s a good one that highlights our desire to maintain stable consumption throughout our lifetime.?

FIRE may look good on paper, but it’s much harder to execute in real life.?

Are you thinking about FIRE?

Mark and I never ended up working together.

He could be on a boat right now teaching some tourists how to fish or he could be stuck behind a desk in a high-rise office complex thinking about what could have been.

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