Early Retirement: The Pros and Cons of the FIRE Movement

“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.”

— George Burns

There is a growing community of people dedicated to quitting their jobs at increasingly younger ages. It goes by the FIRE acronym (financial independence, retire early) and it’s gaining significant traction amongst (typically) high-earning young adults who envision a different, more flexible lifestyle.

Who is the typical FIRE follower? Many come from the tech world, engineering, or other well-paying industries. (It’s hard to save aggressively on a less-than median wage.) Largely male in the early years of the movement, now there are plenty of women and families in the movement. Many retire in their 30’s or 40’s, but some as early as their late 20’s. Some are entrepreneurial, some are not. Some like to travel, others are homebodies. Most are attracted to simple living and time freedom.

The “rules” behind FIRE are simple, as is the basic math used by the community:

• Earn an income that allows you to save.
• Live simply and spend substantially less than you earn.
• Invest the difference—typically in a simple, low-fee portfolio of index funds, although real estate is also favored.
• Retire from traditional work when your investments equal 25X your annual expenses. (If you spend $50k per year, your target number would be $1,250,000.)
• Withdraw only four percent of your assets annually (which can be adjusted upwards for inflation).
• Travel, freelance, blog, volunteer or do whatever “work” inspires you—or no work at all.

“Early Retirement” or Creating an Intentional Life?

In reality, many of the self-proclaimed retirees who quit their jobs in their 30’s or 40’s (sometimes even late 20’s) are anything but “retired.” Some within the FIRE community cultivate multiple streams of income that continue on after traditional work ends. Some are real estate investors and landlords. Some are entrepreneurial and even start businesses, such as successful personal financial blogs like Mr Money Mustache and FinancialSamurai.com (started three years before its founder quit his job).

In our minds, this isn’t so much “early retirement” as it is simply choosing a non-traditional career path, which can be a positive thing. Perhaps the distinction is that those doing so in the FIRE movement have already created a degree of financial independence that frees them from “golden handcuffs.” They are free to make money with their passions, full or part-time, with little financial pressure, working from the location of their choice with flexible schedules. For many, it’s more of a “create your own work” and/or “work optional” philosophy than that of “early retirement” in the traditional sense.

The Frugal Path to Freedom

However, not all FIRE fans continue to create income. Some are more focused on frugality. Dovetailing nicely with the movement towards minimalism, common practices include:

• Tracking your expenses.
• Cutting all unnecessary expenses and reducing the cost of necessities.
• Driving used cars, only replacing when necessary.
• Cooking at home instead of dining out.
• Utilizing credit card cash-back rewards strategically.
• Maxing out tax-deferred retirement accounts such as 401(k)s and IRAs.
• Taking on side hustles or roommates for extra income.
• Moving to/living in locations where the cost of living is low.

In Busting the Retirement Lies, we advocate saving 20 percent (or perhaps more) of your income. In the FIRE community, saving 20 percent is for wimps! Many treat saving as an extreme sport, socking away 50 to 70 percent of earnings. Provided that sort of frugality doesn’t drain all the joy from one’s life, this is admirable. Tanja Hester, who retired from traditional work at age 38, writes of the misconceptions of FIRE frugality in a MarketWatch article:

“Virtually everyone pursuing FIRE lives what looks like a pretty normal middle-class lifestyle. We spend on things we value, like travel and time with loved ones, and we eat normal food… Where we differ is that we get strategic about cutting out spending that doesn’t add value to our lives, and we’re ruthless about avoiding mindless spending and lifestyle inflation.”

Most Americans could benefit from this values-based spending philosophy—no matter what age they retire. (However, even Hester confessed in a different article to getting “obsessive” about grocery coupons, later deciding to stop sweating the small stuff.)

When the FIRE Philosophy Backfires

There can be miscalculations when it comes to the long-term feasibility of an early retirement. The 4 Percent Rule is held up as the model — which is the concept that you can safely withdraw 4% of a portfolio each year and never run out of money. The 4% rule does factor in inflation, but generally at 3% (and sometimes only 2%). And that can be a problem.

Notably, healthcare expenses rise faster than inflation. Healthcare is one of the biggest expenses in one’s later years, with average out-of-pocket expenses often estimated in the six figures. Recently, Fidelity Investments reported that “the average couple will need $285,000 in today’s dollars for medical expenses in retirement, excluding long-term care.”

Unfortunately, the 4% rule would fail to cover actual healthcare expenses for many early retirees. Future costs tend to rise sharply as people age and tend to need more medical care. Additionally, the costs of health insurance and healthcare have risen notably faster than the rate of inflation. A Health Care Cost Institute study showed healthcare prices grew about three times the overall inflation rate during a recent 5-year period. Looking at per-person health care costs from 1960 to 2017 (as reported in The Balance), our analysis shows a shocking inflation rate of 7.83 percent:

Education is another sector with high inflation. A recent study demonstrated a 5 percent inflation rate for education costs over a ten-year period. If you are a parent who dreams of paying for your children’s tuition, retiring early is a challenge.

Then there are market cycles. The early retirement community tends to be heavily invested in low-fee securities such as index funds. While this strategy builds wealth quickly in a bull market, it brings pain and frustration during a bear market. Even Sam Dogen of Financial Samurai — a FIRE leader-turned skeptic — notes this fatal flaw in the portfolios of many early retirees:

“When a downturn hits… it’s an inevitability that FIRE followers will be forced to go back to work and earn their retirements the old-fashioned way. Some might even say FIRE during a recession stands for Foolish Idealist Returns to Employer… They will curse the day they ever heard about FIRE because otherwise they would never have taken the leap of faith at the top of the market and fallen splat on their faces.”

Unexpected events can sabotage early retirement. As we detailed in Financial Planning Has Failed, retirement planning depends on many decisions and assumptions that may not hold true for long. The stock market, housing market, interest rates, and inflation rates rise and fall. Marriages don’t always last. People don’t always stay healthy. The income you thought you would earn writing novels or a travel blog may never materialize. A thousand circumstances can sabotage the future you envisioned. As the old Yiddish proverb goes, “Man Plans, and God Laughs.”

Not everyone is cut out for early retirement. Some people thrive after they let go of their day jobs. Others encounter depression and anxiety. (Research shows that men have a 40 percent higher incidence of depression in retirement.) The lack of structure and pressure to create new income sources can be debilitating for some early retirees.

Other retirees—like my father—simply get bored. My dad returned to work after he realized he preferred a life of contribution to one of leisure. (I tell my father’s story, along with other mini-case studies, in Busting the Retirement Lies.)

As the movement and the media coverage grows, early retirement false starts and regrets seem to be on the rise. MarketWatch recently covered five stories of people who attempted early retirement and then “life happened.” Even FIRE influencers like Dogen have published their own musings about “the dark side of early retirement” and the negatives of the FIRE movement that nobody talks about. Dogen also recently noted “a huge uptick in fearful comments and personal e-mails” from people who retired early and are now questioning their decision. 

Early Retirement Pros and Cons

There are some notably positive aspects of the FIRE movement:

We love the focus on saving. There is a lot to appreciate about the intentional, values-based spending approach. The FIRE movement questions the rampant consumerism we see in today’s society and celebrates saving a large percentage of one’s income. Perhaps more importantly, the movement brings together people who encourage each other to do just that.

A personal finance revolution! The FIRE movement has ignited a “financial fire” for a younger generation, giving them motivation to take their personal finances seriously. After all, the sooner you start saving, the better off you’ll be — whenever you retire! The FIRE movement has helped break the taboo that “it’s not polite to talk about money.” Even when we question the strategies of the movement, we appreciate how it has raised interest in personal finance and started important conversations.

Creating a life you love. We like the out-of-the-box, beyond the cubicle thinking. There are endless ways to create income outside of a traditional job, and doing something you love is more important than following a pre-determined path. We are conditioned to give up time in order to make money. But it doesn’t have to be “either/or.” You can make money and still make time to create experiences with the people you love.

In spite of these positives, the early retirement movement has some big disadvantages as well:

The numbers just don’t work for most people. Retiring early and living off of investments for fifty or sixty years just isn’t realistic for the great majority of people. Too many Americans already struggle to save 10 or 20 percent, much less at the aggressive rates required for early retirement. And retiring just before one heads into prime earning years can bring regrets later.

Work is a blessing—not the enemy. There is a sort of pride that rears its head in the FIRE community. Retirement — an arbitrary idea that really did not even exist in the U.S. until the The Social Security Act of 1935 — becomes the ultimate goal, instead of contribution and productivity. Once achieved, going back to work (as some early retirees do), is perceived as a failure. Why not view work — including at a job — as an opportunity to keep learning, earning, and contributing?

Frugality can go too far. In an attempt to remain “retired,” some people find themselves obsessed with pinching every penny. Every decision is dictated by a strict budget that will last a lifetime — a symptom of a scarcity mindset. And living the rest of your life on a fixed, limited income is the OPPOSITE of freedom and prosperity!

People change — and so do opportunities. Unfortunately, the lifestyle you loved at age 35 (when you set the budget) may not be the one you want when you are 75. Yet it can be difficult re-entering the workforce after a decade or two away.

Don’t neglect to live in the present. “My regret is that I was too focused on getting to the FIRE finish line,” says Carl Jensen, who retired at age 43 — with kids. Admitting to being “dead-set on accumulating wealth,” Jensen confessed to often working 80 hours a week at his job, even while remodeling and flipping houses with his wife on the side.

“My 30s are a blur,” Jensen says now. “I expected early retirement to fix all of my problems, and then it didn’t.”

Net worth isn’t everything. In the race to build a net worth of 25X one’s desired annual expenses, long-term strategies are often overlooked. Life insurance and liquidity may be neglected. Long-term taxation may be ignored. FIRE portfolios positioned entirely in the stock market can cause a lot of anxiety — especially when you are forced to sell low to pay living expenses.

In one online FIRE forum, debates about buying a home vs. renting compared which strategy was the most advantageous over a mere ten-year time frame. If you want to make your assets stretch 60 years, that’s an absurd way to make a decision about your home — your largest expense. Yet numerous FIRE followers rent rather than own, failing to build home equity while putting themselves at significant risk of future market forces.

The Future of the FIRE Movement

Influencers in the FIRE movement have different opinions as to the movement’s viability. Mr. Money Moustache (aka Pete Adeney) tirelessly defends FIRE, seeing it as vital and growing. He clarifies misconceptions, asserting the movement revolves around creating financial independence, not “traditional retirement.”

Meanwhile, Dogen — who left work himself at age 34 — believes that as the stock market and housing market soften, the FIRE movement is in danger. As he explained in a December 2018 blog post:

“Today, my crystal ball is saying the FIRE movement is in for a rude awakening. FIRE practitioners… are finding out that not all is sunshine and rainbows once they’ve quit a stable job with wonderful benefits.

“Instead of being the hare, they would have won the race as the tortoise – steadily saving and investing their income during their highest income earning years with much less stress and worry…

“Unless you’re willing to work more than 40 hours a week, build some side hustle income, generate some stable passive income, save aggressively, and continuously make shrewd investments for the long term, you have no chance of FIRE.”

Even as a documentary film, “Playing with FIRE” launches, celebrating the rise of the movement, Dogen believes the FIRE movement has already peaked. He sees the pendulum swinging towards the opposite—more people delaying retirement in order to afford the rising cost of housing, education and healthcare, and a desire for greater retirement savings.

If Dogen’s predictions are accurate, many FIRE followers will discover early retirement was not sustainable after all.

Hopefully, they will not discover it too late.

Kim Butler and Kate Phillips are co-authors of Financial Planning Has Failed, an ebook that explains the Prosperity Economics path to wealth. Download your complimentary copy today.