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Financially Independent Retired Early: Flaws with Philosophy?

Picture of where you might live if financially independent retired early: San Blas - Kuna YalaOkay, an important first stipulation. I totally understand the allure of the financially independent retired early strategy.

Further, I totally agree with the idea that if you can truly arrange your finances in a way that allows for early independence from a job, you ought to consider that.

But you know what? The whole FIRE (“financially independent retired early”) model seems extremely problematic.

Let me, therefore, quickly identify the five biggest flaws I see with the FIRE philosophy and strategy. See if you agree. If you don’t? Well, then you’ll have at least considered a handful of important issues.

Financially Independent Retired Early Flaw #1: Seven Figures of Lost Income

The first and maybe the biggest problem I see with the FIRE philosophy is the whopping seven-figure income and fringe benefits loss someone experiences.

In other words, if you give up 20 or 30 years of even average earnings plus tax-free fringe benefits, the lost income is easily $1 million. That’s a big “investment” or “gamble”.

No, no, I agree. Some jobs really suck. (I made lots of money writing “how to” computer books but that work really became a grind after the first dozen or so titles. By the end, I hated “writing” as a full-time job.)

And yes, sure, I get that spending the bad weather months on a sunny beach or sailing in the tropics will be great fun. Especially if you’re currently chained down someplace where the weather is wet, gray and cold at times of the year and your boss or coworkers aren’t nice.

But the reality is, FIRE requires you to make a huge seven-figure investment. You really need to make sure you’ve carefully done your accounting. And it seems to me that many people haven’t.

Financially Independent Retired Early Flaw #2: Destruction of Social Security Benefits

A second and related flaw with FIRE…

A typical person (and here I’m talking U.S. citizens and permanent residents) might easily receive $2000 a month and maybe even $2500 a month in Social Security benefits if they work a full 35 years.

A spouse of that person, even one with a spotty earnings record, might get another $1,000 to $1,200 a month.

In other words, people who work a normal span maybe get $3000-$4000 a month. And much or even all of this money can be tax-free.

In comparison, someone who retires early—someone who FIREs–may see their Social Security benefit halved. Or worse. (The specifics depend on how many years of zero earnings.)

You see the issue: Someone who retires early may largely or even mostly lose the social safety net that many people totally depend on in retirement.

You have to be thoughtful about this. Sorry. But you do.

Tip: You can use this free Social Security Benefit estimator at the Social Security Administration’s website.

Financially Independent Retired Early Flaw #3: Financial Failure Rates Jump

Another issue with the whole FIRE philosophy…

If you spend down your retirement savings over 60 years instead of 30 years, your failure rate jumps. A lot.

For example, a 4% withdrawal rate over 30 years might have a 95% chance of success with the typical asset allocation formula. (You can play with tools like FIRECalc and cFIREsim to see this.)

But a 4% withdrawal rate over 60 years—everything else being equal—may mean your chance of success drops to 83%.

That jump matters.

Note: I have talked in other posts (see, for example, Retirement Plan B: Why You Need One) about how we all seem to do a poor job of understanding the financial risk we bear with retirement planning. But the FIRE folks really bear risk—lots more—simply because they’re “out there” for so many more years.

Tip: You can of course dial down the withdrawal rate to keep your “chance of success” percentage just as high. In the simple modeling I did for this post, dropping the withdrawal rate from 4% to 3.6% maintained the 95% chance of success for example. But that’s obviously a significant drop in your income.

Financially Independent Retired Early Flaw #4: Unsophisticated Adherents

Here’s something else to consider…

Some FIRE aficionados are very financially and entrepreneurially sophisticated. I want to stipulate that.

No kidding, some of the guys promoting FIRE are, basically, financial geniuses.

But the reality is many of the FIRE fans, many of the adherents, are not financially or entrepreneurially sophisticated.

Many of these people possess low or no understanding of basic personal financial topics such as passive investing principles, investment risk, asset allocation, or individual income tax law.

This all matters. Because even if the FIRE strategy works for people who are smart and sophisticated, FIRE becomes more difficult if an adherent doesn’t understand this stuff.

In fact, my sense is the FIRE philosophy probably requires sophistication that a large a percentage of adherents lack.

Financially Independent Retired Early Flaw #5: Role Modeling and Mentoring

A fifth, final and slightly contentious flaw to point out…

People who live out the FIRE lifestyle, by definition, are not participating in the labor market or workforce. And, yes, that’s absolutely okay. But, as a practical matter, those FIRE devotees have to lose some of their ability to role model and mentor their kids or grandkids about how to prepare for employment.

If you don’t have kids or grandkids who need modeling and mentoring, not a problem. You don’t need to worry about this.

But if you do have children or grandchildren who look to you for role modeling or for mentoring about how to find and keep and grow a job or grow income and wealth, you may lose your ability to provide that context if you yourself have no recent “boots on the ground” experience.

You need to think about that.

Is There Even a Right Way to Roll?

I don’t want to say FIRE is unequivocally a bad idea. First, people get to make their own choices.

Second, if someone can become financially independent early and then devote their remaining decades to pursuits outside of a job that are more meaningful, great. No reason not to go for that. That choice won’t be optimal for everyone. But for some people FIRE will work great.

All that said, I often think people aspire to FIRE because they’ve got a bad or a poor-fit job. In these situations, maybe a better job or a better fit job makes all the difference.

Or maybe someone isn’t cut out for a job and simply needs to run their own small business.

Or maybe rather than full retirement something like semi-retirement works best.

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About Carol St. Amand

Carol St. Amand

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