I’m sure by now we’ve all heard of the Financial Independence, Retire Early (FIRE) movement. If you haven’t, let me fill you in quickly. FIRE encourages spending less (yay!) and saving move (like up to 70% of your salary more, yikes!) so you can grow your investment accounts and retire early by living off small withdrawals from said investment accounts. So basically the idea is like a 401k on speed.
Not to be confused with the unfortunate Fyre Festival. If you haven’t watched the documentary on Netflix - do it. You’ll probably feel a lot better about your own spending habits afterwards. Like how do these people have so much money to spend on concert tickets? I feel guilty after spending $100 on a piece of furniture I’ll be looking at for the next few decades. More power to them I guess. Maybe I’m just jealous.
I digress, back to the real topic.
Don’t get me wrong. The idea of FIRE is great. Everyone should strive for financial independence. And retiring early is a great goal. But when I think of retiring early I think 60, not 30.
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| How I envision retirement will look |
Let's be real for a second. I’m going to be 30 in seven months. I wouldn’t dream of giving up my job and relying on my retirement savings that early. It’s absolutely nuts to me. I mean, assuming I live as long as my grandparents (hopefully anyways!), I’d be looking at making my savings last 57 years. What really puts that in perspective for me is that my grandparents were married 57 years before my grandfather died, he wouldn’t have worked a single day of their married life.
Another dilemma I see with FIRE is children. I’m 29 with no kids but the idea of having them someday makes me think I need to rev up for some serious earning during my 30s. Kids are expensive - like a quarter million dollars expensive. Knowing that, there’s no way I’m walking away from my day job just yet. And by that I mean until the youngest is graduated from college.
So I’m against the idea of retiring at 30 but there are some good things coming from the FIRE movement. It’s encouraging people to take a look at their finances and actually plan for retirement. Which is a great thing considering 31% of Americans have less than $5,000 saved for retirement. That’s an issue. I know it’s hard to think about the future. Especially when you’re young and it seems so far away but it’s silly not to. Even if you start out small, take the first step.
Need a few reasons to push you in the right direction? No problem, I got ‘em.
1) Employer matching. Your employer may match your contributions to a retirement account up to a certain percentage of your salary. Not contributing means you’re leaving free money on the table. Don’t do that. Take the money your employer is offering.
2) Compound interest. Compound interest means your money is making you money - you earn interest on interest you earned from your initial investment. I’m sure you’re saying to yourself but it’s not going to make much of a difference right? Wrong! Let me give you an example.
Say you’re planning on retiring at 65. If you and your employer each contribute $100 a month into your account (see, starting small!) from the time you’re 20 until the time you retire you would have contributed $54,000 and your employer would have contributed another $54,000 for a total of $108,000. Not bad! But assuming you earn 5% per year on your money (which is low considering the average stock market return is 10% but we’ll be conservative), your money would have grown to $407,000. Almost quadruple what you and your employer put in! And over seven times your own contributions!
Moral of the story: open up your retirement account and contribute what you can, even if it’s not much. Even a little makes a difference. Seriously, stop reading this and fill out the forms.
3) Tax benefits. Contributions to a 401k or traditional IRA are pre-tax. Meaning you don’t pay tax on them until you retire. Since most people are in a higher tax bracket while they’re working, you’ll end up paying less tax on that money come retirement time.
But, retiring at 30 does sound pretty good doesn’t it? I mean, all the free time you’ll have! You can do all those things you’ve always wanted to do! Unfortunately, all the things I really want to do - like travel - cost money, but never mind that for now.
Let’s take a closer look at the FIRE method’s Five Steps to Financial Independence:
1) Change the way you think about money. As the article says, “money only matters if it helps you live a life you love.” Hey, I’m all for being happy. But I think retirement is a little bit misleading here. The FIRE method doesn’t necessarily consider retiring in the traditional sense. Retirement, in this case, is about feeling free and doing what you love. Which might just be your day job. But you’d be financially independent and not need that day job. Retirement might not be the best word but I get it, save money now so you can quit your boring day job and live on dividends while you write your travel blog. I can dig it.
2) Calculate what you need to retire. Ok, we’re sticking with this retire thing I guess. This is solid advice. No matter what age you’re planning on retiring make sure you have enough money to be able to withdraw what you’ll need.
3) Reduce expenses to ramp up savings. The article suggests cutting expenses in housing, transportation and food because the average American spends 70% of their income on these expenses. I mean, for good reason. We need to live somewhere, we need to get to work and, oh yeah, we should probably eat while we’re at it. But these expenses can definitely be trimmed. Make meals at home rather than eating out, get yourself a roommate or maybe skip the subway for a nice bike ride. I have no problem with the trimming of expenses, it’s a good idea. But saving the recommended 50% of my aftertax income would be a challenge.
4) Increase your income. The article recommends turning a hobby or skill into an additional revenue stream. In my experience hobbies tend to cost more money than they save but if you have a profitable hobby, I’m happy for you.
5) Invest aggressively. Someone young can weather some downturns in the market. But, investing aggressively could mean you lose a ton of money too. That’s why financial planners recommend your investments get more conservative as you near retirement. If you have a short timeline aggressive investments could help or hinder your retirement goals.
Overall, FIRE is all about spending less and saving more. Saving so much that you would be able to live off of it for the next 50 or so years.
If you want to see some of the ways FIRE has backfired on people, check out how these people adjusted to their failed FIRE plans.
Do I think FIRE is a horrible idea? Definitely not. I’m dying to be financially independent. That’s what all of this is all about. And I think anything that encourages that is important. People don’t talk about money or retirement enough, if FIRE gets some conversations started I think that’s awesome.
Will I be retiring at 30? Absolutely not. I like my day job and they pay me well to do something I enjoy. Could it be better? Of course. There are days that I’m ready to wring someone’s neck. As of now, those days are few and far between so I can stick it out. And while I’m working I’m going to strive to pay off all of my debt, contribute to my retirement savings (all savings for that matter) and prepare to spend money on whatever may pop up. Because life happens and sometimes it’s expensive.
What I would caution anyone planning to use FIRE is to please be prepared for the unexpected. Don’t cut it close, bulk up your savings and be ready for everything and anything you think might throw a wrench into your financial plans.
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