Is The F.I.R.E Movement A Scam? Episode 114

The Financial Independence, Retire Early (F.I.R.E) movement has captivated the minds of many individuals seeking a different path to traditional retirement. As people look for ways to achieve financial freedom and enjoy their lives outside the confines of a traditional 9-to-5 job, understanding the intricacies of the F.I.R.E movement becomes essential.

The F.I.R.E (Financial Independence, Retire Early) movement method is a lifestyle and financial strategy that aims to help individuals achieve financial independence and the option to retire earlier than the traditional retirement age. This approach is built on three core principles:

• Increasing income: F.I.R.E followers actively seek ways to boost their income through career advancement, side hustles, or entrepreneurial ventures, maximizing their earnings potential and creating additional streams of revenue.
• Living frugally: Embracing frugality, F.I.R.E adherents minimize their expenses by cutting costs, prioritizing needs over wants, and making mindful spending decisions. This lifestyle shift enables them to save and invest more of their income.
• Aggressively saving and investing for retirement: With a focus on growing their wealth, F.I.R.E enthusiasts allocate a significant portion of their income (often 50% or more) towards savings and investments. This aggressive approach accelerates their journey to financial independence, allowing them to reach their target retirement nest egg faster than conventional methods.

The 4% rule, also known as the Safe Withdrawal Rate (SWR), is a guideline used within the F.I.R.E movement to estimate the amount of money needed to retire and sustain one’s lifestyle without running out of funds. To calculate your FIRE number using the 4% rule, follow these steps:

1. Determine your annual expenses: Calculate your estimated yearly living expenses during retirement, including housing, utilities, groceries, healthcare, travel, and other necessary costs.
2. Apply the 4% rule: Divide your annual expenses by 4% (0.04) to determine the total amount you’ll need in your retirement nest egg. The 4% rule is based on the assumption that withdrawing 4% of your initial retirement portfolio each year, adjusted for inflation, will provide a sustainable income for at least 30 years without depleting your funds.

For example, if your estimated annual expenses during retirement are $50,000, your FIRE number would be $50,000 / 0.04 = $1,250,000. This means you would need to save and invest $1,250,000 to achieve financial independence and retire early, according to the 4% rule.

The F.I.R.E movement encompasses a variety of approaches to achieving financial independence and early retirement. While the core principles remain the same, different types of F.I.R.E cater to individuals with varying financial goals and lifestyles. The three main types of F.I.R.E movement are:

• LeanFIRE: This approach focuses on extreme frugality and minimalism, with individuals significantly cutting their expenses to retire on a lower budget. LeanFIRE followers often live well below their means, prioritize needs over wants, and maintain a modest lifestyle during retirement.
• FatFIRE: In contrast to LeanFIRE, FatFIRE emphasizes a more comfortable retirement with a higher standard of living. Followers of this approach aim to save and invest a larger retirement nest egg, allowing them to maintain or even enhance their pre-retirement lifestyle. FatFIRE adherents are willing to work longer or invest more aggressively to achieve their financial goals.
• BaristaFIRE: The BaristaFIRE approach combines partial retirement with part-time work, enabling individuals to retire earlier while still generating some income. This income can be from a low-stress job, freelance work, or a side gig. BaristaFIRE followers use the additional income to supplement their investment withdrawals, reducing the pressure on their retirement funds and allowing for more flexibility in their lifestyle.

In the context of the F.I.R.E movement, the savings rate and target amount are critical components that help individuals reach their financial independence and early retirement goals. Here’s a closer look at each:

Savings Rate: The savings rate represents the percentage of your income that you save and invest for your future goals. A higher savings rate accelerates your journey towards financial independence by allowing you to save and invest more money in a shorter timeframe. Here are some examples of how the savings rate impacts your progress:

• At a savings rate of 10%, it takes 9 years of work to save for 1 year of living expenses.
• At a savings rate of 50%, it takes 1 year of work to save for 1 year of living expenses.
• At a savings rate of 75%, it takes 4 months of work to save for 1 year of living expenses.

Most F.I.R.E followers aim to save at least 50% of their income, significantly reducing the number of working years needed to reach their target amount.

Target Amount: The target amount, also known as the FIRE number, is the total amount of money needed to achieve financial independence and retire early. This figure is typically calculated as 25 times your annual expenses, based on the 4% rule.

For example, according to Stats NZ, the average NZ household spends roughly $1,300 a week. To live lean and follow the F.I.R.E principles, one would need to save about $1.7 million (25 times the annual expenses).

By understanding your savings rate and target amount, you can create a tailored financial plan that aligns with your financial independence and early retirement goals.

While the F.I.R.E movement offers an appealing alternative to traditional retirement planning, it’s essential to be aware of the potential risks and considerations that may impact your journey towards financial independence and early retirement. Some of these include:

• The 4% withdrawal rule may not work in high inflation or high-interest rate environments: The 4% rule is based on historical data and may not accurately predict future market conditions, particularly in situations with high inflation or high-interest rates, which could affect the sustainability of your retirement funds.
• Assumes a 9-10% average annual portfolio growth, which may not be realistic: The F.I.R.E movement often assumes an optimistic rate of return on investments, which may not be achievable in the current or future market environments. Lower-than-expected returns could delay your progress or require adjustments to your retirement plans.
• Doesn’t account for changing expenses, emergencies, or significant life events: The F.I.R.E strategy typically focuses on maintaining a consistent lifestyle and expense level throughout retirement. However, unexpected events such as health issues, family emergencies, or changes in personal circumstances may necessitate increased spending and impact your financial independence.
• Younger F.I.R.E followers may not have experienced an economic downturn: Some F.I.R.E enthusiasts, particularly those who are younger, may not have experienced a significant economic downturn or market crash. This lack of experience could lead to unrealistic expectations and insufficient planning for potential challenges.
• Conflicting research on the impact of early retirement on health and happiness: Some studies suggest that early retirement may have adverse effects on mental and physical health. Additionally, long-term happiness may not be achieved through a leisurely retirement alone, as maintaining a sense of purpose and social connections are essential for overall well-being.
• Divorce can significantly impact a F.I.R.E follower’s path to financial freedom: A divorce or separation can substantially derail a F.I.R.E follower’s progress by dividing assets and potentially increasing expenses. It’s crucial to consider the potential impact of such life events on your financial plans.

By understanding these risks and considerations, you can make informed decisions and create a more resilient financial plan that accounts for potential challenges on your path to financial independence and early retirement.