It's not exactly a get-rich-quick-scheme, but the FIRE movement, which is growing in popularity among millennials, is still problematic.
"We all want to retire early," said Kimberly Bridges, director of financial planning at BOK Financial®. "But this is a little extreme."
FIRE, which stands for Financial Independence, Retire Early, calls for saving some 70% of your income, or 25 times your yearly expenses, to retire early, usually before you turn 40. While there are variations of the movement, one common goal is to save $1 million, then live off a 4% yearly withdrawal.
The movement was born from the 1992 best-selling book, "Your Money or Your Life," but has been gaining in popularity since the 2010s. According to Schroders, it's impossible to estimate the number of followers of the FIRE movement, but there are roughly 800,000 members of a FIRE Reddit channel, and one notable movement blogger has seen more than 33 million unique page views on his website since launching.
But popularity doesn't always mean viability.
"The idea that we can spend more years enjoying life and fewer years grinding at the hamster wheel is a good one," said Bridges. "But it's extreme—this idea, of saving 70% of your income and retiring after 10 or 15 years of working. It might be feasible for very highly paid individuals, such as professional athletes or celebrities, but it is simply not realistic for most people.
"As a financial planner who has built countless financial plans, I feel like that is a very naïve expectation. Most people don't truly understand the risks they would be facing by doing that."
Bridges said people drawn to the FIRE method often fail to consider:
- Healthcare expenses: Health and insurance costs are going to absorb a lot of your savings, especially since you're not on Medicare. According to a 2020 study by eHealth, the combined average annual premiums and deductibles for a family of four were more than $25,000. That would consume nearly 2/3 of a 4% withdrawal on a $1 million portfolio.
- Long-term care: When you shorten your working years and extend your retirement years, it becomes difficult to save for long-term care, which is getting more and more costly. According to Genworth, the median cost of a semi-private room in a nursing home facility tops $93,000 per year.
- Fluctuations in yearly spending: It's simplistic to think that we will spend the same amount every year. Extraordinary expenses–like a healthcare event or a major home expense–happen. And if we haven't planned for them, we could find that our retirement nest egg is being depleted much faster than anticipated.
- Lifestyle and technology changes: Things that didn't exist in life 20 years ago are necessities now, and that trend will continue. "It's hard to plan for expenses if we don't even know what they are," Bridges said.
- Social Security payments: "If you retire mid-thirties, you've killed your Social Security estimates because they're based off a 35-year work history, and if you don't have 35 years, you'll get zeroes for the years you're not working," she said.
- Market ups and downs: The whole premise of financial independence rests on the ability to construct a portfolio that will produce enough income to maintain your lifestyle for the rest of your life. That's a tall enough task with a typical 20- to 30-year retirement time horizon, much less a 60-year time horizon. The impact of a single pull-back in the market could be magnified over such a long time period.
“I think the FIRE method is fraught with risk and uncertainty, but I would never tell anyone they shouldn't be pursuing a life well lived.”- Kimberly Bridges, director of financial planning at BOK Financial
Reducing the uncertainty
One goal of retirement planning, Bridges said, is to reduce uncertainty. Retiring before 40 only increases the years of uncertainty. "The longer the time horizon you're trying to fund, the more years of uncertainty, so when you run the plan through a stress test, you have a wider range of possible outcomes, including negative outcomes," she said.
To mitigate uncertainty in any retirement planning method, Bridges suggests:
- Being thoughtful and calculated in choosing a retirement date.
- Staying current in your field, so re-entry into the workforce remains a viable option.
- Cultivating multiple revenue streams.
- Diversifying your investments.
Balance is a worthwhile concept
While the finances don't quite add up for the average worker, Bridges said the goal of retiring early is a worthwhile one.
"I think this movement is more than just about saving as much money as you can and retiring early," she said. "It's people that have a fundamental belief that we don't need all the stuff that we tend to have in our lives. We could live much more simply, off of much less."
"I think the FIRE method is fraught with risk and uncertainty, but I would never tell anyone they shouldn't be pursuing a life well lived," said Bridges.
"Just don't put all your eggs in one basket. We all need to learn to find the balance during our working years to be able to enjoy our lives and families while staying attached to the workforce and bringing in income."