Okay, 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.
Steve says
#4 seems unnecessarily insulting. It could be better stated that FIRE requires high levels of financial savviness. There are some complicated calculations with a lot at stake, assumptions you have to get right, and you need to have a very good understanding of your current and future expenses. Furthermore, you can’t just replicate what some early retirement blogger did. You can’t go back in time and invest in real estate at just the right moment. And of course many get income to cover some or all of their expenses from their blogs. I don’t begrudge them their success, but it’s not something that you can replicate in today’s situation.
Steve says
I didn’t mean point #4 to be insulting… If it is, you are correct, I should have phrased my words differently.
BTW, with regards to another point you’ve made–that you can’t go back in time–absolutely agree… Ramping up a blog, getting a really excellent run of stock market returns, getting astronomical returns with leverage real estate investments… these may all be investment and entrepreneurial activities that deliver much different returns over the next decade as compared to the last decade. (This BTW would be the sort of subtlety that it seems to me is missed by many…)
Jeremy says
Hi Steve, this is a pretty good list.
I figure we are at least $5 million in the hole after the first 4 years of RE. That is by far the biggest “cost.”
The Social Security penalty is pretty small… the ROI on any additional FICA taxes is negative, much better to just buy an annuity if a fixed income stream is important.
I don’t think the difference in success rate is as severe as shown. Part of the reason FIREcalc and cFIREsim report higher failure rates is there are just fewer 60 year periods over which to do rolling window analysis. A smaller denominator means a higher failure rate. The difference in withdrawal rate between a 30 year withdrawal period and in perpetuity is fairly small and really just depends on the inflation adjusted sequence of returns in the first decade.
Hopefully looking back 40+ years from now, it will look like we were either geniuses or lucky. I’ll take lucky though.
Thanks Steve
Jeremy
Steve says
Good points, Jeremy… good points.
But just for the record, guys like you are not who I worry about! You can do (and help people fortunately with) the math! (Keep up the good work at http://www.gocurrycracker.com/.)
Jeremy says
I figured we weren’t who you were talking about, but I didn’t want to assume :p
btw, thanks for this post. It’s really well written and well thought out. It may be the first critique of ER that isn’t just emotional click bait.
Millennial Boss says
Great post and I agree with your points. Although, I’m on the FIRE path and never plan to stop working. I think that a significant majority of those pursuing fire will make money in some way or another after retiring. I also could get a job if needed. I’ll have the time to learn and prepare for another trade if need be.
Arthur Mendoza says
For social security benefits, I believe the govt will change this by the time I am 67+ and will not be what the estimate will be. Its just gravy to me if I get the full amount.
For flaw #3, I think if my annual dividends exceed my yearly expenses, then I don’t have to sell any of my investments (keep it intact). Until I get to RMD.
Brian says
I think the biggest hole in the FIRE model is not accounting for inflation. The 4% model assumes a fixed withdrawal rate. Officially inflation (federal data) is 2-3% but unofficial figures are usually higher. And with record debt to GDP levels, it’s safe to assume it will remain at this level or higher for the next decade in order to pay off debt. That means costs will compound quickly.
Jeremy says
This is not accurate. Inflation is expected and accounted for.
Financial Samurai says
Bottom line is that nobody quits a job they love. So I agree with your conclusion. I lost a good chunk of income for two years, but I gained it back and then some five years since i left corporate America bc I love blogging. It is the best!
Sam
Alec says
#5 is totally bullshit…roll modeling a kid to get trapped in the rat race? what the hell
Toby says
I disagree. I work with a guy who is FI but he still works part time because he has young kids. He wants them to understand the value of hard work and being responsible. I don’t know many people who can FIRE without working first.
Steve says
>”…I don’t know many people who can FIRE without working first…”
Agree. You’ve said this better, Toby, than I did.
Done by Forty says
All good points to consider.
To add to the Social Security argument, most early retirees are high earners who otherwise would pay at or near the max into SSI for an additional 20 years under normal circumstances. There is a collective cost in addition to the individual one.
The White Coat Investor says
Important critiques of FIRE. Anyone contemplating RE should read this.
Satisfied Ghost says
This is am important critique from a great accountant. (I met with you last year Steve to talk about my situation.) His points on social security are very sound. People need to have an eyes wide open approach to leaving any job. But I do think that most people who aspire to FIRE and can save at that rate, will end up doing other things.
Bryce says
#1 All FIRE folks know they are trading dollars for days. The end game is not money, it’s not time in retirement, it is happiness. Each person’s balance of money vs. time will be different to make up their happiness. But we both agree a lot of folks don’t put in the work/research to make that individualized balance a reality and those retiring earlier vs. working later are at greater risk or feeling financial stress down the road, especially if the homework is not completed.
#2 To really get deep into the specifics I recommend this well written article to exactly calculate what you’d be missing out on: http://rootofgood.com/early-retirement-social-security/ I’d pay special attention to the two “bend points” where the author describes how the formula changes as you work more years and each individual can see how much they would be throwing away, and whether the money is worth their time as the benefit diminishes. The other pessimistic view for many FIRE folks is that SS may not even be there, so for me personally I do not factor that into my calculations. SS is gravy.
#3 I agree. The longer you are retired the more exposure you have. I also see Jeremy’s point about limited data points. With that said “knowing is half the battle” and by reading this series and using their Google Sheet to model things for a 50+ yr retirement, it gives me much more peace of mind. This entire series is unbelievably thorough: https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/
#4 You are absolutely correct. While I am not a genius, my confidence continues to grow each day I dig deep to go through personal calculations. A lot of folks on FB groups sing of the 4% rule while not fully understanding the limitations of the study by Bengen, nor does their knowledge extend to equally important topics such as taxes in retirement (thank you Jeremy for your articles on taxes. I’ve figured out my taxes for multiple states and Federal by hand to really understand my exposure), while they focus on seemingly the easy stuff.
#5 Definitely contentious, haha. The way see it, I am much more envious of someone who has freedom vs. a good career or a flashy car. I wish someone who retired early taught me the ropes when I was in my 20s. There are plenty of folks around to advise my loved ones in career choices, but far too few people out spreading the gospel of FIRE to young minds to let them see all sides of the equation and make their own decision on what would bring them long term happiness. Heck, I wish there were college courses on this as well as basic personal finances classes when I was in school.
There is no one way to happiness. It may be to retire early, move to part time work, or move to a lower paying but more rewarding career, it is all individualized. But if you are considering FIRE, doing your homework certainly gives you a better picture of the positives vs. negatives and absolutely increases your success rate on potentially the greatest or worst decision of your life. Thanks for the great post!
Ten Bucks a Week says
I think FIRE people are a role model of working hard to achieve what others find impossible or unreasonable at best.
I would say unsophisticated adherents are going to cause problems in every group they are part of. If someone isn’t doing the calculations and have nor has a plan then I think they are just hoping. However, if they are using the tools you pointed out, then I think they are on the right path. Also the ROI for Social Security is really the best for those who didn’t make much.
Steve says
Another aspect I was wondering about was, does following the FIRE path benefit or hurt an inept follower? To the extent that it encourages them to save, it probably helps, even if they never save enough for RE. On the other hand, if they retire before they’re actually ready, obviously it hurts. Or if they focus on retiring from their current hated job instead of finding a job or career that they enjoy or can at least tolerate.
Steve says
Good points.
Steve says
Steve, I would agree with your suggestion that FIRE is pretty benign if all it does is encourage frugality and saving.
But those other two points you make–retiring before the numbers say person is ready or focusing on retiring from a hated job rather than finding something better–those are perfect examples of risks or flaws I’m talking about.
kindoflost says
My only real concern of the 5 listed is #4. I think the last 9 years have been too good for the stock market so everyone thinks they are a genius (including me). But the biggest concern is really how to continue to be a contributing member of society, I need to figure out this one.
Steve says
>”…the last 9 years have been too good for the stock market so everyone thinks they are a genius (including me)…”
A really good point. A really good point.
Brian says
As someone who did retire early (wife did as well), I can personally address each of those supposed “flaws”:
#1: If you invested/saved well and have more than enough to retire on, the loss of additional income and fringe benefits shouldn’t be a factor. My job didn’t suck. As an aerospace engineer, developing systems for state-of-the-art aircraft systems, I enjoyed every day at work. But, we (her being a financial analyst) carefully did our accounting, and crunched the numbers. The numbers work.
#2: Regarding Social Security Benefits. Whenever we start collecting Social Security, depending on which of the three milestone ages (62y, 66y, 70y) we choose, we’ll be pulling in an additional $45K – $78K/year (both of us having almost 35 years of earnings history). Since we didn’t include those in our income needs projections, those will be icing on the cake. As for it being tax-free, because we have significant other investments – some tax-qualified, some not – none of its going to be tax-free, no matter how we slice and dice it. We’ve been thoughtful about this and aren’t concerned.
#3: Regarding financial failure rates. The goal to attaining early retirement is saving more than you need. We’ve saved enough that during our (so far) seven years of retirement, our withdrawal rate has been about 2.75% (not near the 4.00% everyone always mentions as a guideline). And with this recent 8-year boom in the stock market, our portfolio has increased by 12% (that’s net including our spending) during this time. This has allowed us to now dial back slightly the risk in our portfolio in preparation for the coming busting of the bubble. Again, the goal is to start with a much larger portfolio than you need so that your projected income needs can be met.
#4: Regarding unsophisticated adherents. No offense taken, but we had a full career of working to understand and work on wealth accumulation. At the same time, we had the opportunity to understand what wealth decumulation would look like and prepare for that. It’s just different sides of the same coin. It requires no more sophistication than being entrepreneurial or building wealth does. Some people do their own taxes; some do not. Some people require the aid of financial planners; some do not. Yes, you have to understand the stuff. But, as someone who is almost a rocket scientist, this is not rocket science. (No offense intended.)
#5: Regarding role modeling and mentoring. As a practical matter, we now have the opportunity to show our heirs how this really works, and how to prepare for employment and beyond, rather than simply talk to them about hypothetical or academic scenarios. We get to show them the reality of a positive outcome if certain practices are adhered to. These efforts are not snapshots in time — they’re on a continuum — Continually investing in one’s self so that advantage can be taken of every opportunity that life presents.
Those who do this are actually the embodiment of how to successfully navigate this competitive market-based financial/economic system as it relates to how to find and keep and grow a job or grow income and wealth. And, I hope that we ourselves can be the context and example within which to demonstrate that “boots on the ground” experience to our grandkids. We’ve thought this through.
Finally. As for having the opportunity to contribute back to society — My wife spends her time volunteering with a few local non-profits, is a competitive senior athlete, and spends time with me caring for our grandchildren. I used this opportunity to run for local public office, am now in my final term-limited months after having served as City Councilman, Vice Mayor, and Mayor of our City, (and I care for our grandkids as well).
For us, it opened up a world of opportunities that we had not even considered before. And this is only in the first seven years of early retirement! Can’t wait to seeing what’s coming around the corner……
FIRE can work!
Steve says
Brian, good points. And you obviously did a great job preparing for retirement. Congratulations! Excellent work.
But to correct a misunderstanding or miscommunication by me, if you’ve worked for nearly 35 years and so have basically full meal deal Social Security benefits, you’re not the early retiree I’m talking to. Or worrying about. I actually almost wouldn’t consider someone who works for 35 years to be retiring early…
I’m most concerned about people trying to retire to 50 year retirements with maybe 20 years of earning. That sort of early retirement can work, I admit that. But my argument is, it’s tricky. (And anecdotally the hundreds of Microsoft millionaires I’ve observed who tried this found it tricky, too.)
P.S. My free, downloadable Thirteen Word Retirement Plan argues that preparing for retirement is really more practical as a 30 to 35 year project.
GOFU says
I love reading comments like this one from Brian. It boils down to “Well, we had high earning capacity and made a ton of money, much more than we needed to live, and we saved it and invested it over a long career and have high capacity for analysis and basically avoided every pitfall the article is designed to highlight and now have much more than we need and have a great life (did I mention we have a great life?!), so what’s the problem with all these rubes who can’t do what we did?”
Exactly what does this tremendous success story have to do with the risks pointed out in the article? So you were smart and avoided these risks and have had good fortune besides. You’ve got it all figured out and I am happy for you. But really, so what?
Comments like this one exemplify a more fundamental issue in the FIRE set. It is all just another form of keeping up with the Joneses. Mr. & Mrs. Jones will tell you all about their new car and their high-end appliances and their recent kitchen remodel and the new string of pearls from Saks Fifth Avenue. Among the FIRE set it is along the lines of “What do you mean you had to work until age 43? I, myself, retired at 30. And I don’t even look at my portfolio any more. By the way, did I show you the pictures of our year in Thailand?”
I am all in favor of each person becoming financially independent, and the sooner the better, so as to maximize liberty and the pursuit of happiness. But so much of this FIRE fad talk practically deifies leisure and is just another form of boasting designed to impress perfect strangers with pseudonyms on the internet. Just another Mr. & Mrs. Jones at a country club cocktail party.
Lenore says
Haha so true!!!
Doug @ The-Military-Guide says
You write a good summary of the issues, Steve, and your post seems to be getting a lot of shares.
However some of the logic may be grounded in the unspoken assumption that FIREs will never again earn another penny of income. Maybe a few are too financially ignorant to handle a variable withdrawal rate for 60 years (perhaps buttressed with an annuity safety net). Too many people try to drive the 4% SWR math to a 100% success rate instead of focusing on eliminating its failures with other tactics that the 4% SWR research can’t model. All of those people will probably continue to work for money until they become financially savvy enough to make the money work for them– or until a family/health crisis forces them out of the workplace. I hope we personal-finance bloggers can show everyone how to do the former before the latter happens.
I’ll offer my feedback on this thought:
“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.”
That misses the point. Kids don’t need role models of good workers– they need role models of good work/life balance.
I’ve been FI since the late 1990s and I’ve been retired since 2002. Our daughter spent the first nine years of her life around working parents, and the rest of her life around FIRE’d parents. She had to get her education and start earning her own money while watching her parents enjoy the benefits of their own FIRE efforts. Now in her 20s, she’s launched from the nest and achieved orbit in her own STEM career. Better still, she’s totally motivated to maintain the high savings rate to achieve her own FIRE.
She didn’t want a role model for being a good worker– she wanted more time with her parents to learn how to achieve the same FIRE life for herself. Now she’s plotted a path to reach FIRE in her early 40s, and maybe in her 30s… not that she’s competitive about it.
Jeremy’s kid (GCC Jr.) is probably talking up a storm these days. We’ll have to get his opinion on role models too.
Steve says
I said, “…you may lose your ability to provide that context if you yourself have no recent “boots on the ground” experience.”
And you said, “… That misses the point. Kids don’t need role models of good workers– they need role models of good work/life balance.”
OK, happy to stipulate kids need good role models regarding work life balance, but what I’m talking about is the labor market knowledge that degrades or gets out of date… If you and I are both, e.g., software engineers but you’re still actively participating in labor market and I’m ten or twenty years retired, I think you’re going to have more valuable knowledge about how to get a job in and succeed in software engineering.
A real life example: Who gives your twenty-something better career advice? Grandpa if he’s 15 years into retirement? Or an older sibling five years into a career?
Jeff says
Most people that I encounter in the FIRE community are actually more focused on the FI portion. Granted I am a relatively new member but it seems that the community is growing into two distinct groups. FI for me means the ability to branch out and try new things from a position of strength.
I think your article should be thought provoking for anyone considering FIRE. If its not, they could very well be one of the people your discussing.
Steve says
Good points Jeff. You make a useful and important distinction…
Sue says
Have you always been your own boss? If so, that may frame your reference in a big way.
Jane says
Superb comments! – Premised, as always, on actionable content. Thanks to all.
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