The FIRE movement, short for Financial Independence Retire Early, has really picked up steam since the financial crisis. If you're feeling early retirement FOMO, it's important you know the risks of FIRE before you take the leap.
In 2009, I helped ignite and start the FIRE movement when I started Financial Samurai to discuss achieving financial independence at an early age. With a motto of “achieving financial freedom sooner, rather than later,” I’ve been helping encourage people everywhere to get their finances right so they can live their best lives.
Coincidentally, 2009 was also the bottom of the previous financial crisis. Up until the COVID-19 global pandemic, the stock market and real estate market performed extremely well. Fortunately, the markets are climbing back since the March 2020 drop.
FIRE Hype Is Out Of Hand
Over 11 years later, FIRE is all the rage and it’s kind of gotten out of hand. As a result of the strength in the markets, more and more people have built great wealth and have found the courage to retire early as well, fueling the FIRE movement’s growth.
Today, there are literally thousands of financial independence blogs out there. And the more people who achieve FIRE and write about FIRE, the more people become aware about this alternative lifestyle.
It's natural after such a great run in the stock market and real estate market that more people want to leave their day jobs and do something else. Many of us have gotten very wealthy since 2009.
Further, as the wealth gap continues to widen, more people are realizing that all the time spent in the office is making someone else rich, not so much themselves. Is working for a CEO making $50 million really worth it? Many don't think so. Likewise, smart people are realizing that joining startups will probably make you poorer rather than richer.
People are waking up to the fact that it's better to live life now. Why wait to live our best lives after we realize we are old, less mobile, and less healthy. Hiking the Inca trail to Machu Picchu is much easier when you're young!
But like everything in life, there are risks.
How Do You Know If You Can Retire Early / FIRE?
My fear is that the FIRE movement is a bull market phenomena where people think they just can’t lose with their investments. But anybody who has been through the 2000 – 2003 and 2008 – 2009 downturns know that bad things can happen.
The coronavirus has also changed the way we look at job security, social distancing, and the government’s power to furlough workers and shut down businesses. Bad things can happen in an instant when we least expect it.
How do you know if you can retire early and adopt the FIRE lifestyle? First, you need to be sure you understand what FIRE really means. My definition of FIRE (Financial Independence Retire Early) is having enough investment income to cover your desired living expenses. If your investment income does not cover your desired living expenses, you will likely not feel at ease.
Some people might pejoratively call you fake FIRE. Kinder people might label you Barista FIRE because you’re hustling online or offline to trying to make ends meet. Whatever the case may be, it’s up to you to decide what’s financially best for your lifestyle.
Let’s talk about the risks of the FIRE movement since so many people are now pursuing FIRE. It’s always good to understand both sides of the equation in order to make the best choices.
Risks Of The FIRE Movement
In 2012, I finally negotiated a severance to be free from full-time work for good. But like everything in life, there are risks. Unlike a lot of fake FIRE bloggers and freelance writers out there, I've actually retired from the 9 to 5, 40-hours a week grind. In my case, it was often a 60+ hour week grind.
I've learned a lot along the way in my financial independence retire early journey. For example, there is a dark side to early retirement that I've written about extensively.
Let me share the top risks for those who achieve FIRE and retire early.
1) You may look foolish if you change your mind. Imagine retiring at 40 after 18 years of work after college. You spend the next five years traveling the world, living a leisure lifestyle and experiencing new things. At age 45, you realize the reason why travel and play is so fun is because of work.
You have the urge to get back into the game, but who's going to risk hiring a 45 year old with a five year employment gap? The employer will suspect you are rusty, and that you may just bolt after a year. As a result, the employer simply chooses to hire someone with no gap in their employment, or someone else from another firm.
2) You run out of money. No matter how conservative we are in our retirement money needs, something unforeseen may happen. Maybe you have a medical disaster, or your house blows down. Maybe your investments tank due to a massive recession.
Although I believe the risks of running out of money during FIRE is overblown, there is still a possibility of a negative sequence of risk.
Even More Risks Of FIRE
3) You lose touch with friends and family. It's nice to have all the time in the world to do whatever you want. But, if your friends and loved ones are busy working all day, they can't join you on your midday hike or adventure to Tahiti. They may also have a family to tend to during the evenings and on weekends. If you've ever taken a staycation by yourself, you'll soon realize how lonely it is when others are busy leading their own lives.
4) It might be difficult to support a family. Unless you have a tremendous amount of after-tax retirement savings, raising a child may be too expensive an endeavor to undertake as early retirees. Losing day job income plus adding the expenses of child might simply be too much to bear.
5) You lose your own self-respect and the respect of others. Unless you're out there saving the world, you might start getting depressed you are contributing very little to society. Others will stop respecting you because you may not be doing anything productive either. Traveling the world and writing about how great your life isn't helping anybody.
6) You turn into a delusional ego maniac. There are plenty of people in the FIRE community who turn into ego maniacs because they need to justify their decision to remove themselves from the work force early. They end up posting a lot of selfies and pictures of their travels over social media to prove how fabulous their lives are. Then they’ll write about FIRE every chance they get on their blogs.
These type of people are the worst because they have such low self-confidence. You can tell people how awesome your life is, or you can just live it. Choose the latter.
Additional Downsides Of Retiring Early By FIRE
7) You’ll be disappointed that you aren’t much happier. So many people think that once they achieve financial freedom or leave a job they dislike, they’ll suddenly be permanently happier. The truth of the matter is, your elevated happiness will only last at most three to six months. Eventually, you’ll revert to your natural state of being.
Think back to your high school or college days when you didn’t have any money compared to now. I’d venture to guess you were just as happy, if not happier when you were a broke college student.
8) You may wonder whether this is all there is to life. Retiring early is like finishing up your favorite longstanding TV show. You’re glad there’s a conclusion, but you’re also sad that it’s over. You hope to find a show that’s as good or better, but there are no guarantees.
Most of us spend 13 years going to grade school so we can spend four years in college in order to get a decent job. Then we spend decades trying to earn and save money in order to provide for our family and then one day retire by 65. With good luck, we’ll live for another 20 years to enjoy all the fruits of our labor.
When you retire at a much earlier age, you are constantly left wondering what’s next. You are mentally twiddling your thumbs waiting for the next big thing while your close friends are all at work. Early retirement can get extremely mundane and boring because you have nobody to spend time with.
Final Risk Of Financial Independence Retire Early
After achieving financial independence in 2012 when I negotiated a severance to try and live my best life, I discovered something very interesting.
My FIRE number kept increasing over time.
In 2012 at age 34, my goal was to achieve $100,000 in retirement income within three years post work. After my wife left her job in 2015, I increased our FIRE goal to $200,000. Then, after our son was born in 2017, our retirement income goal jumped to $250,000.
With about $250,000 a year in retirement income, my family is comfortably FIRE in San Francisco as of now. We spend less than $180,000 a year after-tax, which means we’re still able to save about $35,000 a year to keep boosting our FIRE number.
However, with the birth of our daughter in late 2019, I can no longer comfortable stay retired. Instead, I’m coming out of retirement in order to make at least $50,000 more in retirement income in order to provide for two kids and a wife.
Talk about FIRE inflation!
Your Financial Independence Number Is A Moving Target
I’m pretty certain the earlier you FIRE, the more your FIRE goal will increase as well. It’s only after you FIRE after age 45, that your FIRE goal ends up being closer to your true FIRE number because your expenses are largely known.
Kids really test the will of FIRE folks because we love our kids so much and want the best for them. We’ve tamed our lifestyle inflation. But we’ve got to relearn how to keep our spending in check with kids.
Just know that whatever you think your ideal retirement income is, there’s a good chance it will go up over time if you can’t control your lifestyle.
The biggest risk of the FIRE movement is not being true to your financial self. If you don’t have the passive income to support a retirement lifestyle, you are not really FIRE.
You can either live your life or spend time telling others how you're living your life.
Once you achieve FIRE, there's no need to incessantly go on and on about your fabulous lifestyle. If you do, it will only seem as if you're trying to justify your decision.
I say this to remind myself to diversify the topics on Financial Samurai to keep things interesting.
Inflation Risks With FIRE
A big reason why my FIRE number keeps increasing is due to inflation. College tuition and healthcare costs are out of control! Private elementary school tuition in San Francisco is about $35,000 a year and goes up to $48,000 a year during high school.
If you're a parent, check out Personal Capital's education planner to help you prepare for the expensive cost of education. Take a look at the rising cost of college tuition and feels below if you need motivation to start planning and saving.
Our annual healthcare plan premium is over $28,000 for a healthy family of four. I don't see how this figure is reasonable at all since we hardly ever go to the doctor.
Now that my wife and I are raising two kids, even earning $300,000 a year might start feeling tight as the cost of living continues to increase. San Francisco real estate prices have risen by 70% since 2012.
Even after you achieve financial independence, know that your expenses could surprise you on the upside. You just never know when you'll have a medical emergency or a new or old family member to take care of.
How To Better Prepare For Early Retirement
Now that we’ve covered the most common risks of FIRE and retiring early, let’s look at some ways in which you can better prepare for the financial independence early retirement lifestyle.
1) Track your finances like a hawk. When you truncate your main active income source, you must diligently track all your expenses and investments to ensure they are in-line to provide you a solid early retirement life. I recommend Personal Capital, the #1 free financial tool on the web to stay on top of your finances. Personal Capital is very safe to use.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible. The more you can track your finances, the more you can optimize your finances.
2) Keep relationships fresh. You never know when you’ll need a job or some part-time work to supplement your early retirement lifestyle. As a result, don’t abandon your work relationships. Check in with them once a month or a quarter and buy them lunch. Keep these relationships warm as there are always opportunities that come about.
3) Have a proper asset allocation. The key to living a great early retirement lifestyle is to have the appropriate asset allocation of stocks and bondsand other risk assets. If you can comfortably live off $80,000 a year and you have a $3 million portfolio. There’s probably no need to take more risk since you only need to earn 3% – 3.5%.
I also recommend continuing to save at least 10% of your retirement income each year just to be safe. Build that extra FIRE buffer and take on some paying side hustles that you enjoy.
Enjoy Early Retirement Life!
Like all good rewards, there are risks involved. But I must admit after leaving work in 2012, I have no regrets about taking the risk of saving aggressively and retiring early. I’ve been able to do everything I’ve wanted to do since leaving work and I’d have it no other way.
I’m absolutely positive you will enjoy early retirement life as well. You can travel the world. Spend more time with family. Feel healthier and happier. Keep your financial accounts safe and rest easier. The sacrifices you make as a younger person to be free are worth it.
Best of luck on your journey!