Question: As a financial advisor, what’s your take on the financial independence, retire early, or FIRE, movement? What is it and is it a worthwhile goal?
Answer: FIRE is an extreme approach to saving. The aim is to achieve financial independence more quickly than at the standard retirement age.
Like any approach to managing your money, this path has pros and cons. As a certified financial planner, I don’t think it’s objectively good or bad.
Whether or not you choose to FIRE is about how you want to prioritize your goals in light of the trade-offs required to reach them.
[7 Lessons From Those Who Retired by FIRE]
How Does FIRE Work?
FIRE isn’t defined by any hard metrics. Generally, people who pursue FIRE aim to retire from the workforce before the traditional retirement age. This is often achieved by saving aggressively.
Achieving FIRE requires many of the same steps it takes to reach retirement. The difference is a matter of degree.
So, while a traditional retirement plan might call for you to save 15% of your income and quit working when you turn 65, a FIRE plan might involve saving 60% of your income and leaving work at 40.
Someone who is pursuing FIRE may tailor it by choosing to follow a more aggressive or milder approach. Someone may decide to FIRE at 30, 40 or older. They may choose to quit work entirely, work part time, or leave a higher-paying job to take one that is more flexible and enjoyable.
[READ: Why I Don’t Regret Retiring by FIRE]
What Are the Trade-offs to FIRE?
Here are some examples that show the potential downsides to FIRE.
These are intended to point out the trade-offs, and I want to be clear about that positioning upfront. You may be able to navigate these issues in a way that you find acceptable, which is part of optimizing your choices.
Cutting Expenses Drastically
One popular way of achieving FIRE is to cut living expenses to free up money to save. That’s easy to see on a spreadsheet or punch into a calculator. But in reality, it involves making some potentially hard decisions that will go much deeper than basic budgeting if you take an aggressive approach to FIRE.
For example, you may decide to live in a camper rather than buy or rent a house. Reduced spending on experiences such as travel might mean that you don’t end up vacationing at all or miss out on once-in-a-lifetime events.
Again, none of these things are inherently bad but they involve very real trade-offs in your standard of living. Whether or not those trade-offs are worth it depends on your personal views.
Increasing Your Income
At first blush, there isn’t anything extreme about wanting to increase your income. Most workers do. But to pursue FIRE, you may need to press that further than you’d like. For example, assume you can earn a comfortable living following a traditional retirement path doing a job you like in a career field you enjoy. Would it be worth it to you if you could double your income by taking a job you don’t enjoy in a different field so that you could retire 15 years earlier?
You may not be faced with such a drastic choice, but you’ll likely need to sacrifice something. So it’s important to evaluate that sacrifice in light of what you expect on the back end.
Living on Less
The goal of saving is to be able to comfortably cover your living expenses after you FIRE, so one way to do that is by reducing the amount you need to save by planning to live on less.
Although that’s similar to cutting your expenses before retirement, there’s a key difference on this side regarding risks.
If you FIRE, you’ll still face all the classic retirement risks such as longevity risk, sequence risk or unexpected health care costs. I’m not saying you can’t plan for those things and factor them into your needs analysis, but the reality is those risks are potentially amplified if you retire early because your retirement will be longer and, therefore, more uncertain. Make sure you’re comfortable with that risk, especially considering that you’ll give up some earnings in your prime working years and those risks may not materialize until you’re much older.
The Bottom Line on FIRE
Retiring early sounds great, and most people would like to achieve it. But it involves making larger sacrifices up front to achieve independence at a younger age. The earlier you hope to achieve financial independence and retire, the more extreme those sacrifices will need to be. To follow the best path for you, it’s important to evaluate the trade-offs required.
More from U.S. News
The Pros and Cons of Early Retirement
Biggest Myths About Early Retirement
How Early Retirement Will Impact Your Social Security Benefit
Ask a Financial Pro: I’m a CFP. Here’s What I Really Think of FIRE originally appeared on usnews.com
