One of the biggest trends in the personal finance world in recent years has been the FIRE (Financial Independence, Retire Early) movement. At its best, it’s a passionate group of individuals seeking independence from traditional employment and a healthy work/life balance. At its worst, it’s a group of bloggers with unrealistic financial projections that are a bit too caught up with finding that perfect Instagram shot while traveling.

The movement seems to be more popular in the world of bloggers compared to the offline world of coworkers and neighbors. Personal finance and FIRE bloggers often tout the income their blog is generating, and how that has led them to financial independence. Some of these folks have quit the corporate gigs and now focus fully on blogging and deriving income from their online activities.

Let’s be clear: this is great! Entrepreneurial activities and finding independence outside of more traditional work arrangements can be a great thing. I’ve been in this camp for years, so I can certainly appreciate it.

However, I believe there’s a bit of a leap from generating enough side income to quit a job to the idea of early retirement, and I believe the messaging around it is faulty. So, I find it important to consider alternative views of the FIRE movement. Even if you’re pursuing early retirement, hopefully you still find this discussion fruitful.

Let’s dive into some specifics…

We’ve had a historic bull market in stocks.

It’s no surprise that the FIRE movement has taken hold in the latter stages of a historic bull market run in stocks. The decade long run in stocks has had a myriad of effects.

First, people feel wealthy. The values of their assets have gone up dramatically. With a larger set of assets in the bank or a brokerage account, it’s more tempting to pull the trigger on early retirement.

Second, we’ve had very low volatility. The bull market (the S&P 500) has nearly gone straight up since 2009, and naturally, this has made investors complacent.

Low volatility and consistent year-after-year returns makes everyone feel like an above-average investor, and it can be tempting to think that the party will go on forever.

Bull markets are great for everyone, but the prudent investor has a bit of skepticism and plans for worse days. If you’re considering early retirement, and the amount of assets you have exposed to the stock market is to be a major source of security and/or income, you should be asking yourself a number of questions such as: What if a quick, market correction of 20% or 30% occurs? How exposed am I to market fluctuations? If I had to, could I go a few years without touching the money in my stock market accounts?

A 401(k) shouldn’t factor into early retirement

One of the strangest parts of the FIRE movement is when 401(k) balances are cited. Here’s an example from an article on MarketWatch:

Earlier in her 20s, she set a goal to “retire” from full-time work at age 35, but she later decided to move that date up to 27.
She wasn’t going to “retire” completely, but work flexibly after quitting her job. At that time, she planned to move to Minneapolis to be with her boyfriend. She saved more than $130,000 in a 401(k), about $25,000 in a Roth IRA and kept $20,000 in cash. She also had about $5,000 in a taxable investment account and $10,000 in a health savings account.

If you withdraw money from a 401(k) account before the age of 59 ½, you are not only taxed, but you get hit with a 10% withdrawal penalty. Withdrawing money early on a 401(k) and incurring the 10% penalty is viewed by just about everyone as a really bad idea.

As such, the above example becomes ridiculous quickly. The individual’s $130k in the 401(k) is now irrelevant for the early retirement scenario. Sure, that balance will grow on its own between the ages of 27 and 59 ½, but this person has 30 years until then to figure out how to get income.

So, the person basically has $20k in cash, $5k in an investment account and $10k in an HSA. You can early withdraw contributions from a Roth, so to be generous, let’s just say this person has $60,000 in savings across these accounts for her FIRE scenario. A 4% withdrawal rate on $60,000 is $2,400 per year.

It’s not really a surprise that you read the following later on in the article:

Now, she’s living with her parents until she finds a new, full-time job, back in the IT world where she started.

Withdrawal rates

Since we touched on the topic of withdrawing investment or retirement money, let’s discuss withdrawal rates briefly.

If you’re an investor, there are very few things you can control. They are things such as asset allocation or diversification, contribution levels and withdrawal rates. Everything else is pretty much up to Mr. Market.

In very serious market corrections that occur every so often (e.g. the 2008 crash), even asset allocation or diversification doesn’t hold up very well. In 2008, essentially everything got hit (there was nowhere to hide). While asset allocation is an important consideration, it needs to be held in its proper place.

As such, for a retired individual or someone considering retirement, withdrawal rate becomes the most important factor for your portfolio. Most often you’ll see the 4% number cited as the safe withdrawal rate for a portfolio. It’s reasonable, but even the 4% level can bring about risk. In a prolonged period of time, if your portfolio goes through a major correction due to a larger market event (such as 2008), the 4% withdrawal rate will severely hamper your portfolio survivability.

It’s important to always recall the mathematics of loss. Bear markets hurt your portfolio more than bull markets help your portfolio. If your portfolio goes down 30%, you then need a 40%+ gain to get back to even. If you’re withdrawing 4% through a down period in your portfolio, some losses become permanent.

How’s this apply to the FIRE discussion? Risk is a crucial element of any long-term financial planning, especially in a retirement scenario where regular income is either taken off the board or reduced. The amount of money you withdraw from a retirement portfolio is a major element of risk to consider.

If you want to retire early, be conservative in your estimations of withdrawing money from investments and think through in advance possible scenarios where you may need to cut back on the withdrawal rate in order to maintain the long-term viability of your portfolio.

Re-examining the idea of work

It seems like much of the FIRE mentality is about escaping a mundane work environment. That might mean getting away from a 9-5 job or getting away from being an employee where you’re at the mercy of an employer.

Whatever the reason behind the motivation for early retirement, a broader discussion of work seems important.

Here are a few principles I tend to embrace regarding work:

1. Working simply for the ability to make a living and provide for yourself and your family is not only okay, it’s an admirable thing. One thing that can get lost in the pursuit of more fulfilling work is the idea that work in and of itself is still a worthwhile thing. The person who works a mundane job day in and day out while providing for his or her family is worthy of our respect just as much as a jet-setting entrepreneur managing his or her business from exotic locales.
2. If you seek more enjoyable or fulfilling work, awesome! But realize that nothing is easy. There’s a misconception often in the FIRE community that it’s super easy to get a few passive income streams up and running, and then, you’re off! The real world doesn’t really operate this way. Other than things like simple index funds, there are very few passive income streams. For example, a friend of mine that derives his income from real estate rentals (often cited as passive income) works harder than anyone I know. You should always expect that generating income is going to require hard work.
3. Beware the promise of online income streams. I’ve made a full-time living off of online audiences now for the last seven years, so I can say with first-hand experience that it’s not for everybody, and it’s likely much harder than you think. If online income is your goal, then go for it, but plan to work very hard for little to no money for years. Even if you get over the initial multi-year hurdle, for most people, it’ll likely never be any substantial money. Could it result in a hobby you enjoy and make a little extra cash? Yes! But for many, if they examine the hourly wage they’re earning for the time put in, they’d have been much better off working a second job elsewhere.
4. I wish I had more patience when I was in my 20s. Since much of the FIRE conversation occurs around young people, I’d encourage anyone in their 20s (or maybe 30s) that is reading this to be patient. I was a very impatient 20-something always seeking the next thing, the next business, the next way to make a buck. While things worked out fine for me, I wish someone had sat me down and encouraged patience. You have a long career ahead of you. You will be able to do many, many awesome and fulfilling things. It’s okay to be patient, earn a paycheck and learn from your company, your co-workers, your bosses. Work your way up in your company for a few years and take on additional responsibility. The experience is extremely valuable and will aid you down the road when you want to be more independent.

Family considerations

I’ve observed that discussions of family are often missing in the FIRE equation. “Retiring” early on a relatively small asset base gets pretty difficult when you start factoring in children. Or, what about aging parents?

I can tell you from first-hand experience that kids are expensive! Even when you’re trying to “do things different” from maybe the wider culture, there are still a large number of expenses that can be difficult to avoid.

While many FIRE participants maybe don’t have kids, or plan to never have kids, I’d also remind folks that things change in life! Priorities change, circumstances change, and you might find yourself with kids ten years after you assumed that you’d never have kids.

Regardless of your situation, I encourage you to consider (at least to a small degree) the chance that your perspectives on family may change down the road. And if they do, having the flexibility to adjust financially will be paramount.

A better path for those looking for an alternative work/life situation

I’ve spent roughly 1500 words poking holes in the FIRE movement.

I don’t want to just throw cold water on a movement which has legitimate intentions and goals, so perhaps I can offer some suggestions for a better path forward for people looking to change their work/life circumstances? Here are 5 tips for those intrigued by the FIRE movement but want to consider alternative paths:

1. Plan to work harder than anyone else. The first tip is a basic one, but it’s often overlooked. Spend a few years working harder than anyone else setting up a business or additional income streams. Don’t quit your job, but spend your free time working. There are no guarantees, but you CAN build something valuable in your spare time without destroying your current financial picture.
2. Don’t dismiss your experience and skills. Use them! The best way to grow additional income streams is to leverage your existing skill set and network. An easy transition from traditional employment can often be consulting in the same space. This sort of transition has the following elements working in your favor: You have skills in this space, you have a network in this space, and you have a track record you can point to which should help you land clients (often the hardest part of being on your own).
3. Expand your skills so you can wear multiple hats. When you go out on your own, you’re going to be doing everything yourself. You’re going to selling and trying to land clients, providing the service or building the product, creating invoices, managing the books, and handling things like insurance and taxes. While you’re getting a paycheck, why not try to expand your skills so that such a transition will be smoother? Ask your employer if you can help out in other areas. This not only makes you a more valuable employee (and maybe help land a raise), but it’ll give you valuable experience in a number of areas that will help you later.
4. Always be more conservative in your projections. Almost every entrepreneur who “takes the leap” is too optimistic with regards to projections. Initial sales and revenues are almost always lower than you think. Whatever you’re projecting to make in your first year, cut it in half and then consider how that will impact things. Additionally, make sure you have a cash cushion for personal emergencies. There’s nothing more stressful than deciding whether to pay for fixing your car or funding your business. While you’re struggling to generate revenue, life is still happening. Things break, people get sick, etc.
5. Don’t forsake saving for “real” retirement. Probably the biggest problem with early retirement is that it means you’re no longer saving for “real” retirement. If you’re under 40, the reality is that you might have 50 years of life left to pay for. Having enough money for all circumstances that life can throw at you over such a length of time is not a simple matter. If you transition out of traditional employment to a more entrepreneurial setup, make sure you’re still socking away money for later in life.

To conclude, if you’re someone drawn to the FIRE movement, congratulations! It means you want more for yourself. I encourage you to consider your future situation from a number of angles and remind yourself that what you’re doing now still has tremendous value. There’s no rush to escape it. Seek to find fulfillment in your current situation while you prudently pursue the next phase of life. Good luck.