The FIRE Movement: Pros & Cons

Thanks to the explosion of documentaries, amateur blogs and burgeoning media interest, FIRE (Financial Independence, Retire Early) is fast becoming a household concept.

Add a global pandemic to the mix, and the additional million Australians jolted out of traditional incomes are, unsurprisingly, looking for a change in the way they interact with money.

What is the FIRE movement?

Financial Independence Retire Early (FIRE) is about saving and investing while you’re young so you can retire younger, say in your 30s or 40s.

For many, FIRE is the answer; a plan to live frugally and invest surplus into low-risk but strong yield investments in order to live off of the passive income many years before super would otherwise kick in (and giving them a vast emergency safety net for future economic catastrophes). Think of it as the emblem for a new wave of intentional living, safe investing and “work optional” philosophies that are getting people of all ages engaged with their future finances.

How does the FIRE movement work?

The basics of the FIRE movement mean you have to:

• Change your lifestyle to live frugally
• Pay off your debts
• Calculate how much money you can live on each year and stick to it
• Set up a detailed budget
• Cut back on non-essential spending and save as much as you can
• Increase your income
• Invest for your retirement

But, as with anything, taking off the rose-tinted glasses can reveal some complications. Even as a firm FIRE follower myself, I’m not oblivious to the risks. So let’s fight FIRE with FIRE – what are the pros and cons of the FIRE movement?

Pro: We don’t simply live to work. FIRE means we don’t have to

It’s Investing 101. Putting in the work upfront means that compounding (interest on your interest) carries most of the load later on. It’s your money working for you, so that you don’t have to.

FIRE symbolises living on your terms. It takes the focus away from mindless consumption, working until we die, and buying to distract ourselves from the daily grind – which in turn feeds into a cycle of unhappiness and living hand-to-mouth. It’s a reawakening that can be achievable but does take a huge rearrangement of priorities. Many people think living frugally means foregoing fun, connection and leisure. On the contrary, it’s about being smart, intentional and respectful with your money.

FIRE represents a greater goal, which funnily enough, isn’t about the money at all. It’s about living. Money is simply the means.

Pro: Safe investing historically wins out

The Trinity Study (a piece of dated financial research into how much you could safely withdraw from your portfolio over a 30-year period) is interesting reading. It posits some ideas on how we can draw down our money without ever running out of it. It’s not very current, but it does put forward some good ideas about historical market movements that are still very relevant.

The truth is that even despite major economic and financial downturns, many solid investments have, and will continue to, withstand them. COVID-19, and the many more cycles of growth and loss to come, will be no different. Markets have always been volatile in the short term, but they always win out over a long enough period.

In fact, dips are fantastic times to buy on sale, and during them, you’ll see many FIRE followers on the virtual trading floor like a frenzied crowd on Black Friday. FIRE isn’t about shooting the lights out with the next big investment opportunity or dabbling in high-risk ventures. It’s about learning how to manage your money in a relatively safe financial environment and letting history repeat itself (right into your bank account).

→Related article: What is the Financial Independence and Retire Early (FIRE) Movement?

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Con: Mainstream FIRE can feel limiting

Traditionally, those who have blogged about achieving financial independence have followed a very linear path to it: invest in index funds, follow the 4% rule (Safe Withdrawal Rate), diversify amongst property, stocks, traditional retirement accounts or other safe assets like term deposits and retire by 40. But what if you don’t subscribe to those traditional avenues?

The proliferation of different types of FIRE can be a welcome change. After all, as a relatively new (and man-made) construct, it’s whatever you want it to be.

Retire by 60? It’s still ten years better than 70. Don’t want to diversify because property investing is your thing and shares scare you? No problem. If your money-making aspirations lie in investing in startups, pull out the turtleneck, and fill your boots. The goal is simply reaching financial independence in a way that feels much more accessible than the traditional gated pathways to wealth.

Con: Stopping work suddenly can be a psychological danger zone

Stopping work suddenly, but particularly early, poses a barrage of mental health risks. Imagine working full-time, with no wind-down, and then stopping altogether at 35 or 40? It’s a frightening notion for many. How will I fill my time? What do I do with my days, and my very able mind and body? How do I handle the comments from my family or friends about being lazy and not contributing to society?

Personally, I think that part of the trouble with this is in the way traditional ‘work’ is defined. In fact, working can mean any number of things. Who is to say your economic and social contribution is fulfilled only by traditional notions of employment – by sitting at a desk for 8 hours a day? Who is to say that volunteering (bettering the lives of other people, which has a direct impact on economic, health, and societal outcomes) is more powerful than lining the pockets of corporations, especially if they don’t pay tax?

Shift the focus to how you want to spend your time, and start making it happen. And better yet, think about moving to a FIRE work schedule that might look like working part-time, only six months out of the year, or a week a month before stopping completely.

Con: Failing to plan is planning to fail

FIRE requires real planning, working on multiple hypotheses, and nutting out your numbers comprehensively. What happens if your investments (or even one of the streams) reach an all-time or unprecedented low? If you get hammered with an unexpected, mammoth bill? If you experience a death or a major change in tax circumstances?

FIRE is great in theory but the practice ten years down the line, when your employability may have been impacted by time out of the workforce, may render you in a difficult spot. Those who don’t plan (and get appropriate financial advice along the way) may risk getting swept up in a fantasy that is not sustainable long-term.

However you look at the concept of financial independence (or whether you choose to retire early, semi-retire or retire at the conventional age), there’s no harm in adopting some of the FIRE principles in your money management strategy. Even shaving a couple of years off of the final working day is worth the effort.

How much money do you need to earn in the FIRE movement?

How much you’ll need to earn in the lead up to retiring is dependent on what you need for living expenses and when you want to retire. But according to Mr. Money Mustache, a FIRE movement icon and a retiree since the age of 30, it doesn’t matter if you are a teacher, doctor or shop assistant you can still retire early if you save and invest 35% of your income.

How much do you need to retire according to the FIRE movement?

If the FIRE movement sounds like it might be for you, the next question is how much do you need to retire early? According to the FIRE movement, before you retire you should aim to have 25 times your annual expenses in your investment portfolio and after you retire withdraw no more than 4% per year. So, if you and your partner need on average $50,000 per year, your goal should be $1,250 000, and $50,000 to spend each year after retirement. Sounds like a tall order, but apparently can be done if you follow the FIRE movements principles of living frugally and investing wisely.

Cover image: GaudiLab / Shutterstock.com

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