Questions to Ask About the FIRE Movement

The FIRE (Financial Independence, Retire Early) movement is picking up steam as major media outlets interview those who have integrated it into their lives. The movement’s rise isn’t a surprise — who wouldn’t want to retire early and be free from the shackles of a 9-to-5 job?

FIRE followers save a lot of money — we’re talking at least 50% of their take-home pay. The goal is to amass a lot of wealth, so they can stop working as soon as possible. At its core, the movement is about using money as a tool to live your best life, whether that means taking up a hobby, traveling around the world or spending more time with family.

You may have read success stories and tips from forums and websites about topics such as being content with less, separating needs from wants and using advanced investment strategies to maximize your pre- and post-tax dollars. While these topics are great, there appears to be less conversation around considerations for after you achieve the FIRE goal — topics such as unexpected life events like long-term health care and divorce.

Will I Miss Out on Social Security?

Just because you decide to retire early doesn’t mean you’ll miss out on Social Security benefits entirely.

Most FIRE people plan to work after their retirement. It’s just that many choose to leave their corporate jobs in pursuit of other work they’re more passionate about, without worrying about whether the income will sustain their expenditures.  

In other words, if you choose to work after early retirement, you may still be contributing to Social Security and receiving payments when you reach your traditional retirement age.

If you plan not to work (or plan to make significantly less income), you’re not going to receive as many Social Security benefits as someone who worked longer. However, you’ll need to work a certain number of years to qualify for Social Security benefits. Many FIRE people don’t factor in Social Security benefits, so they don’t need to rely on them as part of their income.

What About Long-Term Care Costs?

It’s true that health care costs are skyrocketing, and insurance premiums for long-term care costs aren’t getting lower. While there’s not a whole lot you can do in terms of predicting how your health will turn out — the best you can do is lead a healthy lifestyle — you can create a robust estate plan (including power of attorney).

Shopping around for health care options also comes in handy. Many people opt to purchase long-term care plans or enlist the help of trusted family members to help them manage their finances. There is no right or wrong answer.

What About Divorce?

Considering the statistic that more than 30% of marriages end in divorce, couples need to factor divorce into their plans. It’s not romantic, but it’s crucial if both partners want to set themselves up for financial success.  

If you’re not married yet, consider a prenuptial agreement to divide assets. If you’re already married, consider having a separate account for each of you in case things do go south. That way, you’ll each have money to weather the storms.

What About Withdrawal and Sequence Risks?

Sequence risks look at when your investment returns. In other words, when you make withdrawals from your retirement accounts, there is a possible risk that what you’ll earn afterwards will not sustain you during your retirement years. You also need to factor in rates of return, meaning how much you’ll earn from the principal amount.

As for what to do about withdrawal and sequence risks, the short answer is that stock market valuations are not good timing tools. That’s because markets aren’t that easy to predict — if they were, we’d all be multimillionaires.

The truth is, past behavior cannot predict what will happen in the future. But you can look at valuations to help better frame your expectations for market returns. Timing the market is risky; many people may choose not to live the FIRE lifestyle because they’ll be driven by indecision or put off retirement out of fear of a crash or recession coming soon. 

Many early retirees use the 4% or 3% withdrawal rate to ensure that there is enough money in their investments. Under this rule, you don’t take out more than a certain percentage of your portfolio each year. The idea is that you won’t touch the principal so that amount will keep growing during your retirement years.

Do I Need to Care About Inflation?

Inflation — when prices rise to keep up with the economy — can be a real risk for early retirees. If you have $1 million in 2018, that amount won’t carry as much weight as it would in 10 years. 

Knowing that inflation can eat into your retirement savings, FIRE devotees are focused on how their investment returns will hedge against it. Assuming inflation is at 2% a year, you’ll want to make sure your investment generates returns of more than 2% each year.

What If I Run Out of Money?

This is a common fear.

At the end of the day, all you can do is plan and make sure the numbers work in your favor. Also, it’s a good idea to keep up with marketable skills so you can return to work one day if you have to.  

Many early retirees take on a second career or find a hobby that pays. This could protect you against needing to dig into all your retirement savings to pay for expenses.

What questions do you have about FIRE? Let us know in the comments below.

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