Leave it up to a bunch of personal finance nerds to start branching out and creating subcategories of a simple concept.
Financial Independence/Retire Early (FIRE). When you spell out the acronym it says it all really.
Then there are subcategories of FIRE, Fat FIRE and Lean FIRE. The definitions are easily searchable in Reddit here: Fat FIRE and Lean FIRE. I’ve read somewhere that Lean FIRE is retiring with annual expenses less than $40K per year. Fat FIRE is retiring with expenses over $100K per year. What about the space between $40K and $100K? Who knows? Who cares? That’s my attitude anyway.
I’m personally not a fan of subdividing a simple concept. If you spend $40,000 a year, have saved up $1,000,000 and therefore decided to retire and never work again starting at age 30, then I’d suggest you read William Bengen’s 1994 article. This is where the idea of the 4 percent rule began. When you’re done read it a couple more times. Pick out all of the caveats to a 4 percent withdrawal rate and see if it still applies. It might and it might not.
If I knew someone that lived out of a trailer and could adapt to any situation, I’d say go for it. Save your 25x annual expenses, retire at 30 and never work again. That’s the type of person that will have a higher probability of success than say your average American living in the typical American household.
Personally, I would die of boredom or depression before I out lived my money in that scenario…but to each their own. I may take a few weeks off to have a “do nothing” vacation, but I’ll be itching to get back to work before too long.
Many folks have done right by taking advantage of the long bull market run, accumulating 25x annual expenses and hitting the eject button at a cubicle office. Or have they?
Recession Tested
Something I have observed for a long time is that most of the online financial independence bloggers have come about after the 2008 to 2009 recession. There are a few out there who have been at it longer, but they seem to be very few.
I have to say, that after 10 years of a bull market I too feel like I could retire now and live indefinitely on my savings, given the current state of the economy. I’d like to think I know better though.
The modern FIRE movement needs a recession. We need something to come along and take back some of those bull market gains, see what works, what didn’t. I will bet anyone out there that there are folks (probably lean FIRE folks) that will be left having to find a source of income, either at or after the next recession.
The next recession will also test Fat FIRE folks as well. Can a Fat FIRE person continue to live the fat lifestyle even in a depressed market?
Of all the advice floating around for the past 10 years, I would like to see what really works and what doesn’t. We don’t need to line up people in the public square and throw rotten tomatoes at them (maybe some we do…) but I’d be the first to admit if my pre-recession idea was a bust following a recession. It’s how we learn and grow.
I personally think a recession will separate the men from the boys, toss out some bad ideas, and strengthen the FIRE community through sharing of lessons learned. More specifically, I think a recession will test the 4 percent rule.
Oh, and hopefully do away with silly terms like lean FIRE and Fat FIRE.
Are People Actually Retired?
Retirement
1a: an act of retiring: the state of being retired
b: withdrawal from one’s position or occupation or from active working life
c: the age at which one normally retires
2: a place of seclusion or privacy
Source: Merriam-Webster online Dictionary
My personal definition of retirement has resided around 1b above.
Again, just my perspective, but most of the bloggers or FIRE folks out there seem to do something to earn income. Not all of them, but most by my observations. I read comments from these butt-hurt people on chat boards, primed and ready to call out someone claiming they FIRE’d when in reality they still work. I personally don’t fell butt-hurt at all, but from a very literal perspective, it’s hard to deny the fact that if you’re working, generating income, it doesn’t necessarily jive with the definition stated above.
Real estate investing, blogging, public speaking, those are just a few things that come to mind. You’re doing these things, earning money, doesn’t that go counter to the definition of retirement?
I don’t really care personally. What I see here are people that ditched jobs they didn’t like, picked up new jobs they did like, and as it turned out they like the new job so much it doesn’t feel like working! Maybe we should call these people boss-less FIRE, or entrepreneurial FIRE. Maybe not.
That is where my mind is, stop doing a job you don’t like and start doing something that is work but so enjoyable that it doesn’t feel like work. However, if your prerogative is to not work at all anymore, then great more power to you.
Apparently I’m Not Alone
Suze Orman opined that someone would likely need around $5,000,000 to retire early, saying that just a simple 25x annual expenses sounds risky, and for someone young may not be enough if you choose not to generate some additional income. She was faced with quite a bit of criticism.
Financial Samurai supported her assertion that a simple 25x annual expenses may not be enough. I tend to agree with both (I’ll just add here that incidentally, they actually have a finance background where most of the FIRE bloggers are homegrown, self-taught finance enthusiasts). Suze, being of an older generation, has also seen several market cycles and probably all manner of people who have retired early, got it wrong, and paid the price by going back to work.
The FIRE community is no different than any other. There is an echo chamber that develops among its disciples, soundbites, stereotypes and pre-thought out ideas are blurted out to anyone that challenges existing belief.
X Factor FIRE
Between myself and 99 percent of the others out there that test the FIRE waters, there’s always that uncertainty of “do I have enough?”, what happens with this or that situation or emergency? It’s a common theme I read about in message boards so I know I’m not alone.
My answer to this is what I call the X factor, but really it’s the “me” factor. As a healthy adult with an education, work experience, life experience and the ability to walk and breathe on my own I have the capability to make money. I spent around the first 20 years of my working career working because I had to. Now that I’m debt free and have over 25x annual expenses saved, I’m in a comfortable position with options. I can continue to work, I can change careers, I can take a sabbatical. I have options.
When I reflected back on the 2008 to 2009 recession, I recall seeing my 401k drop by 38 percent. One of the feelings I had at the time was to work harder. Put in more hours, be more valuable at work. If I were to carry that perspective to the present day, if a recession were to occur, I’d have similar thoughts. My finances will take a hit and I’ll turn inward to myself to work hard and make up for it. I guess it’s my natural tendency but I doubt I’m alone.
The problem I ran into when thinking about early retirement is thinking in absolutes. Trying to get it nailed down and perfect in my mind that I have enough, that I won’t out live my expenses, that I have insurance against major illness, injury or property damage. This was coupled with thinking that I had to escape from something I didn’t like doing to a new world of comfort and ease.
What I realized was that this is a self-limiting belief. I grew up with parents that lived the same templated lifestyle as most people and I fell right into that same lifestyle. Trying to break that mindset is difficult, especially when you’ve been at it for a lifetime.
You don’t need absolute comfort that you have money for a lifetime, that is too self-limiting. You need enough. You need enough to allow your brain to work for you and come up with a way to live on your own terms. Use the savings you’ve generated in conjunction with your ability to generate some income and combined you will have enough for life.
What I realized is that if I can get most of the way there financially, I can pick up the rest. I get the same vibe from other professional bloggers out there as well. They saved hard, lived frugally, invested wisely, then left the workforce, but most did something to generate some income. Sure I have read some that have what I would call a “do nothing” retirement, but for the most part people have interests. Generating income through blogging, managing investments, real estate, freelance work are all very common in this community.
The thought of working indefinitely, doing things I enjoy, relieves me of the pressure that comes with thinking whether or not I have enough.
This way I don’t dwell on figuring out how I’m going to build up a sum of money that gives me the 100 percent confidence it can weather a recession or last my lifetime. Not when I have myself to fall back on. I need a nest egg that gives me the freedom and flexibility to exercise my options.
A Snapshot of X-Factor FIRE
So here are my thoughts on X-Factor FIRE:
- Save minimum 25x annual expenses
- Debt Free
- Account for medical expenses
- Cash
- Insurance
- X-Factor
My idea on financial independence goes beyond just the simple 25x annual expenses. I like the 4 percent rule because it’s helpful to give you a clear target which in turn should help you to more clearly assess your risk. However I do not think it is the one go-by to account for all your retirement needs, at least not for an early retirement.
Minimum 25x Annual Expenses
I have written about my thoughts on the limitations of the 4 percent rule. However I’m not going to throw the baby out with the bath water. It is still useful.
This is a flexible number. I pick 25 times annual expenses because it feels right for me. Knowing that I’ll always be working and generating some sort of income, the 25x annual expenses amount gives me a cushion of comfort to choose what I do and how I make money.
For someone that is laid off or abruptly faced with a life change or specifically loss of income, having 25x annual expenses gives you options. It’s not just 25 years of living expenses, with interest and dividends, or income from real estate, royalties or business, you can go back to school, learn a new skill, do a lot of things to pick up a new career. It gives you time which in turn gives you options.
I could imagine someone with better or more entrepreneurial spirt than myself feeling comfortable with say 10x or 15x annual expenses. My take is that you need that cushion of wealth to give you enough confidence to seek out what you really want. I’d recommend you not let anyone tell you how much is enough, only you can do that.
I’ll state again that I personally do not subscribe to the notion that someone under the age of say 65 can just save up 25x annual expenses and live care free for however long they live. I think there has to be more thought to it than just that.
Debt Free
I’ve written about my stance on debt in other posts…
I don’t care for debt and for a simple guy like me, being debt free is another extra layer of freedom.
Medical Expenses
Medicine in the US is in a pivotal if not chaotic place. Will we have some sort of free, government provided health care? Will we have to continually pay exorbitant rates for health insurance, including insurance we don’t even need? Will prescription meds continually go up?
There’s just too much uncertainty in the medical world for my liking. I choose to set aside a bucket of money just for future medical expenses.
Right now my health savings account (HSA) is my primary (only) go-to account for medical savings. I highly recommend saving money tax free for medical expenses.
Cash
Cash and insurance go hand in hand. There’s short term cash and long term cash. I call short erm cash, the cash you need on a daily, weekly, monthly basis to pay for your needs and wants. The long term cash is just cash that sits in an account to cover an unforeseen expense. You leave this cash somewhere that you can get to it because you know or have been told by others to save for a rainy day because you never know…
I actually created a personal finance risk register in this post to take the unknowns out of long-term cash. Going through the risk register should be a self-soothing exercise. Think about those unknowns and make them knowns, how bad are they? What is the probability they will happen in the near or long term?
Insurance
Maybe I missed something, but a lot of the personal finance blogs out there don’t really go far into insurance. If anything there are some posts about medical insurance, but life insurance or umbrella policies? I don’t see many of those. Guys like Dave Ramsey rank insurance pretty high on the financial plan, and I tend to agree.
When you look at what commonly causes bankruptcy in the US, medical expenses are typically ranked number one. Others would include catastrophic loss of property, divorce, and law suits. Chances are you’re not going to insure against all of the things out there that will decimate your wealth, but at least pick off the big ones. I currently pay for auto, home, life and umbrella insurance. I see insurances as wealth protection. It also influences my decision on how much cash to keep.
In addition to medical and life, Dave Ramsey recommends an umbrella policy after reaching $500,000 in net worth. I personally like the idea given I live in a big city where anything can happen and all of a sudden my wealth is at risk due to a lawsuit.
Now Go Do Something!
There you have it, the major components of X-Factor FIRE to be examined and picked apart by the internet.
Save money, invest, eliminate debt, account for medical and insurance needs, build up some cash, and go forth and contribute to the world!
Thanks!