There was an interesting article in the NY Times this weekend titled “How to Retire in Your 30s With $1 Million in the Bank”. The Times tells the story of a growing movement called FIRE – Financial Independence Retire Early. The basic gist of the movement is this:
- Don’t let money control your life.
- Value happiness over materialism.
- Don’t get caught up in the rat race.
I think these are all wonderful ideas and worth striving for. But I also think reality is much more complex than that and I find stories like this misleading people about what is reasonably attainable. In this post I will explain some of the pros and cons of the FIRE movement and how I think we can view some of the FIRE movement’s goals in a reasonable context.
CONS. I want to end this on a good note so let’s get the cons out of the way upfront.
The main issue with the FIRE movement is that it’s a massive fallacy of composition via the paradox of thrift. Keynes explained long ago that a monetary economy cannot expand and grow if people are saving more than they are investing (not financial market investing, which is actually reallocation of savings, I mean spending for future production). For instance, if I have an income of $100 in period 1 and save $0 then someone else has an income of $100 in period 2 (the $100 I decided not to save). If they decide to save that entire $100 then I have no income in period 2. We cannot all save our income and sustain a growing economy – basic paradox of thrift.
This is why, when you read an article like the one in the Times, you’ll find that the FIRE movement is aimed specifically at a small group of people (usually rich techies) who are able to attain something that the majority of us mathematically cannot achieve. These excess savers are relying on the rest of society to generate offsetting excess investment in the future. So the goal is to spend a small part of your life contributing investment to the macroeconomy and then spend the majority of your life benefitting from what you hope will be excess investment to fund your excess savings. While this will be very nice for a small part of the population it would be a colossal nightmare for everyone involved if it were widely adopted.
This becomes evident when you read about the people who are achieving this form of financial independence. For instance, the article describes a few people who were able to achieve this by doing the following:
- Earn a very high income.
- Save 70% of that income.
- Allocate the difference in the financial markets.
On average, these people are earning an income that is 3-4X the median household income. They save 10X what the average household saves. They invested aggressively in low cost index funds during a strong bull market. This is great. But it’s worth emphasizing that this is extremely difficult to achieve and impossible for most people.
Additionally, financial reality is a messy path because life is often a messy path. For instance, there are a significant number of variables that must be accounted for when we consider the success stories of a few people implementing the FIRE approach:
- Graduating with student debt.
- The rising cost of childcare.
- High cost of living in high income areas.
- The inconveniences of living in low income areas.
- The risk of a long bear market in stocks.
- Long-term health and emergency risks.
- The sustainability of withdrawal rates over a 40-50 year period.
- The importance of work as a means of purpose.
- Nice stuff is, well, kinda nice to have at times.
Alright, I am being too negative and that’s really not my goal here so let’s move this along….
PROS – Yes, there is a lot more good in this movement than bad!
There is a tremendous amount of good that comes from the ideals of the FIRE movement. Among them:
- Money does not equal happiness.
- Materialism does not equal happiness.
- Working more to get more money will make you less happy.
- Saving is good!
- Investing in the markets in low cost index funds is good!
I think these are tremendously good concepts. But I also think we can view these concepts as good without taking them to an unreasonable or unattainable extreme. So I would revise many of these ideas:
- Find out what is “enough” for you. This is probably the most important financial question you can answer. Your “enough” might be considered “too much” by other people. We’re all different and that’s fine.
- Don’t do what you love and don’t work to retire, work to find purpose. Retirement and doing what you love is overrated. We work in a modern monetary world because the success of our society is tied to the contribution we all make to that society. We want other people to work and generate an income because we want people to contribute to the greater good. People who make a significant amount of money have generally contributed goods and services that made other people better off. A life of good work is a good life. Good work doesn’t always mean you will love it. In fact, good work is generally work that other people love you for doing.
- Real financial independence is balance. None of us can ever be completely free of the constraints of money. But we can balance how we make money with how we spend and utilize our money in trying to attain happiness. This is going to vary from person to person because happiness is different for all of us, but balance is the key to financial success.
- Saving is not the key to financial success. Most people believe that saving money is the key to financial success, but as I noted above this is a fallacy of composition. The key to financial success is investment, spending for future production. Things like education, job training, business investment, etc are things that have a huge financial multiplier that lead to higher future incomes. And it’s much easier to control and grow your pool of savings if you have a higher flow of income.
- Follow these basic financial rules. Again, there’s no need for extremes. You can live a life doing purposeful work and finding balance without having to go in an extreme.
I love what many of the FIRE people are doing. But I also want people to keep things in a reasonable perspective. It’s perfectly fine to aim high and potentially miss your target. But I think most of us are better off setting more balanced and attainable goals and rewarding ourselves along the way as we benefit from those small sustainable successes.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.