The Trouble with FIRE
Financial independence is a means to an end, not an end in itself
This article is a longer version of a Twitter thread that ended up getting a lot of attention. The good thing about Twitter threads is that they are simple to create. The thread took only ten minutes to write. The problem is that it isn’t possible to fully explain a topic on Twitter without the risk of misunderstandings. This is especially true for complicated topics like financial independence and early retirement.
Click on the tweet below to read the entire thread as a formatted PDF file:
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“Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris — I wanted the independence. I desperately wanted it.”
— Charlie Munger
Trial by Fire
One of the things that I disliked about my job was public speaking.
Unfortunately, delivering a speech at a conference was simply an unavoidable part of my job during the weekend of September 13-14, 2008. As I went over my presentation for the hundredth time during that weekend in Chicago, I was oblivious of the events taking place on Wall Street leading up the Lehman Brothers bankruptcy. I was too focused on doing well, or at least not looking foolish, during my speech on Sunday.
A couple of weeks earlier, I had made the decision to end my career in software and pursue investing on a full-time basis, something I had wanted to do for over a decade.
The combination of making a decent income over thirteen years in the software industry coupled with a very high savings rate and some good investments allowed me to reach my “magic number”, the point at which I felt comfortable going without a paycheck permanently. I had never ratcheted my lifestyle at a pace commensurate with my income growth and my ongoing income needs were modest.
I had a key role in a small company, so I provided six months of notice which put my “retirement” date around the end of the first quarter of 2009.
Little did I know that my net worth would be cut in half, at least on paper, between the day I made the decision to quit and when the decision would ultimately take effect in March 2009. To put it mildly, this was an uncomfortable experience.
I was starting my FIRE experience with what seemed like a trial by fire.
Time is the Currency of Life
The FIRE movement, which stands for “Financially Independent, Retire Early”, has gained a great deal of popularity over the past decade. When people in the FIRE movement refer to “early”, they are not talking about retiring at the age of 55 or 60. Many FIRE devotees aim to retire much earlier — typically in their 30s or 40s.
Financial independence always appealed to me because, like Charlie Munger, I desperately wanted the independence that it would bring. The freedom to know that your basic economic needs are already taken care of means that you have the ability to fully control your most valuable asset: Time.
Not having financial independence means that you must sell your time for money.
You might enjoy your job, or you might hate it. But regardless of how you feel about your job, the requirement to work in order to pay for food and shelter means that you do not fully control your time, and if you cannot fully control your time, then you are not in full control of your life.
The “Financially Independent” part of FIRE has great appeal and I think it is certainly possible for those who are willing to put in the effort and have the right mindset. In as little as fifteen years, I believe it should be possible for many people to reach financial independence. I reached that point at the age of thirty-five after a thirteen year career.
The goal of being financially independent at a relatively young age is one that nearly everyone should have. There really is no controversy in my mind regarding the “FI” part of the FIRE movement. Independence provides optionality, and having optionality is almost always a good thing.
Today, there are countless blogs, websites, discussion forums, and other online communities that are devoted to the FIRE movement. I am not sure if the FIRE movement existed in any form back in 2008, but if it did I was not aware of it. In fact, I never thought of what I was doing as pursuing “early retirement” at all.
My education had been in finance, but I switched to software after college because I was able to earn far more on contract jobs in the Silicon Valley than I could ever hope to earn in an entry level finance job. I didn’t hate writing code, but I didn’t love it either. I did enjoy the intellectual aspect of writing algorithms to solve problems. But mostly, work was just a means to an end, a way of earning (and saving) money.
After a few years, I began managing a team of engineers and started writing less code. The pay was higher, but the work was not as intellectually interesting. I fulfilled my need for intellectual activity by saving as much money as I could and working on investments in the evenings and on weekends. I typically worked at least sixty hours per week at my job and another twenty hours per week on my investments.
By the middle of the ‘00s, financial independence was clearly in sight. I had a clear idea of what was next.
It wasn’t “retirement”.
Yes, I was planning to take the time to go on several trips that I had deferred numerous time due to my work schedule. But my goal was to study investments on a full-time basis and compound the value of my portfolio.
When I look at many of the FIRE blogs, websites, discussion forums, and other communities, I often see that people fail to fully consider how they will spend their time after reaching financial independence. Everyone typically agrees on the rough contours of how to reach financial independence, but relatively little attention is spent on the question that is far more important:
If you have been working non-stop for years or decades, especially if you dislike your job, it is easy to dismiss this question. You dislike your occupation intensely and wish to escape from it. There’s nothing wrong with that motivation. No one wants to spend their days doing work they dislike and feeling trapped.
But it is important to understand that removing a source of misery does not automatically lead to happiness.
Victor Frankl spent nearly three years during World War II in a concentration camp. His memoir, Man’s Search for Meaning, is an important record of his awful experiences, but also a profound philosophical work.
In a postscript to his book, written in 1984, Frankl stated that the ultimate goal for many people — happiness — is not one that can be directly pursued. Instead, it must ensue. If a person has a reason to become happy, he or she will achieve happiness. And the reason to become happy is invariably the achievement of one’s purpose in life.
I think that Frankl’s observation is obviously true, and it is really true at any age. Whether you leave the workforce at the age of thirty-five or sixty-five, you need to be able to answer the question: What’s next?
Having the financial resources needed to remove a source of misery or discomfort from your life can lead to the conditions required for you to pursue happiness, but it cannot deliver happiness itself. I realize that this is a counterintuitive idea, but I assure you that it is true for almost everyone.
Every general statement risks falling into stereotypes. There certainly are people in the FIRE community who have plans for what they are going to do with their lives. Many people plan to focus more on their family, pursue other types of work that are potentially lower paid but more fulfilling, volunteer for unpaid work, or go into business for themselves. But a very large number seem to think that endless travel and recreation will make them happy. I am not saying that this won’t work for some people, but I think that it is more rare than generally believed.
When I say that optionality is almost always a good thing, what I mean is that you have to have an answer for the question of “what’s next?” or that optionality can become a path to aimlessness rather than happiness. And an aimless life can eventually lead to misery just as easily as a life full of work that you dislike.
Are You Really Financially Independent?
It might seem odd that I put this section after “What’s Next”, but I did it because there is no point in really delving into the question of whether you can quit your job and retire until you determine for yourself whether you should do so.
But let’s say that you do have a solid plan for what you will do with your time and are really to pull the trigger on FIRE. Are you really ready to do so?
How confident are you that you are truly financially independent? If you are very young, say in your 30s or 40s, are you confident that you truly have enough money to last for five, six, or even seven decades?
One of the major issues I have with the FIRE community is the almost religious belief in what is called “the four percent rule”. The rule is very simple which is part of its appeal. The idea is that you can safely consume four percent of your portfolio every year, adjusting this annual consumption for inflation, and be very confident that you will not run out of money.1
For example, let’s say that you estimate that you will need $70,000 per year, which is about the median household income, to fund your retirement goals. The four percent rule says that you would need a starting portfolio of $70,000/0.04 = $1,750,000. You would consume $70,000 during the first year and adjust each subsequent annual withdrawal for inflation.
While this rule is simple, there are several problems with it especially for people who are retiring at a very young age, which I list here in order of importance:
The four percent rule posits that one can follow this strategy for up to thirty years with a very low probability of running out of money. If you are retiring very early, your time horizon is longer than thirty years, and probably much longer. At thirty-five, I estimated that I was likely to live another five or six decades, twice as long as the four percent rule was tested for. 2
The four percent rule, like all other studies, is necessarily backward looking. The rule was originally developed in 1994 at a time of much higher interest rates on bonds and lower equity valuations. There is no assurance that this rule will work in the future even for people retiring at normal retirement age who might actually only have a three decade horizon to plan for.
Sequence of return risk could quickly decimate a portfolio if an early retiree is unlucky enough to leave the workforce right before a major bear market. If you retire with the idea of taking four percent withdrawals but your portfolio declines significantly early in retirement, you will either end up taking withdrawals much higher than four percent, be forced to cut spending, or re-enter the workforce.
Many argue that the four percent rule is conservative enough and using a lower withdrawal rate brings about the “risk” of dying with a large estate. However, there are many reasons to err on the side of caution when retiring at a very young age because any of the following events could occur over the next five or six decades:
Your family situation might change. You could get married, get divorced, or have children. If you’re retiring at an early age, it is perhaps more likely than not that one of these major family events will occur and result in major changes to required annual income.
Your health could deteriorate. Leaving the workforce means buying private health insurance, most likely on the ACA exchanges in the United States. My premium for health insurance today is four times as expensive as it was in 2009. However, the real risk is encountering a dreaded disease and seeking specialized treatment outside your health network.
Your friends and family might encounter financial difficulties. It is only human to want to help family and close friends. Are you going to be able to say no to requests for help that might arise when you have what would seem like a high net worth, even though that high net worth is only producing a modest “safe” annual withdrawal?
Your interests might change. You might be happy going hiking or playing cards for recreation today, but what if you want to take up golf or skydiving in the future? Many people assume that spending in retirement will decrease due to lack of commuting costs and not having to purchase work clothes. But for early retirees, these factors can easily be overwhelmed by new expenses. New expenses can easily come up, especially if you are directionless and bored in retirement because you have no discernible goals in life. Spending money to alleviate boredom is similar to taking drugs to alleviate boredom. It can seem to work for a while and become addictive.
The fact that financial markets have performed well over the period during which FIRE became very popular might make concerns over the four percent rule seem silly. But not every decade provides equity returns like the 2010s. The 2000s were far less generous, and the 2020s might be as well.3
I am not going to suggest a rigid alternative to the four percent rule, but I will say that in a world of low returns on bonds and high equity valuations, it would be prudent to consider a withdrawal rate of three percent or less. If the worst thing that happens is you have a larger portfolio in a couple of decades, is that really such a bad thing?
Conservatism has a cost. The difference between using a four percent and three percent rule is significant. If you need $70,000 of income per year, the four percent rule says you need a portfolio of $1.75 million to retire while the three percent rule calls for a portfolio worth over $2.3 million.
I have now been “retired” for thirteen years which is the same length as my working career. Do I have fundamental regrets about making that key decision?
The answer is no.
I do not wish that I was still working a management job in the software industry. I do not miss the work. I never have to make speeches. I do not miss the constraints on my schedule. I highly value the freedom I have to set my own schedule. I have full control of my time and I would not wish to go back to the way things were before.
However, the path has not been smooth.
As I mentioned before, my net worth on paper was cut in half between the time I decided to pull the trigger on FIRE in September 2008 and when I actually “retired” in March 2009.
March 2009 turned out to be the bottom of the bear market, but I did not know that!
No one did.
However, a few things saved me from excessive mental turmoil.
I had confidence in the value of my investments and the eventual recovery of market prices. There was no need to panic.
My planned withdrawal rate was lower than four percent. Even with the large drop in my net worth, I felt that I was on firm ground.
During the six months of constant market declines between September 2008 and March 2009, I was still working. I saved cash like a madman and built up an even larger cash reserve. I also received a cash payout for unused vacation time. I had no need to sell investments in the near term to fund my expenses.
I knew that I could return to the software industry for at least the first few years of my “retirement”. I made a conscious effort to keep up to date with relevant technology until I was certain I would not need to return. Fortunately, I never had to.
Although I have no regrets in terms of the fundamental decision to “retire”, I found that I did miss certain aspects of having a job.
I missed my daily commute. This might sound crazy, but many people need to have a beginning, middle, and end to each day. Coffee shops replaced the office on many days to simulate a commute.
I missed daily interaction with coworkers. I did not enjoy my work, but I did enjoy interacting with coworkers. I had built a team of intelligent and high performing coworkers who were (mostly) pleasant to interact with.
I missed the “external scorecard” provided by a job. There are limits to an inner scorecard. I started doing stock research but had no colleagues to share my work with. This was the primary reason for starting The Rational Walk website in 2009. Over time, my need for external input decreased to almost zero, but initially I wrote new posts almost every day for two years.
I think that most people will find that they miss certain aspects of a traditional job. The only way to find out what those things are is to actually stop working. You might even hate “retirement” so much that you choose to voluntarily go back to your old job.
Financial independence represents the option to no longer work for a paycheck.
It is not a mandate to stop working.
You might want to work even after you have no financial need to do so. So, you should stay current with your skills until you’re sure that you will not want to go back to work.
A Twitter thread can only say so much and leaves room for misunderstanding.
I broadly agree with the goals of the FIRE movement when it comes to “Financial Independence”. But I do think that the community has certain blind spots when it comes to “Retire Early”.
Hopefully this article does a better job of explaining where I think the FIRE movement falls short and potentially help some people think about what their early retirement goals are really all about.
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There are many articles about the four percent rule that you can easily find on Google. I did a search today and found a number of good ones include this article published by Charles Schwab Brokerage that does a better job than most of pointing out the risks and nuances behind this supposedly simple rule: Beyond the 4% Rule: How Much Can You Spend in Retirement?
Vanguard recently published an article discussing the 4% rule as it related to early retirees: Fueling the FIRE movement: Updating the 4% rule for early retirees