Why FIRE Doesn’t Add Up

What Does FIRE Promise?

FIRE (Financial Independence, Retire Early) is a financial philosophy that promotes a relatively brief period of aggressive saving and investing followed by a very early retirement, typically by 35. The principles and culture around the FIRE movement were developed and promoted by Peter Adeney via his pseudonymous blog, Mr. Money Mustache.

The appeal of FIRE is easy to grasp: working for a decade and then spending the rest of your life doing what you want is a much better prospect than what many of us face (working for the rest of your life and never retiring at all). And the undergirding methodology and broad philosophy of FIRE is good:

  1. Live within your means and cut out unnecessary expenses
  2. Invest aggressively, especially when you are young
  3. Find a source of happiness that is separate from consumerism

Undoubtably, following these 3 pieces of advice will leave you well-positioned for financial success. But stretching 10 years’ of savings into 60 years’ of income is quite a different proposition – and it is precisely here where the promise of FIRE goes up in smoke.

The Objective of FIRE is Not Actually Achievable

According to his bio, Peter Adeney saved 50% of his income for several years and was able to quit working after less than a decade because of it. His blog, Mr. Money Mustache, offers lots of money-saving tips and basically good financial advice. The explicit promise is this: if you follow this method, you can retire early too. However, the FIRE philosophy has some major gaps that make it unrealistic for most people.

Saving 50% of your income is impossible

First of all, the “50%” Mr. Adeney saved was actually 50% of a combined household income. Both he and his wife worked full time during their earning period. What’s more, they worked in tech (Mr. Adeney was a computer programmer) during the turn-of-the-century tech boom, and retired in 2005, before the 2007 recession. During this time, both he and his wife averaged $67,000 annually – that’s $134,000 a year [source]. So sure, they were able to save $67k/year…but they were also spending $67k/year. The 2018 Census puts median household income at $61,937. In other words, 20 years ago the originator of FIRE was literally spending more per year than both you and your spouse make together, yet credits his success solely to aggressive saving.

Saving 50% of your income is also not enough

If you are a median income household earning about $62,000, saving 50% means you are saving $31,000. Setting aside, again, that this is likely impossible (median rent alone in several cities is more than $30k/year – you can’t save 50% while also paying for housing at this income level), this is really not enough to retire on. 

If I invest $31,000/year for 10 years at 8% annually compounding interest I end up with a nest egg of about $450,000. Assuming a steady 8% interest rate, that $450k will earn [450,000 * 0.08] $36,000 in interest each year. I could therefore withdraw $36,000 per year and live off that interest-earning nest egg forever. $36k a year isn’t much, but it’s in line with what a FIRE adherent expects to live on during their extended retirement.

So the FIRE math works, right? Not really; I had to use a lot of idealized math to hit that number. For example:

  1. I can’t take the tax advantages on my retirement accounts when I’m 30 years old, so I’m paying taxes and/or fees on my limited “retirement” income.
  2. A continual 8% stock market return is unrealistic. It has happened over certain 10 year periods, but I’m only in my 20’s once…and a plan that requires a best-case scenario to work isn’t a plan; it’s a wish.
  3. Because of investment volatility, the standard recommendation is to withdraw only 4% of your index fund retirement account per year. But a 4% drawdown – instead of 8% – of my hypothetical $450k nest egg only leaves $18k per year to live on. That’s a nice bit of supplemental income, but it’s not what I’d call retirement.

Following the Tenets of FIRE Can Be Unhealthy

Probably the worst thing about FIRE, in my opinion, is the illusion of control it gives the individual…and the resultant personal guilt when the system fails to work. For example, I can cut little luxuries from my daily life, or get a second, low-wage job, fairly easily. But despite those things being easy to do, they make my life worse. Suddenly, I’m working 80 hours a week (40 of those hours at minimum wage) and I’m never allowing myself any sort of respite. A cup of Starbucks isn’t a nice treat anymore – it’s a waste of money. So when I inevitably break down and quit the job, or buy a new mattress because my old one prevents me from getting good sleep, or whatever, and suddenly fail to save my 50% for the month, I feel guilty about it, because I mistakenly believe that I have failed at following the system. I don’t realize that the system, itself, has failed me.

Saving 50% is not a good goal to have (it’s not S.M.A.R.T., if you’re familiar with that convention). 50% of what? As I’ve shown above, simply saving “half of my income” is not sufficient to retire on; you need to hit some hard numbers. To support a 60-year retirement, I effectively need to be sure my yearly withdrawals never exceed my average interest income. Such a long timeline doesn’t allow for a drawdown in principal. With these numbers (8% interest rate; 4% withdrawal rate), I need a nest egg of $900,000 just to earn my $36k a year. Hitting this mark in 10 years means I need to invest $62,130 per year at 8% interest. What that means is, if I make the median household income of $61,937, even saving 100% of my paycheck for ten years is not enough for me to retire on.

Also note how close that number, $62,130, is to the amount Mr. Adeney and his wife were saving during their earning period ($67,000). Yeah, FIRE works…if you and your spouse both pull down tech industry salaries. The fact is, you need to get the money before you can save it. Any early retirement plan that doesn’t prioritize maximizing income during your prime working years is leaving out a critical part of the equation.

3 thoughts on “Why FIRE Doesn’t Add Up

  1. Nice article, I’ve been curious about the math behind the FIRE movement. I wonder if most FIRE followers are higher income earners? Otherwise – there’s no way you can make FIRE work. Health insurance alone would eat a huge portion of your annual budget.

    1. Good points Jared! Yea I’m sure your household income would have to be high income in order to truly retire in like 10 years. Plus you bring up a good point about health insurance. I assume you would have to buy your own private insurance? That would get really costly.

      1. When did the FIRE movement really pick up steam? I wonder if there are many FIRE followers that are 15-20 years into their “retirement”.

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