The Adviser You Can Talk To Podcast
April 20, 2022
Packing it in at 65 with a gold watch was once the stereotypical model for retirement. But times have changed, career paths have changed, and for a new generation, retirement planning is changing too. This week, Andrew Busa and Sophie Benander discuss the dream of achieving financial independence and retiring early—aka FIRE, as it’s known to its devotees—and examine the methods and pitfalls of the FIRE approach, including:
Whether or not you’d like to follow the FIRE-y path, the approach has lessons for us all on how to live more comfortably in retirement. Listen now to learn more!
The FIRE movement has been around since the 1990s, but it’s just recently started to heat up. Join us as we discuss the “financial independence, retire early” strategy—the pros, the cons and everything in between. Hi, this is Andrew Busa. Welcome to another The Adviser You Can Talk To Podcast. Today, I’m joined by my colleague Sophie Benander. She is our assistant director of wealth management. Welcome, Sophie.
Hi, happy to be here.
Happy to have you here as well. Today we are focusing on a financial movement that has picked up a lot of steam in recent years. I know we’ve seen it out there. We’ve heard a little bit about it from clients as well. That is FIRE, which stands for financial independence, retire early.
That’s right. I’m actually really excited to talk about this topic today. And I think the biggest reason is it’s not a trend, it’s not a fad. This is an entire movement and essentially reshapes your entire lifestyle and really puts you on a path toward your most prized goals in the future.
Absolutely. So we’ll get into more of the history as we get into the meat of this podcast, but just to kind of tee us off, what is the basic premise of FIRE other than it has a great name?
It does have a great name. When you participate in the FIRE movement, you are really focused on extreme savings and really aggressive investments throughout all of those working and earning years of your life. And the aim is to retire early—and retiring early is such a loaded phrase, as is financial independence. It can mean different things to everybody. But Andrew, you work on a ton of financial plans here with our clients. Have you heard any inklings of this? Wanting to retire early?
We have noticed—and I talked to the other financial planners on the team too—that a lot of the plans that we create, especially for younger clients…these folks are very interested in seeing what their financial plan looks like if they do retire earlier or at least maybe stop what they’re doing now and maybe potentially earn lesser income at a certain age. So let’s stress-test the plan for age 50, age 55. That sort of traditional retirement age of one’s mid-60s is sort of changing, I think. So it’s been interesting to be able to create those plans for folks and then stress-test them. Today, we will take you through the history of FIRE, and we thought what might be helpful is to discuss the two sides of this equation—financial independence and retire early—to talk about what those really mean. Finally, we’ll leave you with our thoughts on what we like and what we might not think is so hot about FIRE, excuse the terrible pun. Sophie, any other thoughts before we dive in?
No, let’s do it.
All right. Give us the history lesson on FIRE. Where did it come from and why is it so popular now?
FIRE stemmed originally from a book written in the early ’90s called Your Money or Your Life. It was written by Vicki Robin and Joe Dominguez. And it was really revolutionary in the way that they helped people take a deeper look at their relationship with money. It was all about this correlation between the energy you put forth into the world through your work, through your career, and then the money that you earn in return for that. So it was this concept that really made you think about that trade-off and if your personal values, those things that you hold near and dear, really fit into that equation that’s happening in your life.
Right. From what I read about that, they kind of pose this as time being your most valuable commodity. It’s a nonrenewable resource. You can’t get it back. So it’s all about thinking, starting with the premise of how fulfilled are you with the time that you’re spending at work?
Exactly. And if you want to manage this relationship with your money and really be able to focus on fulfillment in your life, you change your lifestyle and you save at least half, if not more—sometimes closer to 70%—of your income. I mean, this is a huge change.
But you invest it really strategically and often aggressively, and then you’re able to retire early, quote-unquote—and we’ll kind of go into what early means—but then you’re able to live off of the income through those investments they’re making.
Yeah. And like you said, we’ll get into the nuts and bolts of how does that investing part work? Where do you save to make this a reality? And I want to underline, too, what you said about potentially close to 70% of your disposable income being saved toward this goal. I mean, that’s pretty staggering, just because if you think about the traditional rule of thumb that we as financial planners will talk about with people, you should be trying to hit that 10% to 15%, savings goal on an annual basis to stay somewhat on track to retiring someday. So obviously this is a huge increase, and that’s why I think it kind of intrigues a lot of people who think well, okay, maybe if you did do that, could I move my retirement up significantly? This concept has been around for a little while, and you said the book was written in the ’90s, but it’s really picked up steam recently in the millennial generation, it seems. Is that right?
It has, it has. And I’ll throw a pun back at you. It’s definitely caught fire with the millennials and the Gen Xers, but this generation, the millennials and the Gen Xers, they love this concept of giving up things, not acquiring them but giving them up and really preferring experiences over material possessions, over things. So you think of Marie Kondo, decluttering and all the buy-nothing movements. There’s this preference toward the idea of freedom from capitalistic tendencies. So this FIRE movement is a perfect fit for this generation. This generation wants to define their own lives. They want to find purpose and they want to achieve freedom, especially financial freedom.
Right. So it goes back to your point at the beginning. This is really more of a lifestyle than an investment strategy, if that makes sense. It’s kind of an overall philosophy of how to live one’s life, I think. And there’s more nuance to this too. There are actually different kinds of FIRE. I know there are three types we talked about when we were getting ready for this podcast.
There are. The first one’s called Luxury FIRE. This is where you want to retire without altering your standard of living, maybe even gearing up for additional expenses in retirement. So you want to spend more than the average person would, and there’s less emphasis on being frugal or minimalistic now. This type will allow you a ton of financial flexibility in retirement, but it’s probably going to take you a little bit longer to achieve those goals, just because you need to accumulate that much more to maintain that lifestyle.
The next one’s called Lean FIRE, and this is almost the complete opposite. There’s this huge emphasis on the minimalist lifestyle, effective immediately. You start now. You aim to survive on the bare bones. We’re talking $25,000 or less a year in expenses. This is drastically reduced. So you’ll have less financial flexibility in retirement, but you’re going to achieve FIRE so much quicker because you don’t need as much. And I think that the concept behind this too is that if you can create the habit of giving up those material possessions now, and you can do that through all of these years, once you get to retirement, you’re not going to be so dependent on them. So you almost create those habits now, and that’s the lifestyle that you want to live.
And then there’s the Goldilocks, the in between, right?
There is. The Barista FIRE. I love the name of this one. This is kind of a combination of the two types we just mentioned. This is, I think, where the art comes in because you have some level of Lean FIRE, right? So you are going to aim to survive on a little bit less expenses than you did before, but when you get to retirement, whatever that is for you, you plan to work part time, or maybe you have some part-time side income that will give you that financial cushion.
Right. Okay, good. So I feel like we’ve got a pretty good handle on what FIRE is, where it came from and what that sort of lifestyle might look like. But let’s start to get into more of the specifics here by first talking about what does financial independence mean? How do you achieve that? Which will then eventually, of course, lead to being able to retire early. So first, just starting with your thoughts, how do you interpret the phrase financial independence? I feel like it covers so much.
It does. And I think this is a good time to talk about the distinction between financial independence and financial freedom, which are two terms that I think are used interchangeably, especially when talking about FIRE, but they’re actually a little bit different. So the FI in the FIRE we’re talking about here is about accumulation and aggressive savings now. You’re living with some level of frugality with a specific goal to retire early. At some point, you will become independent from your work and your earned income. And that is financial independence. Financial freedom is a little bit more of a mindset. It’s more about finding peace and knowing that you’ll be able to have enough cash flow in retirement even if you decide to change your lifestyle down the road if you’re not quite sure about what it’ll look like. To be able to think, “I will have the freedom and that peace to retire, and I won’t regret anything. And I have a sense of security that I’ll be able to absorb whatever life throws at me in the future.”
Right. And let’s think about, too, that accumulation part of achieving financial independence, because I think that’s what really gets into the mechanics of how this might actually work for somebody. So let’s say you can determine that you’re able to save up to 70% of your discretionary cash flow. Where are you actually putting that money? As an example, we would always want to make sure that you have a sufficient emergency fund, right? So that’s a savings account, not invested. That’s typically around three to six months of your expenses that you could pull on in the case of an emergency— if you lost your job, something like that—to bridge the gap. You always want to have that as your foundation.
Beyond that, you’ll want to be looking to, of course, max your employer retirement account, like a 401(k) if you have one. That’ll allow you to take advantage of any match or free money that your employer will give you. And then beyond that, right, that 70% still covers a lot of extra cash flow. So where does that all go? Theoretically into a brokerage account, right? That’s just a regular individual or a joint account that you could open up at a custodian. And the reason for that is because you can access that money penalty-free if you were to retire early, but it’s still going to be invested, still going to be growing—unlike a 401(k) or an IRA, which we’ll talk about a little bit later, where there are some rules around when you can actually access that money.
So it’s really thinking about how you accumulate and where you decide to save. That needs to be thoughtful. Of course, we would always encourage you to work with a financial planner on figuring out what is the right mix for you. And by the way, we like it if you can save into that Roth IRA as well because if you can save that much money, why not. Roths are great. I’ll pause there. I mean, how does that all kind of sit with you?
I think that’s great. Thinking about those buckets and where and how much you should put into those buckets is where the art comes in and where you have to become really strategic about what your goals are and how you’re actually going to achieve them through these different vehicles.
Right. I know we’ve all said at some point: Boy, I’d love to win the lottery. But what would you actually do if you did, right? We’ll talk about this too, in the retirement section, but that’s really what the idea of financial independence, I think, creates. If you could be comfortable, have all your expenses covered without needing to be reliant on a job. But it’s an interesting question that kind of fits into how you define your financial independence, right? That’s sort of the philosophical aspect of all this.
It is. It is. And it’s actually a harder question than you think. I bought a couple Powerball tickets over the weekend and I’m looking up at the board, $196 million. What would I do if I won $196 million? It’s a hard question. I mean, really when you think about not having that pressure of earned income, it makes you dig a little bit deeper and think about those values and those goals. Maybe it’s traveling, maybe it’s spending time with your family. Maybe it’s just being able to do something and put your energy forth into a cause or an organization that you feel really passionate about. It’s just all, again, about not having that pressure of earning that income.
Right. That’s really what that financial independence is all about. And as I think about this, when we’re having this conversation: Is this movement designed for someone who is sort of uninspired and not really super engaged with where they are in their career? What about the idea of just putting that energy into switching careers and thinking about that, or is there more to it than that? What are your thoughts there?
That’s a good question. And I think it is a good thing to talk about and think about: If FIRE sounds like something you like. But again, going back to that key piece of the FI, the financial independence in FIRE, it’s really important to be intentional about why you’re doing this. And so with FIRE specifically, it’s not about being fulfilled now while you still have the worries of saving and earning—again, that pressure. It’s about making those sacrifices now with the goal of becoming fulfilled in another stage in your life, right, in retirement. Focusing your energy in phases here—and going back to that independence piece, just becoming independent of your work and your income. So, Andrew, I think we should talk about the focus of saving versus just increasing your earnings. Is there one that’s more important than the other, or is there a relationship they have within the FIRE movement? What do you think?
Yeah, this plays into where we are now in this conversation: In the accumulation phase to get to financial independence. And I think you kind of can’t get there unless you’re able to increase your earnings significantly. Because again, this is so reliant on such a large amount of discretionary cash flow that the increase in earnings is sort of—that’s the spigot, right? That’s what leads to you being able to save and invest so much in excess, which sort of gets back to one of the ideas you talked about at the beginning: Your time being your most valuable commodity here. So how are you spending that appropriate amount of time to maybe invest in yourself to be able to increase your earnings? What do you do really, really well that’s going to allow you to maximize what you can earn in your earning career?
That’s a good place to transition over to retirement. So let’s talk about retiring early, that part of the equation. All of us listening today, I think, would love to retire at some point. That’s why we’re here and that’s how we help a lot of the clients that we talk to: Figure out what does retirement look like. But we need to put some parameters around that and what retirement really means. Also, there are literally some rules we need to be thinking about when it comes to retirement.
Absolutely. I think this is kind of like the come back to earth moment where you really do have to think about what we do. Again, some of those rules that we need to stay within, the first being Social Security, which is age 67 if you were born after the year 1960. And the next is your 401(k), which is probably going to be a large source of savings for you because of that deferral aspect and all the employer matching that you can get from it. So there are some rules within there too.
Yeah. And some plans require you to meet a specific age to tap into that source, right?
That’s right. So you need to make sure that you look into the details of your employer’s specific plan. They are all so different. The age will never be below 55 though. So just something to keep in mind. There’s also the 59 1/2 rule, where it says you can’t withdraw from your 401(k) or IRA without incurring a 10% penalty, which can be pretty hefty and really dip into that savings. That goes back to your point of making sure you have that brokerage account bucket where you don’t have to tap into your 401(k) or your retirement accounts, where there are rules around the age.
Yep, absolutely. And you actually mentioned—just to touch on that age 55, sort of a lesser-known rule out there—but it is an IRS guideline that basically allows you to avoid paying the 10% early withdrawal penalty on a 401(k) or a 403(b) if you leave your job during or after the calendar year you turn 55. Again, check your specific plan for this. But this is just something to throw out there that’s kind of interesting. It’s one of those lesser-known rules.
Absolutely. So those are a couple things to think about as far as age, but the next thing with retire early is how you’re actually going to spend your time.
Yeah, absolutely. I mean, let’s face it, you’re working 40, 50 hours a week, and we go back to that notion of how you’re spending your time. Well, how do you plan on spending that time when you’re no longer working? I think that if that’s sort of what’s driving you to eventually retire early, that needs to be a really clear kind of vision in your head.
It does. It really has to be at the forefront of your journey. There’s so many cases where, again, your passion is to give your time and your energy to a nonprofit or that organization that you love. And the FIRE approach is a really great way to get there.
Right. Because you’ve achieved financial independence, to bring it full circle, and then you’re able to spend time how you want to, theoretically, in retirement. There’s another movement out there and maybe it’s a sister movement of this, I’m not really sure. But I’ve also read about this whole idea of a mini retirement. And this could probably be its own episode, but what do you make of this? And does it kind of play into FIRE at all?
That’s right. And a mini retirement is definitely different and you end up taking time away from your job, from your career, just for an extended period of time. It isn’t a vacation; it’s not a sabbatical. It’s intended to be very strategic, which is similar to the FIRE movement, but in a very shortened amount of time. But I think this is the key: You actually do go back to work and you actually really want to go back to work. You’re not looking to focus your energy on that next phase in retirement. You do want to enjoy and focus more energy within your career phase.
Yeah, absolutely. So maybe this is sort of an alternative to FIRE for somebody who just wants to kind of reset and reassess where they are in their career.
Yeah. Could be also a great test if you kind of like FIRE and the concept of it. This is just a very condensed version and could be something good to try out to see if you like it.
Yeah. Well, we’ve covered a lot of really good ground here. I want to leave the listeners with our thoughts on what we like about this and what we don’t like about FIRE as much. I’ll let you kick this off.
I think what’s great about it is that it does give you an opportunity to be incredibly intentional about what you want to do with your life. FIRE is all or nothing. It really is, which is the reason why it is a movement and it’s not a fad—because of that long-term nature. It takes a lot of intention. It takes a lot of commitment and you really have to love it to do it. It’s not for everyone. It actually makes me think of the second habit in Stephen R. Covey’s The 7 Habits of Highly Effective People, which is begin with the end in mind. And so, again, it’s about focusing on what that end goal is. If it is retiring early, it’ll keep you incredibly focused. You’ll be able to communicate your goals throughout your life and to those who are close to you. So it could be great if it’s for you.
Yeah. I agree. Agree with all those thoughts. I might bring the conversation down a little bit with some of the cons that I’m thinking about, but I think money ultimately is really just a tool to help you achieve what you want to do. It sounds kind of simple and obvious to say, but potentially if you’re dead set on saving 50%, 60%, 70% of your income while you’re working, maybe you’re missing out on some things that you could otherwise be enjoying during those years. Right. Maybe it’s okay to go to that concert or buy that car that you’re looking at. That’s ultimately why you are working and earning money at the end of the day. I think it’s always a little bit of a balance where maybe it’s possible to be overdisciplined and kind of miss some enjoyment along the way. But it’s a very interesting movement. I’ve enjoyed reading about it. I honestly have more to learn about it, but I really enjoyed kind of studying up for this podcast.
Me too, me too.
Well, this has been a great conversation. And I know it’s been on the minds of a lot of people out there and maybe it’ll generate some more questions. Maybe we’ll do another episode down the road. But this has been Sophie and Andrew from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show, and you can also check us out at www.adviserinvestments.com/podcasts. Your feedback is always welcome. And if you have any questions or topics that you’d like us to explore, please email us at firstname.lastname@example.org.
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When you think about not having that pressure of earning income, it makes you rethink all of your values and goals.
When you think about not having that pressure of earning income, it makes you rethink all of your values and goals.
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