In Defense of FIRE

I started writing this rebuttal in defense of FIRE as an introduction to a related topic, but as the words kept flowing and ideas kept coming, I realized I had an entire blog post in front of me.

The financial independence retire early (FIRE) movement is often misunderstood and its followers dismissed as foolish frugal freaks with a lot to learn about life.

The reality is more nuanced, of course, but it’s way easier to tear down a lifestyle you don’t identify with when you portray it as scrimping excessively to maybe one day live a simple existence on a paltry budget with no job.

I think we all know that such a caricature of a FIRE aficionado is laughable, but it’s the one that’s most often held up as a reason to reject the idea entirely, so I’d like to set the record straight.

 

in-defense-of-fire

 

We’ll do so by dissecting the following introduction to FIRE from Dr. Buck Joffrey. This is from the show notes to his most recent Episode 335: How to Buy Expensive Toys and Profit! on the Wealth Formula podcast.

I don’t know Buck personally, but we’ve shared a virtual stage with Passive Income MD’s Leverage and Growth Summit in the past, and he comes across as a humble, knowledgeable investor, which is why I was so taken aback by his words below. The featured podcast actually sounds like a great listen, but I have a hard time getting past the first few paragraphs of the written introduction, which are as follows:

 

Have you heard of the Financial Independence, Retire Early (FIRE) movement?

The movement is defined by extreme frugality and extreme savings and investments in hopes of retiring early and living on small withdrawals of accumulated funds.

The general rule of thumb is to live on only 30 percent of your income and invest the rest. So, if you make $300K per year and are in a tax bracket of 40 percent you would be living on $54,000 (less than 5K per month) per year after taxes in hopes of retiring a few years earlier.

There is nothing special about the investing patterns for these individuals. They typically invest in a very traditional way through ETFs. The hope is that the market will keep going up and allow for 3-4 percent withdrawal for life at some point.

What’s particularly interesting to me in the physician community is that the FIRE people are rather militant. They mock other physicians with nice cars and homes. It’s so weird to me.

Should you consider this kind of lifestyle? Well, personally I would not. It doesn’t sound like a lot of fun! And frankly, the militant FIRE people don’t sound like much fun either!

 

The strawman was sloppily set up and easily knocked down.

Bravo.

Let’s take a look at some of these misguided statements and set the record straight about “these people,” as he refers to people like me in the podcast.

 

Extreme Frugality

 

The movement is defined by extreme frugality and extreme savings and investments in hopes of retiring early and living on small withdrawals of accumulated funds.”

 

No, no, and no. Allow me to rephrase. “The movement is defined by saving a significant portion of one’s income in order to retire early, living primarily on investment returns while one’s portfolio will likely increase in value most years.” That’s much closer to the truth

 

Frugality does not have to be extreme. It doesn’t need to be present at all if one’s income is substantial.

The concept of slowly depleting your savings ingores dynamic withdrawal strategies that incorporate cash flows, tax-efficiency, and capital appreciation that will guide how one actually accesses retirement savings.

As research by Michael Kitces has shown, the median outcome from following a 4% safe withdrawal rate for three decades is to have 2.7 times more money than you started with 30 years earlier.

 

Save It All and Cross Your Fingers

 

The general rule of thumb is to live on only 30 percent of your income and invest the rest. So, if you make $300K per year and are in a tax bracket of 40 percent you would be living on $54,000 (less than 5K per month) per year after taxes in hopes of retiring a few years earlier.

 

What the what? I’ve never seen that rule of thumb of living on only 30%, but I’d suggest it’s wise to save somewhere between 25% and 75% of your post-tax income, depending on numerous factors, including your age, income, and eagerness toward reaching FI quickly.

I’ve suggested that physicians strive to live on half if FI is a top priority. It may not be possible in all locations or in all specialties, but it’s a good starting point for financial goal-setting.

The tax computation is absurd and disappointing coming from someone who promotes real estate investing and should have a decent understanding of how our tax code works.

I’ve done the calculations, and a physician who is married with a combined household income of $300,000 will pay in the range of $75,000 to $80,000 between federal income tax, FICA tax, and state income tax in an average state that levies 5%. This assumes that they invest in tax-advantaged investment accounts that most physicians have available like a 401(k), 457(b), and HSA.

Live on half of what’s left, as I recommend as a stretch goal, and you’re spending about $110,000 a year. If you’re single and therefore paying higher taxes, you might have just shy of $100,000 to spend annually.

Finally, if you do go to the extreme and save 70% of your income and learn to live on the remaining 30%, you’re not “hoping” to retire “a few years earlier.”

You’re preparing to be able to retire decades earlier. It’s not crossing your fingers and hoping for the best; with modest investment returns, the shockingly simple math demonstrates that you’ll be financially independent in a decade or less if you’re starting with nothing.

 

The Age-Old Tradition of Exchange Traded Funds

 

“There is nothing special about the investing patterns for these individuals. They typically invest in a very traditional way through ETFs. The hope is that the market will keep going up and allow for 3-4 percent withdrawal for life at some point.”

 

What could possibly be traditional about investing in ETFs? They’ve been in existence for fewer than 30 years and have only become prominent investment vehicles in the last decade or so.

It is true that index funds, whether in mutual fund or exchange traded fund form, tend to make up the bulk of many FIRE devotees’ portfolios. There’s sound evidence to support that choice for those who want to be truly passive investors.

Many of us also invest in other asset classes, including real estate and alternatives. If you’ve seen my portfolio, you know that I’m invested in a variety of passive real estate deals, startup companies, and a handful of individual stocks. ETFs make up all of about 2% of my net worth.

We’re hit again with the word “hope” as though we have no understanding of stock market history or the fact that many stocks pay dividends, negating the requirement for stocks to go up to be profitable for the investor.

Bill Bengen’s study wasn’t founded on hope, nor was the Trinity study. These rigorous academic papers from the 1990s show that even in the worst of times over the last century, a mix of stocks and bonds had an excellent (97% or better) chance of lasting 30 years or more when starting with an initial withdrawal rate of 4% and adjusting annually with inflation. In most cases, the portfolio was larger 30 years later despite those regular withdrawals.

The future could indeed present a scenario worse than the Great Depression, Great Recession, or stagflation of the 1970s and early 1980s. That’s why some people recommend or plan on a 3% or lower “withdrawal” rate. If we end up in a world where a 2% withdrawal rate doesn’t cut it, almost no one is safe, and I’m afraid we’ll have bigger things to worry about than equity valuations.

 

Militant FIRE People

 

What’s particularly interesting to me in the physician community is that the FIRE people are rather militant. They mock other physicians with nice cars and homes. It’s so weird to me.”

 

I’m FIRE people, and I don’t know that I’ve ever been called militant. I’ve hung out with hundreds of other FIRE people at events like FinCon and Camp FI, and they are some of the more empathetic and genuinely kind people I’ve met.

Can you find examples of people mocking the extravagant spending choices made by others? Of course. Social media is full of people pointing fingers at people they don’t understand and the choices they make.

So are blog posts and podcasts, apparently.

 

No Fun for Anyone

 

Should you consider this kind of lifestyle? Well, personally I would not. It doesn’t sound like a lot of fun! And frankly, the militant FIRE people don’t sound like much fun either!

 

Dr. Joffrey gets something right here. It is a personal choice, and it’s he claims it’s one he would not make. The way he presents FIRE, it’s a choice I wouldn’t make, either, and neither would many who are actually part of the FIRE movement that I know well.

As he states, it is indeed a personal choice, and I think he’s actually opted in to FIRE whether he knows it or not. I’m pretty sure he’s got the FI part down, and while not fully RE, he uses his financial status to live life according to his own terms, much like the proponents of a more realistic FIRE lifestyle, including me.

This misperception of FIRE is not entirely the good doctor’s fault. Mainstream media also misses the mark, often portraying leanFIRE as the only option with frequent mentions of rice and beans, brown bananas, and perverse penny pinching.

Truth be told, one can also FIRE with either a normal or an abundant level of household spending. It’s just math, and it’s not complicated.

While I haven’t shaken some of my frugal tendencies, I’m partial to more of a fatFIRE lifestyle.

To us, that looks like six-figure annual spending, a seven-figure home, and a good mix of domestic and international family travel. For others, it may be a more modest lifestyle, which is perfectly fine. Again, it’s a personal choice, and Spend Less, Live More is a motto that can take you far.

 

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Am I much fun?

I can’t be the arbiter of my own fun-ness. As the Butthole Surfers proclaimed, “you never know just how you look through other people’s eyes.”

I can confirm that I have fun, and pursuing FIRE has made much of it possible. I recently penned an overview of my first three years of FIRE, and here’s some of the fun I have had thus far in 2022:

  • Traveled for a few weeks in Florida with my family and rode many rollercoasters
  • Cruised from Texas to New Jersey over 13 days with stops in Central America, South America, and the Caribbean with friends and family
  • Saw Harry Potter and the Cursed Child on Broadway and toured around New York City
  • Saw the Blue Man Group in Boston and appeared on stage with my kids in the audience
  • Spent a few days in Cape Cod with my family
  • Spent a week in Maine visiting breweries in Portland and hiking Acadia National Park with my family
  • Spent a week with my parents and brother in Minnesota and watched my Golden Gophers stomp opponents in person at two home games and one away game so far
  • Weekly beach volleyball in the summer and plenty of running, including two 20-mile runs in preparation for an October marathon
  • There was also a stop in Niagara Falls, a scenic drive through Canada, a week in Denver and Longmont, CO, a New Belgium Brewery tour, and a summer spent by the lake in northern Michigan where the weather is near perfect. Happy hours, hot tubbing, pontoon rides, etc…

 

Before the year is out, we’ll have taken our boys to Poland (my wife’s heritage is Polish), Sweden (my heritage), London, and on another long cruise with stops in France, Spain, and Portugal before traversing the Atlantic. When we return to The States, we’ll do some downhill skiing with our Indy passes on a slow road trip to Minnesota to celebrate Christmas with my family.

That’s what FIRE looks like in my world, and even though I’m not fully retired (I have this blog, you see), it’s a heck of a lot of fun.

Interestingly, the FIRE-bashing came as part of an introduction to a conversation about purchasing goods that are more likely to appreciate than depreciate. That’s something the FIRE community has been preaching for years.

Perhaps you don’t want FIRE for yourself. Maybe you’ve been misled and simply don’t understand it. Whatever your position, I believe that FIRE is far more appealing and much less spartan than you’ve been led to believe.

 



 

12 thoughts on “In Defense of FIRE”

  1. Well written piece. As a longer term but now more casual reader of investing and financial related websites, would seem many keep beating this dead horse. There’s ample material spanning all perspectives for DIYers and others to digest. You do you and I’ll do me. Now, off to hopefully find some fresh, insightful and useful information!

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  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. It’s getting better, at least from when I read about it in the media. CNBC Make It has done a good job showcasing “regular people” who have or are working toward FI. I’ve written we don’t need any more retired folk who just travel and consume all the time, but financial independence and having a choice regardless of compensation is a game changer.

    And yes Leif, you sure are a fun person with all those cool adventures!

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  4. As a casual observer of POF and Buck (via their respective blog/podcast), for the past 1-2 years, perhaps I can offer some insights. Buck essentially painted a caricature of the “typical” FIRE group member. There are some features that are indeed exaggerated, but there are some semblances of truth, hence the caricature analogy. Perhaps Buck lumps the WCI and POF crowds in as one, as the WCI’s history seems more “austere” in terms of stressing “extreme” frugality, living like a resident, and delaying gratifications, etc. I recall reading a POF group member on POF’s Facebook group that she was put off by advice given to her by WCI in regard to buying a new car for her family. Supposedly, WCI advised her to buy a used car off of Craigslist (and even provided a sample link?) rather than buy new. Group member went on to point out the car linked was old, out-dated, and would not have the safety features she values for her young family. Buck’s reference to FIRE members investing in just ETFs broadly refers to constant references to investing in 401k, 529s, index funds, etc. With the advent of PIMD, Semi-Retired MDs, and other docs investing in real-estate, there seems to be a trend away from traditional index funds. But the mantra of “VTSAX and relax” among the FIRE members has stuck to the group over the years. I’m just pointing out that Buck made his wealth in real-estate in the past decade plus, and was/is showing others how to follow in his footsteps, but few seemed to realize/discovered the power of real-estate until recently. Even WCI is now getting into the act with the WCI real-estate “course”… As I understand it, Buck is independently wealthy via his real-estate transactions and entrepreneurial pursuits, and does not own a 401k, 529, and definitely does not invest in index funds. He would point out that it’s ironic for a group of docs that are in the top 1-5% of earners and enhanced intellects in their professional career would still invest with the masses in public equities and government designed retirement vehicles. In a sense, he cannot relate to the FIRE crowd and hive behavior, when there are alternative (investments) out there within their grasp, that would get them to and beyond FI, much faster. Surely he can’t relate/understand the nuances of the FIRE crowd’s obsession with the 3-4% withdrawal rate, etc, and would get it wrong on how long it would take them to reach FIRE (per their definition), presumably, as he runs in circles with those with extra zeros to their net-worth.

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  5. The only point I would quibble with is Kitces’ hyperbolic quote “the median outcome from following a 4% safe withdrawal rate for three decades is to have 2.7 times more money than you started with 30 years earlier”.

    This is one of my pet peeves of not differentiating between real and inflation adjusted values. To his credit Kitces himself notes that this is hyperbolic in the next paragraph: “on a real (inflation-adjusted) basis, retirees finish with more than 100% of their inflation-adjusted principal 60% of the time…[]”, a substantially different perspective.

    This is an important distinction because the 4% rule is fairly risky for true early retirees, and I would like popular FIRE media to be a little more honest about the historical results. As Karsten Jeske has shown many times, about 11% of the time the 4% rule failed over a duration of 60 years. Whether that’s risky or not is up to the individual to decide. It’s also a tad cynical to tout the 4% rule but run a 6 figure blogging business. 😉

    Finally, I would posit that most FIRE material is hopelessly optimistic (e.g. childless and homeless people in their twenties lacking the imagination to realize perhaps in ten years their lives and desires might evolve) but to each their own.

    As someone whose household is close to what most consider FatFIRE worth but cannot imagine retiring these are all questions that are near to my heart. I’m not sure FIRE is the answer but I would be hard-pressed to give up my assets or inflate my lifestyle. Right now I’m appreciating FIRE assets with the security of a salary. The best of both worlds in some ways.

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    • Thanks for the comment, Big Bob, and congrats on reaching fatFI. The more you have, the lower your “withdrawal” rate can be, and the more likely you are to see your portfolio grow, whether you’re working or not!

      Like you, I’ve got the best of both worlds with financial freedom and an income, and adding location independence a few years ago was a real boon, not to mention giving up the pager!

      I don’t Kitces’ work to be an exaggeration. Using nominal returns is the norm, and he does, as you point out, also show inflation-adjusted figures. If you start with $3.6 Million and have $10 Million 30 years later, that’s 2.77x more money, and almost precisely the median outcome. Obviously, $10 Million won’t have the same purchasing power after three decades, which is where using real returns (a.k.a. inflation-adjusted) can be helpful.

      Most FIRE material I read and share via The Sunday Best is not hopelessly optimistic and most doesn’t come from twenty-something singles, although I occasionally feature them, too, primarily as a contrast to the norm. In recent years, at least, I find the articles that I find most useful coming from other parents in their 30s and 40s whose lifestyles more closely match my own. What you find in mainstream media is another story.

      Cheers!
      -PoF

      Reply
  6. I wonder if in the future if FIRE will branch off into several different genres. Those who are hardcore frugal, lifestyle hackers and flashpackers. It’s fascinating to think of all the possibilities financial independence offers.

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  7. I think much of the criticism boils down to two things, (1) lack of imagination to accept other lifestyle choices and/or (2) self-interest. People who pitch financial podcasts or -products, or who work in media, have a lot to gain from keeping people working ad infinitum. Very little incentive to encourage independent consumers.

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  8. It is easy to pick apart extremes. I also think that there are extra pressures for physicians who have so much tied to their career and are immersed in that culture (as you have done a great job discussing throughout your journey). However, the financial independence framework and whatever you want the RE piece to be when you are FI is powerful. There are many ways to get there that vary by pace, sequence, and current vs future goals. I switched those variables around multiple times as I muddled through to FI. Recently, I described that framework as my Flavors of FIRE and have found it a useful way to discuss with colleagues and for me to deliberately reflect and adjust course.
    -LD

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  9. Great points– you are a great example of someone living it up after retiring. It’s hard to look at all of those things you’ve done and call you austere! I also appreciate you pointing out we’re talking about retiring decades earlier, not just ‘a few years’ while making huge sacrifices.

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