Why does everyone want to put out the FIRE?

There have been a number of articles in the mainstream media criticising the FIRE movement, some with valid points and others not so much.  I’m not sure why there has been so much attention recently, but I’ve tried to take an objective look at some of the issues raised and have a look at what’s valid and what’s not.

Extreme frugality

One of the main criticisms raised is that FIRE requires retirement on a shoestring budget with no niceties at all.  This article talks about a microscopic budget and no nice clothes, jewellery or going out to dinner. 

This quote from a UK Telegraph article is just hilariously wrong.   “Sure, save half your salary, eat the roadkill, bin-dip, raid the charity shops, recycle everything, just stay in and actually read the T&Cs of things rather than waste money going out. From this you will create lots of savings, but sadly very few memories.”

The claim of extreme frugality would be a valid criticism if it were true, but the FIRE movement encompasses a number of different types which broadly can be broken down to Lean FIRE, regular FIRE and HI FIRE (c’mon guys, we all know HI FIRE sounds much better than Fat FIRE!). 

There’s no hard and fast rule but personally I use a metric for a couple of less than $40k being lean FIRE, $40k to $50k being regular FIRE, and anything beyond that being Fat FIRE.  Others may have different definitions though which is fair enough. 

I’ve mentioned before what $40k or $50k a year gets me and my family and suffice it to say that while I’m not going to be living it up on luxury yachts or driving a Ferrari around town it’s a pretty damn good life.  I don’t eat roadkill or go dumpster diving, I’ve got plenty of memories of the fun stuff I have done and still do.  I do eat out regularly, I go to sporting events, I do domestic and overseas travel, trust me it’s a pretty sweet life! 

Now it certainly helps that I have my house paid off and don’t have to fork out any money for rent, but I think you can pretty easily and comfortably live on $40k or $50k.  Also most Australian FIRE blogs I read seem to be aiming for regular FIRE or above rather than Lean FIRE.  Nobody is advocating eating baked beans for breakfast lunch and dinner or never going out to eat or travelling etc. 

There are of course plenty of things which people can do to reduce their costs, Dave at Strong Money Australia has some great posts on that here and here and there are lots more around in the FIRE blogosphere if you want to look.  None of them strike me as being about living on a microscopic budget though, just being smart about where you spend your money.

So to me at least, this criticism isn’t particularly valid and to the extent that it is it doesn’t really apply to most Australian FIRE seekers anyway.

There’s no safety net

Hahaha what?  This survey says that 30% of Australian couldn’t come up with $1,000 to deal with an emergency.  20% couldn’t even come up with $500.  One of the first things that people who are involved with FIRE do is setup an emergency account, usually with 3 to 6 months of living expenses.  Unless you are living on one of those “microscopic budgets” that’s a hell of a lot more than $1,000 so you’re already in a better position than 70% of the population!

Given that the whole aim of FIRE is to have a large amount of assets which pays you an income to live off, on top of that emergency fund most people in the FIRE community will also have some non zero amount of assets which provides an even bigger safety net.  Even if you’re just starting out you probably have something saved up which puts you ahead of most people.

Now if you want to argue that if you declare FIRE and straight away get a run of bad returns in your portfolio you’re going to be in trouble and may have to go back to work then that’s actually a valid criticism.  You’re still going to be in a better position than the vast majority of people out there who don’t have your level of assets and may also now be out of a job, but it’s a fair enough call. 

On top of this the times when the market is falling dramatically tend to be when there is a recession and therefore it’s harder to get a job, but even if you had a couple of years of bad returns in a row you’ve still probably got several hundred thousand dollars to keep you going for a while at least. 

I’ve also written here about some of the things I have in place to provide me with more of a safety net.  Is it absolutely perfect?  No.  Am I guaranteed to make it through an emergency with no consequences whatsoever?  No.  Is anyone in that position though?  No.  I look at FIRE as giving me a hell of a lot more of a safety net to protect me than most people have though. 

American finance “expert”Suze Orman is worried about what would happen if I got hit by a car, or got sick, or got cancer.  Well I guess I’d look at my personal insurance and health insurance and figure out how much it was paying out, add that to the money I’ve already got saved up, then assess the situation. 

That puts me in a much better position in than the vast majority of folks who couldn’t go more than a week or two without a paycheck coming in, and who don’t have any personal insurance beyond whatever less than adequate default amounts they may have in their superannuation.

She also claims that ““You need at least $5 million, or $6 million. … Really, you might need $10 million,” she said — short of that, it’s just not going to be enough for most people.” Come again?

People retire all the time with far less than this and are perfectly fine!  Using the 4% rule as a rule of thumb (I’ve written here about why you shouldn’t take it as the gospel truth but it’s near enough for our purposes) 5 million dollars would get me an income of $200,000 a year.  I don’t earn that now, I’d be willing to bet less than 5% of the population earn that currently, and somehow I’ll need that much in retirement?  Pull the other one Suze!

I’m going to say that this criticism is mostly false, and to the extent that it’s real you’re still in a much better off position than the vast majority of people.

They won’t be able to stick with their investments if markets go down

This article talks about investors not being able to handle it mentally if markets drop in value given that we’ve had about ten years of bull markets in stocks and property. 

Certainly looking at some of the commentary on https://www.reddit.com/r/fiaustralia/ there was a lot of nervousness about the volatility in October and November.  I didn’t see anyone pulling the pin on their investments but there were certainly at least some people holding off on investing more money, but there were others who put more money to work. 

The same article talked about an over reliance on passive investments which will go down in value if markets as a whole go down.  And yep, this is absolutely true.  Much of the Australian FIRE community seems to be looking more at LICs than ETFs but they’re likely to have much the same problem anyway, possibly to a greater or lesser extent depending on what happens to their underlying holdings.

What’s that alternative though?  Invest in actively managed funds which cost you more and are likely to deliver much the same result or worse after fees?  Put it all in term deposits which go backwards once you factor in tax and inflation?  If you want your money to grow it needs to go into growth assets like shares and property, and you need to be able to handle the volatility.

I’ve talked here about what a bear market feels like and it is definitely hard work holding on to your investments when they start going down in value at a fair rate of knots.  Everyone is fine with losing money in theory, but when it comes to the reality of doing so it is hard yakka. 

So this criticism to me is definitely going to be valid for some people at least.  Given my experience with these sort of events due to having worked in finance for a long time I’m pretty hopeful I’ll be able to stay the course, but it’s definitely going to put some people off.

It’s only for high income earners

Another criticism of FIRE is that it’s only for high or at least medium income earners.  This article asks whether FIRE has anything to offer people on lower incomes.  The reality is that to some extent we all have fixed living costs we need to pay out of our income and the lower the income we have, the less money we are able to invest.  That’s just basic maths. 

The good news is that if you’re on a lower income you’re probably used to living on less and will likely be aiming for a lower income in retirement so you don’t need to save as much.  But if you’re already living pretty close to the edge then you don’t have much available for saving either.  I haven’t run the numbers but this post shows that it’s going to take a lot longer to hit FIRE if you’re on a lower income which is exactly what you would expect.

That’s not to say that putting aside what you can for an emergency fund and then saving isn’t going to be smart behaviour, but it will normally take someone on a low income a lot longer to hit FIRE than someone on a high income.  So there is some validity to this criticism.

What’s wrong with working

“What is wrong with working? Why do the FIRE people dislike working so much that they want to quit at age 35? Working gives people purpose. “

I don’t dislike my job, I quite enjoy it most of the time.  But if I didn’t need to earn money to put food on the table I’d rather be spending time with my family or catching up with my mates or running some of the excellent trails around where I live or any number of other activities which I find more enjoyable. 

Look if you love your work and you’d do it for less money or even for free then I’m very happy for you!  The reality is though that a lot of people aren’t in that situation.  I agree working can give people purpose, and I think it’s important for people to realise that if you want to get places in life then you need to put in some hard work. 

But part of the reward for that hard work is that sooner or later you get to stop working.  If you’re smart about what you do with your financial reward then you should be able to stop working a lot earlier than most and start doing other stuff which you find more enjoyable.  And if you decide that you just want the FI part of FIRE then hey, good luck to you!  So sure, there’s some validity to this criticism but not a whole lot.

It’s a bull market phenomenon

“The biggest issue with the FIRE movement is that it’s the ultimate bull market phenomenon. FIRE seems to work because the stock market has gone straight up. A bear market will change that. Even if stocks do return 8 per cent to 12 per cent over time, it’s not going to be any fun living on a shoestring budget and watching your nest egg decline in value by 30 per cent to 50 per cent. That will be the point in time in which most FIRE adherents get online and start looking at job ads. Of course, after a decade or more of being on the sidelines, they aren’t going to be very employable.” 

I’ve written before about sequencing risk both in accumulation phase and drawdown phase and it’s unquestionably an issue.  It’s a hell of a lot easier to hit your FIRE number if you’ve had a tailwind from whatever asset class you’re in going up steadily over the last 5 or 10 years. Which is pretty much what most major equity markets have done since the GFC with the exception of 2011.

I haven’t written about it yet but there are some years in which it’s pretty much impossible to hit FIRE because you run into big bear markets and the losses there overwhelm whatever savings you are putting in.  There’s a bunch of different factors in play, but as a generalisation if you hadn’t declared FIRE in 2007 just prior to the GFC chances are very good you weren’t going to be doing so until 2012 or so because of that huge hit to your portfolio back in 2008.

So yes, it’s probably not much of surprise that we are seeing a lot more people successfully hitting FIRE or getting closer to it now because markets have provided great returns for the last 9 years or so.  When we have another crash in stocks, property or both we’re pretty unlikely to see anyone declaring FIRE and we are likely to see a lot more people panicking or getting very nervous.  That’s the way human beings work. 

But if you’ve been saving and investing your money over time you’re still going to be a lot better off than most people who have spent every last dollar that has hit their bank account, and assuming markets recover you’re going to have hopefully bought investments cheaply which will stand you in good stead in the future.

So yes, this is a valid criticism, but if you’re still working you’re still going to be better off than somebody who hasn’t been pursuing FIRE.  And if you’ve declared FIRE already then you’ve still got plenty of assets to keep you going for a while which buys you time to decide what you are going to do.

Summary

A lot of the criticism of FIRE has been wrong or misrepresented what FIRE is about.  None of the bloggers I read are advocating dumpster diving or living off a microscopic budget that doesn’t allow you to have any fun.  FIRE gives you a much better safety net than what the average person has if things go wrong. 

Some of the criticism is valid to some extent at least though.  It is hard to stick with your investments when they start going down.  FIRE is easier if you have a high income.  There’s a lot to be said for working (at some stage of your life at least).  And it’s certainly a hell of a lot easier to get to FIRE if you’re investing in a bull market.

But assuming you don’t feel like you’re depriving yourself of much (or anything) by pursuing FIRE you’re still much better off than if you weren’t pursuing FIRE.  So why not give it a shot!

What do you think of all the recent articles criticising FIRE?  What criticisms do you think are valid? If you liked this post and would like to read more like it then please subscribe!