“Early retirement?! In this economy? You must be insane! Interest rates are near 0%. The stock market has seen some of the quickest drops ever recently. Unemployment is through the roof. People are living longer than ever. Social Security is doomed. And you think your little pile of investments can last you from age 30 to 100?!”
The FIRE movement has come under a lot of scrutiny for its fantastic claim that your entire working career only needs to last about a decade if you follow a simple formula: Aggressively reduce your expenses, try your best to increase your income, and then consistently invest the difference between the two. Eventually, the return on those investments will cover all of your living expenses going forward. At that point, you’re financially independent, and you can do whatever you want.
Sounds great, but what if it doesn’t work out?
The Risks of Early Retirement
The math behind early retirement is pretty solid based on historical data. As long as the economy doesn’t behave any worse than it did during the biggest crashes we’ve seen in the last century or two, everything should hold up. But life is uncertain, and sometimes plans fail.
What would happen to a 30-year-old who had enough invested to quit her job forever, entered into early retirement for a few years, and then endured the worst economic meltdown the world has ever seen? Stocks drop 90%. People everywhere lose their jobs. There is no end in sight.
Her first thought might be, “Wow, this sucks. I guess my retirement plan is completely falling apart.” But it’s important to realize that her next thought would almost definitely be, “Wow, I am so much more prepared for this than everyone else around me.”
As a thirty-something retiree, she has a few things going for her:
- She still has a massive pile of savings to fall back on. Even though it was severely damaged by a stock market drop, she kept some of her net worth in bonds and cash, and she might even have a paid off house.
- She has no debt to service whatsoever, except maybe a mortgage.
- She is still young, energetic, and ready to get back to work if needed, for as long as is needed, even if that means starting over from scratch and learning a whole new trade. Time is on her side.
- In her race toward financial independence from ages 20 to 30, she learned how to be happy with less. She never drove fancy cars or lived in a big house before, meaning she’s already psychologically prepared for the lean times ahead.
No market crash can take your ability to be happy with less away from you.— Trip Of A Lifestyle (@TOALifestyle) March 12, 2020
Her worst-case scenario is to get back to the grind for a few more years, wait out an economic recovery, and keep adding to her investment pile. It isn’t exactly what she’d envisioned, but at worst, she’ll be all set up to try another early retirement by age 40, still decades ahead of everyone else. And let’s not forget that she did get to enjoy a few years of straight-up chillaxing in there, too, before it all went to hell.
The Bone-Chilling Terror of Traditional Retirement
Alright, so maybe I’ve convinced you that retiring in your 30s isn’t a death sentence, but it might still seem a little risky for your taste. That last scenario didn’t exactly sound fun, even if it worked out okay. So let’s consider the alternative:
Regular, responsible adults usually take things slower and plan to retire somewhere around age 60-70. The cool thing about doing it this way is that you get to take your spending a little less seriously along the way.
Rather than going hardcore and saving 50-75% of your income to retire in your 30s, you only need to save and invest around 10% throughout your working years to fund a normal “golden years” retirement. You pay your bills, park that 10% in a 401(k) or an IRA, and the rest is play money that you can spend on new SUVs, 82-inch TVs — whatever.
But wait…Couldn’t the same nightmare economy hit when you’re about to enter into traditional retirement, too? What would that same economic scenario look like for a 60-year-old retiree who had saved “enough” to throw away his work clothes?
Our sixty-something retiree’s disaster scenario would look something like this:
- He would have a similar savings and debt situation to our thirtysomething retiree above, but…
- He has a very limited number of potential working years ahead (if any), with no time to start over and learn new skills, if needed.
- He has lower energy and motivation to deal with the stress of a situation like this.
- His medical situation is likely much worse than when he was 30, and his medical costs may be expanding dramatically in the near future.
- Throughout his life, he spent ~90% of his take-home pay, meaning he’s gotten used to the finer things. It will be emotionally distressing to make the budget cuts necessary to survive bad economic times.
This blog’s audience is mostly on the younger side, so hopefully I’m not freaking anyone out too much here (that wasn’t my point). But if I’m being honest, we’ve definitely taken a lot of comfort in the fact that even if an economic depression strikes, we’re never gonna be left out in the cold like in the 60-year-old’s example above. Even if the worst happens, we still get a “do-over button” provided by saving at a young age. That would be true for a 40-year-old retiree as much as it is for a 30-year-old, too.
Moreover, if everything goes according to plan in early retirement, the most probable outcome is that your portfolio continues to grow, not shrink, as you draw from it throughout life. That means you actually end up with too much money, and you can take safer cash and bond positions when you’re older without worrying about running out of money at all. These “nightmare scenarios” are actually extremely unlikely.
Rebranding the Pie in the Sky
So why do people get so mad when they hear about FIRE? Maybe if we just changed the name from “retiring early” to “deliberately saving a large portion of your income at a very young age so you can enjoy more years of your life,” stuffy old people would stop complaining about it.
Truth be told, we ourselves aren’t completely on the standard early retirement path. Since age 29, we’ve considered ourselves to be “semi-retired.” For now, we still do a little freelance contract work (around 10 hours per week per person), but none of it requires us to be in an office or set an alarm clock. We both pretty much feel like we’re retired.
We make more at those side gigs than we need to pay our bills, so rather than drawing from our investments during “retirement,” we are still adding to the pile. Some might say we’re not retired at all. That’s fine. The key is that we’ve designed a lifestyle that’s really enjoyable to us, and we’re not obligated to do any work we don’t like, since we can always quit and fall back on our portfolio.
This is another safety net of early retirement. When you leave full-time work so young, you may find yourself earning extra money that you don’t really need, just for the fun of it!
Some people will probably read all of this and feel unable to relate to the idea of having a bunch of excess cash for investing. Near the beginning of our journey, we were able to achieve a super high savings rate while making salaries of about $38k per year per person, but there are tons of people out there who make way less than that. If you’re one of them, I hope you won’t read our blog and just write us off as high-income snobs.
Most of this website’s cost-cutting tips are applicable to people at all income levels. No matter how much or how little you make, reducing your expenses as much as you can and saving as much as possible will give you more freedom and financial security than you would have had otherwise. Just do what you can. And if you do manage to get your income up to a middle-class level or higher, you can actually quit the rat race altogether in a matter of about 10 years from when you begin.
The bottom line is that in good economic times or bad, the younger you start on the path to financial independence, the sooner you can achieve it. Once you get there, ignore the haters, and cut back on work whenever you feel ready. It’s less risky than you think. The “retirement age” is whatever you choose it to be.