FIRE (financial independence, retire early) has been making its rounds through the big publications lately. Financial independence itself is fairly ubiquitous. Many people retire in their 60’s, because that is when they become financially independent due to the ability to claim their Social Security and a pension, if they have one. FIRE is different because there is a growing number of individuals that are trying to speed up their path to financial independence well before their 60’s.
Why? Well that’s different for everyone, but for the most part it provides optionality. Staying home full-time with the kids or with an aging parent is a lot harder when your employer expects you to show up at the office at least eight hours a day from Monday to Friday. That three month backpacking trip is hard to pull off if your employer doesn’t offer sabbaticals for personal pursuits.
I shouldn’t get upset when a topic like FIRE gets misunderstood by the masses. While I’m sure folks have been reaching financial independence and retiring before 60 for a long time, the internet has definitely made the topic more widespread. The articles about FIRE in the big publications are often misunderstood since they are so short and are just trying to elicit some clicks from anyone online. Due to this, many misconceptions form around FIRE.
Let’s discuss a number of the misconceptions about FIRE below.
You Need To Make Six Figures
Of course, more money never hurts (to an extent). The math behind FIRE is all about expanding the gap between your income and your expenses. There are two ways to accomplish this: 1) increase your income, and 2) decrease your spending. You can only decrease your spending so much without depriving yourself and your dependents. But at the same time, I’m sure everyone can find some fat to trim in their spending that won’t negatively impact their happiness, and even might improve it.
When folks discover FIRE and realize it’s something they want to pursue, they usually start with the low hanging fruit which is cutting expenses. It’s much easier to cut the cable package or clothing subscription service than it is to increase your income right away.
Increasing income can take more time. Getting that extra accreditation or starting that side business can take time and effort (and sometimes money). But the benefit with concentrating on increasing your income, is that if you keep your expenses constant, every dollar more that is made can be saved 100% (after taxes, of course). This is why many folks on the FIRE path will cut the excessive spending, but then concentrate on increasing their income to speed up the path to FIRE.
Fortunately, or unfortunately, depending on which camp you’re in, health insurance gets cheaper for those with lower taxable incomes. Investment income is usually more tax friendly than earned income, and therefore those who are truly “retired” usually pay less for health insurance.
You Need To Be Ultra Frugal (Rice and Beans)
The more frugal you are, the faster you will become financially independent. It’s just the math. But you don’t have to eat rice and beans every day to achieve financial independence. If you want a more cushy budget and to be able to spend on some luxuries, it’ll just take a little longer to achieve FIRE. Or you will have to increase your income that much more to achieve FIRE in the same time frame. If you are happy retiring with a budget of $40,000, good for you. If you need $100,000, there is nothing wrong with that either. Just keep in mind it will probably take a little longer. There is no shame in spending money if it makes you happy, even if some FIRE articles try to shame spending.
You Can’t Access Your 401k or IRA Until 59.5 Years Old
This is not true. There are two main strategies to access this money before 59.5 years old: 1) Roth conversion ladder, and 2) 72(t) SEPP. Other bloggers have covered this in great detail, so I will point you there. Don’t let the confusing acronyms and titles scare you. These strategies aren’t all that complicated.
People Who Retire Early Don’t Contribute Their Share to Society/Economy
Sure there are some early retirees who might not ever work again, and spend their fair share of time on the beach. However, they are still contributing to the economy through their spending. With that said, the majority of early retirees that I have seen actually became more productive after they achieved financial independence. Why? Because they don’t have to work a job they are not passionate about anymore. They are free to pursue their passions. They are free to try out that entrepreneurial pursuit they didn’t have time for with a full time job. They are free to volunteer their time to causes they find worthy. They are free to take that lower paying job at the state park, and be out in the wilderness they love. They have optionality now, without the chains of a 9 to 5.
In the end, some folks will just not ever understand the appeal of FIRE, and that’s okay. It’s not for everyone. Hopefully, with clearing up some of the misconceptions, at least the path of FIRE will be understood a little better.