I dont really like the FIRE acronym (which stands for Financial Independence Retire Early), especially when its linked to a young age. I see it as more as sensationalized clickbait, akin to the headlines on magazine covers like Flat Abs in 28 Days! The techniques may still be helpful, but the results can be overblown. Magazines know these headlines attract our attention. Thats why they use them. We just cant take them too literally.
Instead of FIRE, I prefer a strategy of becoming financially comfortable and taking a pivot. Being financially comfortable means having assets that may not support your lifestyle for a lifetime without working, but your assets are large enough to give you some options. Taking a pivot means going off your current track onto something else. There are many ways to pivot, such as:
Change career work on something you identify with but doesnt pay as much
Go from working full-time to working part-time
If you are married or in a committed relationship, go from both partners working at an employer to just one partner working at an employer
Take a gap year or several gap years
Start a business that may not become fabulously successful
You dont have to wait until you are truly financial independent before you pivot because a pivot greatly reduces your risk over retiring early. If your pivot comes with health care, you just removed a huge unknown from retiring early.
Historically a retiree can safely withdraw 4% of the initial investment portfolio, adjusted for inflation each year. If the income from your pivot still covers your expenses, you will withdraw 0% from your investment portfolio. If it covers half of your expenses, you will withdraw 2% instead of 4%, which makes your withdrawals very safe even in a low-return environment.
The level of risk you have when you pivot is completely different than the level of risk you have when you support yourself only from portfolio withdrawals.
Former Wall Street Journal columnist Jonathan Clements wrote a blog post in January with the title Second Childhood. It described the pivot very well.
Jonathan said now that hes working on his own projects, hes working harder than ever while making only 1/3 of what he used to make. Hes happy because he gets to choose his work: how much work, what he works on, when and where. With the freedom to explore in this second childhood, you are allowed to make mistakes. He thought he would enjoy teaching, but after trying it for one semester he realized he didnt. So he just dropped it, and thats totally OK.
Have a Plan B
Of course, your pivot may not turn out to be as rewarding as you originally thought. But if you treat the move as a pivot as opposed to permanently signing off from your career, you still have the option to pivot back. Some careers or professions are easier to pivot back to than others. Before taking the pivot, have a Plan B. Pivoting back is not a failure!
You become financially comfortable by saving and investing. My wife and I maxed out our 401ks every year since our very first job. Shortly after, we also maxed out our IRAs and invested in taxable accounts. We made some mistakes along the way. Fortunately they were made early enough when we didnt have as much money. After those mistakes we invested in globally diversified low-cost index funds and ETFs. This worked very well for us. With investment earnings, we accumulated 12 years of our average inflation-adjusted salaries.
We took our first pivot three years ago when my wife quit her job. We cut our income by 50%, but the remaining income still covered our expenses. We still have health insurance. We dont worry about withdrawal rates at all because we are not taking any withdrawals. Our spending actually increased as our income decreased. We landscaped our yard. We remodeled our kitchen. We bought a new car. The spending made our life more enjoyable.
When we take our second pivot, we will cut our income again, to a point where it wont cover 100% of our expenses. We will have to take withdrawals and buy health insurance on our own. We will see challenges from three major areas:
1. Low expected returns. Equity valuation is very high by any measure. Bond yields are still very low. The expected returns of a globally diversified portfolio would be 4%-5% before inflation as opposed to the historical returns of 5%+ after inflation. Thats a big difference. Low expected returns means we wont be able to withdraw from our portfolio as much as historical returns would indicate. Our defense: income from the pivot reduces our dependency on portfolio withdrawals.
2. Sequence-of-returns risk. Low expected returns would be bad enough. If even poorer returns happen in the early years, it will make the situation worse. Here the pivot becomes helpful again. It allows us to keep it gentle in tapping our portfolio in the early years.
3. Health care. We dont know how stable the Affordable Care Act will be. High health-care inflation will keep putting pressure on the system. Nobody has a magic wand. We will just to have to be prepared to deal with it. Because we treat this move as a pivot, if we have to go back to work, we will.
In short, our approach to FIRE is not retiring early but taking a pivot. Its retiring early by not retiring early.
Harry Sit is the founder of Advice-Only Financial, a boutique financial adviser search firm. He blogs at The Finance Buff. This is adapted from a post on his site headlined Financially Comfortable and Pivot, and is republished with permission.