Most people agree that saving a portion of your paycheck for retirement is a good idea. After all, no one wants to extend their working life or re-enter the workforce as a senior citizen. But how much SHOULD you save? This question is hotly debated, and at the center of the newest trend in financial planning: the FIRE Movement.
What is the FIRE Movement?
FIRE is short for “Financial Independence/Retire Early.” According to the proponents of this movement, early retirement can be achieved through an aggressive savings rate. In short, if you save a large percentage of your income, you can live on those savings for longer, meaning that you can retire much, much earlier. I hear about this topic so often from clients and prospects, that I decided to write a whole chapter on it (chapter 12) in my book, The Resiliency Effect.
The actual retirement dates depend a little on how much you make (the more you make, the more you need to save) — but here’s a stylized example for someone who starts saving aggressively around age 25 and makes six figures by age 30.
If you save 15% of your income you would be able to retire after a 40-year career (around age 65).
Let’s say you double it and save 30% — You’ll shave about 15 years off retirement and be able to retire after a 25-year career (around age 50). Not too shabby.
Now, if you increase your savings rate all the way to 50% of your income — You’ll shave another 10 years off retirement and be able to retire after a 15-year career (around age 40).
Most people start thinking about whether FIRE makes sense for them in their late 20s or early 30s. And I typically bring it up to people who have reached a certain level in their career, are making good money, but they don’t love their job so much that they think they’ll want to continue doing it for another 30 years. If you can take the opportunity while you’re young to plough money away into savings, as long as it’s invested appropriately, it will have decades to grow and compound. Knowing at age 30 you only have to work 10 more years can be a huge motivator to focus on increasing savings rate. But it’s not for everyone.
Two Schools of Thought
There are essentially two schools of thought regarding the FIRE Movement. First, there are the supporters of the movement. These people love the idea of increasing savings rates to shorten the time it takes to retire and achieve financial independence. For them, it is an incredibly simple way to focus on saving in the short-term, so that they can enjoy a much longer retirement. I would advise people in this camp to focus more — not just on the destination of “getting to retirement” — but also focusing on what you’re retiring TO. How will you spend your time? What will you do differently from your current life? What does life look like when you get out of bed in the morning?
On the other side are critics of the FIRE Movement. These people say that it is risky and even ridiculous to think that you can retire at the age of 30, 40, or even 50 with an aggressive savings plan. For them, it is more of a pipe dream than a realistic proposal, as most people cannot afford to put such a large portion of their paycheck in savings. To those people I would say — dream bigger for yourself — there is very little than cannot be achieved given moving one of two levers savings rate and time. Maybe early retirement doesn’t appeal — but there are probably other things you’d like to do in life that require money. Saving and time are the only ways to get there.
If you’re in either camp — it takes time for savings to accumulate interest, so just setting the money aside is not enough, you have to invest it in a diversified way and be invested for the long haul (not hopping in and out of the market when you think it seems right). You also have to make sure you’ve thought carefully about health care costs and later-stage expenses that you don’t have while you’re young.
It Doesn’t Have to Be a Zero-Sum Game
While the FIRE Movement has taken a lot of heat, and some of the criticism is valid, it does raise some interesting and useful ideas. At its core, Financial Independence/Retire Early is all about savings rates. Though it may not be realistic for you to double or triple your current savings rate, increasing the rate at which you save is still a great way to grow your wealth and secure your financial future.
Even just increasing your savings rate by 1% or 2% can yield significant results down the road.
You don’t have to go all-in to achieve financial independence. Incremental changes to your financial plan are a great way to add a few years to your retirement while still enjoying your current lifestyle.
But your savings rate doesn’t have to be all about retirement. Maybe you have different goals that you would like to achieve, like taking a year-long sabbatical or becoming a digital nomad. Given a high enough savings rate and some time you can achieve pretty much anything you want.
Let’s take a look at some of the other benefits and opportunities that increasing your savings rate can provide.
Alternatives to Retiring Early
Increasing your savings rate can have a lot of great benefits. First and foremost, it gives you options. Whether you want to have a longer retirement or just an extended vacation, putting more into savings can help you achieve your goals and have greater flexibility with your money.
A higher savings rate can also help when there is turmoil in your workplace. Perhaps your income has stagnated, your company provides poor retirement benefits, or maybe you are concerned about layoffs. In any case, having that additional savings cushion gives you the freedom to take time off when necessary and find a new role that suits you better.
Another alternative to retiring early is simply working less. Increasing your savings rate will give you the ability to work less and/or restructure your work life when necessary. If you want to go from full-time to part-time, a higher savings rate can help make it happen.
Finally, a higher savings rate can also help you start a new business. Transitioning from a traditional job to business ownership takes time, so adequate savings can help with rent and other expenses while your business is getting off the ground. Additionally, you can draw from these savings to cover the initial costs of starting your business.
There are many other reasons why you might want to increase your savings rate, but it’s all about finding the right motivation. If early retirement is what motivates you, by all means, let that be the catalyst for increasing your savings rate.
However, figuring out what you will do and how you will spend your time is also a very important component of ensuring your financial plan will work.
Are you a proponent of the FIRE Movement? Tell us your thoughts!