How to Put Some FIRE in Your Financial Plan

SHOW NOTES

Fire??

• • The FIRE movement has gained significant traction over the last decade, but is it all it’s cracked up to be?
    • On today’s show, we’re breaking down what it actually takes to be a part of the FIRE movement, whether it’s worth it, and some practical steps to put some real fire in your financial plan.
  • What is the FIRE movement?
    • Financial Independence, Retire Early
    • The goal for participants is to save and invest very aggressively so they can quit their jobs and live solely off small withdrawals from their portfolios decades before the conventional retirement age of 65 (often in their 30s or 40s).
  • But… is it really feasible?
    • In order to accomplish this goal of retiring incredibly early, participants of the FIRE movement are required to save and invest 60-80% of their income (and it’s still not guaranteed to last).
  • Do we support the movement?
    • Well, we definitely support the “FI,” but not so much the “RE” in this context.
  • This is the financial equivalent of an extreme diet.
    • There’s no balance.
  • Whenever your retirement date is set, you need a clear view of how long your assets will last (and if they’re enough).
    • Are you on track for a successful retirement?
    • Visit 15minuteretirement.com for your FREE retirement checkup!

Retirement is Risky Business

• Retirement alone is risky business. Retiring early (especially this early) is even riskier.
• If you’ve listened to the Get Ready For The Future Show much before or attended one of our workshops, you’ve heard us talk about the 3 big risks to your retirement: Longevity, Inflation, and Sequence
• These don’t just go away in the FIRE movement. In fact, they’re all bigger risks.
• Inflation:
  • Even if you’ve worked to save a majority of your income, squirreling away money isn’t the same as a plan.
  • That money won’t be worth tomorrow what it was yesterday.
• Sequence:
  • In the last 50 years, the market has seen a lot of fluctuations.
  • What happens if you retire really early and we enter a lengthy recession? Will your money last?
  • James and Joe
    • James and Joe shared a lot in common.
      • They both worked for the same company, and coincidentally they arrived at their respective retirement dates with exactly the same amount of money in their 401k plans, which happened to be $500,000.
      • They both withdrew 5 percent of their balance at retirement from each of their accounts to create an income for each of their families to live on.
    • The only difference between James and Joe was the year in which they retired. See, James is 10 years older than Joe.  That means James retired in 1966 and Joe followed along 10 years later and retired in 1976.
    • Now, with everything, other than their retirement dates, in common, here’s what the outcome of James and Joe’s retirements looked like.
    • James and Joe both invested in a mix of stocks and bonds, represented here by the S&P 500 and 10 Year Treasuries.
    • Both men increased their income according to the inflation rate each year to keep up with the rising cost of living.
    • James started with $500,000 in 1966 – 18 years later in 1982, he was completely out of money.
• Longevity:
  • Traditional retirement lasts about 20-30 years. That’s already a long time to go without a paycheck. FIRE asks you to add another 20 years or so to that.
  • Life expectancy is on a general upward trend.
  • 40+ years in retirement is a long time to have to sustain income.
  • Even if the average Arkansan saved half of their income, they wouldn’t be able to overcome the longevity issue.
    • The median household income in Arkansas is $62,387 – bringing home about $50,000 after tax.
      • Save $25,000 / Live on $25,000
      • 7% “after-tax” return on investment
      • $934,484 taxable account at age 40
      • With a more conservative 5% after-tax return as you withdraw
      • Withdrawing $50,000 / year
      • No market risk
      • $0 balance in 24 years and 10 months (or age 64)
• If you retire this early, the first 20 years of your retirement you’re missing out on the 401k match / a lot of “free money.”
  • A lack of education leads to a lack of motivation – there isn’t enough education on how 401k plans work for you.

Put Some Real “Fire” in Your Plan

• If we don’t really suggest joining the FIRE movement, what can you do to put some real “fire” in your financial plan?
• Focus on financial independence!
  • Start NOW!
    • The only better time to start focusing on financial independence was yesterday. You can’t go back and start earlier, but you can make the decision to start now.
    • Don’t wait for it to “make sense.”
      • Making your money work harder for you is what makes sense.
• Don’t pass up free money
  • At the very least, max out the match your employer is willing to contribute to your retirement. If you don’t, you’re throwing away free money.
  • The earlier you start, the more time your money has to work harder for you.
• Answer this: What’s the Plan?
  • Without a plan, the future is just what happens to you.
  • The future can’t be what you want without planning for it. In some ways you can’t have a future without a plan; because all you really have is what you’re doing now and a hope that it all works out.
• Have some hesitations about planning?
  • Feeling secure about your future starts with how you see your future.
  • Download What’s the Plan – a Manifesto for Your Life, Your Worth, and What Happens Next

Consider This…

• We don’t suggest you hop on board with the FIRE movement. We do, however, suggest that you consider these things to help put some “fire” in your pursuit of financial independence.
• Consider your “Why”
  • Why do you want to retire so early?
    • If you want to retire at 30 or 40 because you hate your job, know this: retirement won’t fix being unhappy with your life.
  • Find your purpose
    • Even if you aren’t exactly where you want to be, can you find purpose in what you’re doing?
  • If you can’t find your purpose in your current field, consider a career change
• Consider what “Early” Really Means
  • It takes a lot of effort to retire even just 5 years early. Imagine the unnecessary financial strain of adding 15-20 years to that.
    • That’s also a lot more time to have to pursue a purposeful life without blowing through your retirement savings.
  • Even if you can retire early, does that mean you should?
  • “Worktirement” is also an option to increase your freedom while still providing income (and in some cases employee benefits).
• Consider What’s Missing
  • Lower Social Security Benefit
    • Social Security benefits are also calculated based on your highest 35 years of earnings.
    • If you retire at 40, you’re retiring without the later, higher-earning years of working factored into your Social Security benefit. Those are factored in at zero.
    • A closer look:
      • Your benefit gets reduced by 5/9 of 1% for each month you collect Social Security before your full retirement age (up to 36 months, so at age 64).
      • If you retire more than 36 months early, your Social Security benefit will be reduced by another 5/12 of 1% per extra month.
    • Having to cover healthcare costs until Medicare kicks in.
      • A healthy 65-year-old couple retiring in 2019 can expect to spend more than $387,000 for retirement health care costs, not including long-term care (HealthView Services Financial).
      • This number only accounts for about 24 years in retirement.
      • You can imagine how much larger that figure would be if you double the amount of time you’re in retirement.
    • Not able to benefit from tax advantages because you don’t work long enough.
      • To qualify for premium-free Medicare Part A, an individual must have worked 40 quarters in their lifetime.
      • A quarter of coverage is a 3-month calendar quarter in which a person worked in a job and paid Medicare taxes
      • The monthly cost for Medicare Part A may change, but in 2021, people who paid Medicare taxes and earned between 30 and 39 quarters pay a monthly Part A premium of $259. Individuals who paid Medicare taxes for less than 30 quarters pay $471 a month.