It is with our passions as it is with fire and water, they are good servants, but bad masters.
–Aesop, Greek fabulist and storyteller
FIRE up your portfolio
The FIRE (Financial Independence Retire Early) movement puts a hefty premium on financial security. Their goal is to clock out of the workforce well before the age of 65. In some cases, before they turn 40.
How do they do this? They trade today’s luxuries for financial independence. They may save 50%, 60%, or even 70% of their income. Like a runner training for an ultramarathon, discipline and focus are paramount in this approach. The FIRE savers max out their 401k plans and contribute to other tax-deferred vehicles such as IRAs. They sock away cash in taxable brokerage and savings accounts.
However, FIRE is challenging. It requires significant commitment and sacrifice in the short term. This frugal lifestyle means making trade-offs and cutting out small indulgences that others take for granted. Achieving a high savings rate and accumulating enough wealth to sustain early retirement takes years of consistent effort and discipline. It requires careful financial planning, investment knowledge, and a long-term perspective.
But it’s not simply about growing their savings. Minimizing expenses is a part of the equation. The FIRE crowd holds back on vacations and eating out. Their cars are simple and usually purchased used. Forget about streaming services, pricey popcorn at the movies, or the latest clothing styles. They are always looking to cut corners and therefore boost savings.
But the emphasis on early retirement may discount the fulfillment that comes from meaningful work, or the social benefits of remaining active within a profession or community. Meet Sam Dogen. Sam retired at the age of 34 with $3 million. Now he’s back in the workforce. He left retirement behind because he missed the camaraderie of the workplace and often felt lonely. There is only so much golf or pickleball Sam can play during the week. While his investments lost ground last year, he’s also figuring out that college for his kids is not cheap.
What about the rest of us?
FIRE is an interesting dinner conversation, but most folks prefer to save for retirement at a more reasonable pace. Nonetheless, we can learn something about diligence from FIRE. Might we be able to modify some of the principles FIRE devotees live by? Absolutely! Here’s a more moderate plan:
- Set aside six months of expenses in an emergency fund. While skyrocketing interest rates have hampered stock market performance over the last year, savers can now earn up to 5% risk-free. We’d be happy to point you in the right direction.
- Save up to 15% of your income in your company’s 401k. If zero to 15% in one paycheck leaves you short of breath, start small and ratchet it up every couple of months. But if 15% is too difficult or interferes with other financial goals, at least capture your company’s match. It’s free money. Why leave any behind?
- Get out of debt.This includes student loans, credit cards, and auto debt. We can talk about whether you should also try to pay down your mortgage in a judicious manner over time, with the goal of being mortgage free as you enter retirement.
- Max out IRA and HSA.Consider fully funding an IRA account and max out your health savings account if it’s offered as a part of your health coverage.
- Are you 50 or older?If so, consider catch-up contributions for retirement savings. If you’re 50 or older, you’re eligible for an additional $7,500 in catch-up contributions.
- Diversify within asset classes and among asset classes.When you are young, a diversified portfolio that leans heavily on stock funds is probably your best choice. Dollar-cost averaging allows you to take advantage of market dips. As you near retirement, you may want to gradually reduce risk by shifting to fixed income investments and reducing your exposure to stocks.
There are no easy roads, but a disciplined approach that emphasizes consistent savings, a modest lifestyle based on your income, and minimal debt will serve you well as you travel the road toward financial security and retirement — whether you’re on FIRE or not.