The FIRE movement is doing a major disservice to retirees and soon-to-be-retirees.
I’m referring, of course, to the so-called “Financial Independence, Retire Early” movement. Followers save a disproportionately large portion of their salaries in their 20s and 30s, in order to retire early—say at age 40—and live on their savings for the rest of their lives.
The debate about this movement so far has been largely about the assumptions behind the financial model that shows how it’s possible to retire at age 40 with what has been saved over the prior 15 years. My beef with FIRE is not with either those assumptions or the model itself, but with something even more fundamental.
This more fundamental problem is that the FIRE movement is irrelevant to almost all individuals, and as a consequence is dangerous. Only a very small minority of individuals have sufficient assets to retire early at more than a subsistence level. And when they realize how much smaller their 401(k)s are from what would be needed, they may very well decide to incur far riskier strategies than they would have otherwise—and end up worse off than they would have been had the movement never existed.
To be sure, there is a debate raging today among retirement advisers over how many assets you need in order to retire early. Suze Orman, the personal finance guru, believes you need at least $5 million. Others, such as Mitch Tuchman, believe that’s “nonsense” and calculate that the requisite number is closer to $1 million.
Regardless of what that number is, however, I think we can all agree that the vast majority of investors don’t come anywhere close.
Take a look at the accompanying chart, which plots data from Vanguard on the typical size of 401(k) balances as a function of age. Consider investors in the 35-44 age group, which presumably is the target cohort for retiring early. On average, they have just $68,935. The median account size—the level for which half have larger balances and half smaller—is $25,800.
An investor who retired with a 401(k) balance this size and who utilized the so-called 4% spending rule would therefore have to retire on yearly income between $1,032 and $2,757. Good luck with that.
And note carefully that Vanguard’s survey reflects account balances among investors who have a 401(k) in the first place. Many more do not.
Of course, because of Social Security, the picture painted by the meager average 401(k) balance may be too bleak. But Social Security doesn’t kick in until age 62, at the earliest. So it doesn’t do much to help during a retiree is his 40s and 50s.
So what good does the FIRE movement do to tell someone that they can retire at age 40?
It’s akin to luring a young basketball player to drop out of school with visions of someday making into the N.B.A. The net result in virtually all cases, of course, is that the player will be worse off for the rest of his life. In that regard, I note that we’re already seeing articles about the successful few who have retired early, complete with beautiful photos of the happy retirees lounging on a beach somewhere.
My recommendation is not to even read those articles. To the extent young investors take them seriously, they will be shocked upon recognizing how far short their 401(k) accounts are of what is needed to retire early. And that, in turn, could very well lead them to take on much-greater-than-market risk in hopes of building up a portfolio of requisite size by age 40—akin to a “Hail Mary” pass in football. In my four decades of tracking the performance of investment newsletters, such high levels of risk almost always, sooner or later, crash and burn.
In no way do I intend this discussion to discourage investors from spending less on current consumption and investing more in the future. That remains good and sound financial advice, and to the extent the FIRE encourages these behaviors it will have a positive impact.
Unfortunately, slowly and steadily building up retirement wealth over a lifetime does not appear sexy or exciting, especially when compared with the allure of retiring at age 40. But, deep down in, we all know that slow and steady wins the race.