Financially Independent or Retired Early?

There is a healthy and active FIRE community online.  FIRE, for those unfamiliar, stands for Financially Independent, Retired Early.  Most often, the retired early part implies retirement in your 40s, if not your 30s.  But the question becomes: do you really want to leave the workforce at a young age?  Instead, would you rather be financially independent, so that you can choose when and if you want to work? Are you so miserable working that you wish to never again get paid to do so?

Granted, early retirement does not happen unless you are financially independent.  After all, how will you pay for life’s necessities?  However, for many in this community, FIRE seems to be in and of itself a goal.  They view it as a way to keep score, and many sacrifice greatly in order to reach it.  The downside is that you might sacrifice living your life to its fullest in the meantime.  Sacrificing some of your best years (your 20s and 30s) in favor of having more leisure time in your 40s, 50s and beyond does not sound like that great of a tradeoff to me.  This tradeoff itself may not even occur, as life tends to get in the way of sound financial planning.

My family and I are frugal people.  We buy two to three year old cars and drive them into the ground.  We do not wear fancy clothes, nor do we eat out much (with young kids, that wouldn’t be practical anyway).  When I say that you may be sacrificing the best years of your life, I’m talking about living as a monk just to hit your number sooner.  Spending every weekend at home instead of going out with your friends or eating rice and beans each night takes its toll on your spirit.  Instead, you need to practice discipline and deliberately choose where you want to spend.  The best course of action is to limit your large, fixed expenses (housing, vehicles, and previous debt) and the rest works itself out easily.  If you have limited those major categories, then you’ll generally be able to save a healthy amount each month while enjoying things like travel, good food, and fun activities.

Ideally, you want to have your cake and eat it too.  That’s why I preach earning power so much more than saving power.  You can lead a really, really, really nice lifestyle in most of the country spending $40,000 – $60,000 a year (after-tax dollars).  However, to be able to spend that, you need something in the neighborhood of $80,000 to $100,000 in gross income.  Beyond payroll and income taxes, you have to pay for health insurance and take advantage of a known tax break today by putting money in your 401k or similar retirement plan.  Tack on a savings rate of 50% or more, and you’re nearing the $150,000 – $200,000 earnings requirement.  If you hate your job that pays $60,000, and want to save half your income or more to retire early, you will not have much leftover to enjoy your 20s and 30s.  Frugality only gets you so far.

The Ability to Say F-You

I suspect that the primary motivation behind the desire to be FIRE’d is that most value their freedom and quite a few people flat out hate their jobs.  Much of this, to an extent, is just attitude.  Are most jobs exhilarating and exciting?  Nope.  Are there jerks, brown-nosers, and backstabbers in every organization?  Pretty much.  Are most jobs going to match up with most people’s ideal career?  Not a chance.

This has been true throughout history.  And for much of history, most jobs were worse than anything that we have today.  A job that provides a solid income and allows you to maintain a somewhat middle-class lifestyle is a good job overall.  Will every part of every job fire up your passion?  No, it won’t.  Even if you ran your own business doing what you love, you still have to deal with payroll, accounting, marketing, legal, and other day to day operations.  Life is logistics, and that’s as true in business as it is in your personal life.  A big part of any company is dealing with those mundane tasks.  When you’re young and early in your career, those tasks will fall on you.

Beyond the sometimes daily drudgery, work can also be challenging due to the lack of personal freedom.  Bosses are literally little dictators in America.  We have an employment at will society, which means that you can quit at any time for any reason, but you can also be fired at any time for any reason (with a few exceptions, such as race or gender).  A boss doesn’t like you and forces you to work the overnight shift?  That’s perfectly legal, and if you make a stink about it, you can be fired.  You received a lower bonus, mainly because you’re a woman and not a member of the boys’ club?  Unless you’ve got a LOT of explicit emails or recordings of your boss saying that’s the reason, you have no recourse at all.

We make a trade-off every day.  In exchange for a steady paycheck and benefits, we give up some of our freedom and commit to doing some of the drudgery.  The alternative is striking out on your own (something I would normally recommend, but since I have not done so, I would be uninformed at least and a bit of a hypocrite at worst).  My hypothesis is that most of these annoyances go away once you have the ability to say F-You.  If your boss wants you to work the overnight shift and you don’t want to, tell him or her no.  If you are a great employee and they know it, odds are they’ll cave.  If not, then you can quit and go find something else.  Same with an underpaid bonus or anything else for that matter.  All of a sudden, the tables have turned.  If you don’t have F-You money, you need the job more than the boss needs you.  Once you make your F-You money, it’s the other way around.

Benefits of Early Retirement

The point of this article is to argue that early retirement is not a goal by itself, or even a goal that should necessarily be sought.  Before I go there though, there are many benefits to retiring early and those deserve to be discussed.  Time, and your freedom to do things when you choose as opposed to cramming everything into a weekend, being the key one.  A peak life is lived on off-peak hours.  Have you ever been to Costco on a Saturday?  So has everyone else, because that’s when everyone else has the time to do it.  Monday thru Friday working nine to five is the norm.  Because it’s the norm, all of life’s other activities, from logistics to recreation, have to be done in the evenings or weekends.  Want to go to an amusement park?  How about Tuesday morning instead of Saturday afternoon?  No lines and no waiting.

The freedom gained goes beyond just living life on off-peak hours.  Working takes an incredible amount of time.  Assuming you’re a busy professional, you’re probably working at least 9-10 hours a day and commuting for an hour or more.  Getting ready in the morning and decompressing at night takes another hour out of the day.  That’s 12 hours of work related activities.  Assuming you sleep a normal amount, you may be lucky to have an hour or two for activities of your choosing, once you factor in the time for cooking and eating, running errands, and life’s other basics.  Beyond that, I know that I’m pretty wiped out once the late evening rolls around, which happens to be exactly when those one to two hours of freedom arrive.  I don’t want to play, I want to veg out!  Without work, you have freed yourself to be able to what you want for a good 50-60 more hours.  That much freedom is scary for some, but imagine the possibilities!

Finally, the health benefits from leaving the workforce have been well-documented but can be substantial.  There are also negatives, but those are discussed below.  Without good health, the rest of life gets much more challenging.  One of my biggest fears is some sort of substantial disability.  Take away my good health and the ability to get up and go every day, and there would be no chance to build a Great Family.  Working causes more of life’s ailments than we like to admit.  Constant stress as well as poor health habits such as sitting all day really takes a toll over time.  Beyond that, working out or doing physical activities can be done in some of those 60 freed up hours.  There’s no more need to cram in the gym at 5am.

Financial Consequences

Now let’s turn the tables and look at some of the negatives of early retirement.  Financial consequences can be substantial.  I like to use the following waterfall of savings when measuring wealth progress:

  1. Fully funded retirement accounts (on a per year basis): Take the known tax break and any company match while you can. The benefits of tax-free growth are well-known but should not be underestimated.
  2. Emergency Funds: I’ve touched on this in the past. Emergency funds should be part of your family’s financial structure.  The additional flexibility provided by an emergency fund more than pays for the potential cost of not having those funds invested in risky assets.
  3. Pay off Debt (including mortgages) and Eliminate Fixed Expenses: Paying off debt such as auto loans, credit cards, and student loans should be obvious. But pay off your mortgage too?  Living debt free and minimizing fixed expenses gives maximum amounts of financial freedom.  By definition, dropping fixed expenses means a larger share of your total expenses are variable.  Those expenses can be ramped up or scaled down depending on your finances.  Plus, I’ve yet to meet anyone with a paid-off home that regretted the decision.  There are few decisions in life where that’s true.
  4. Build the F-You Fund: The F-You fund is your fortress, your moat, and your battalion of Navy SEALs holding off the financial barbarians at the gate. Building up the F-You fund is what provides the possibility of an early retirement.
  5. Get Rich Money: Once you’ve got your solid base of F-You money, feel free to funnel remaining money into higher risk, higher returning investments. In investment management lingo, these are the investments that look to return multiples on capital, not just internal rate of return (IRR).  These are the funds that are used to build a truly Great Family, financially speaking.

The financial consequences related to early retirement impact each of these.

  1. Retirement Accounts: The US tax code strongly favors work when it comes to retirement tax breaks. It strongly favors capital in every other category.  The 401k maximum contribution is $18,000 in 2017 ($54,000 total with employer contributions), while the maximum IRA contribution is only $5,500.  You can only have a 401k through an employer, or a self-employed 401k if you have your own business.  Giving up work means giving up almost $13,000 per year in tax deferred investing and a known tax break.  Also, your Social Security check will be smaller when you actually hit retirement age.  Most people tend to underestimate the importance of Social Security.  It is no-risk (unless you include US government default risk) and grows with inflation through time.  That’s one heck of a nice annuity.
  2. Emergency Funds: Emergency funds become exponentially more important if retired early. First, you do not have additional earned income to either use to fund an emergency, or to replenish your emergency fund if you have one.  Second, without a paycheck or several years of self-employment history, you will not have the ability to get a loan or line of credit if needed.
  3. Debt and Fixed Expenses: Hopefully you’ve eliminated all debt before retirement. However, early retirees are missing a large increase in fixed expenses: health care.  Health care is subsidized through employment, both through the employer picking up a share of the bill and because it is paid for on a pre-tax basis.  Buying individual insurance, even with the Affordable Care Act, can be expensive and done only with after-tax dollars.  Additionally, most of the affordable plans in the individual market come with high deductibles and co-pays.
  4. F-You Money: Most early retirees’ F-You funds are woefully underfunded. There’s a lot of dangerous financial living.  The 4% withdrawal rule isn’t even safe for a “typical” 30 year retirement, let alone a 50 or 60 year retirement.  Using something more reasonable like a 3% withdrawal rate would increase the required size of the F-You fund by 33%.  Using something even better like a 2.5% withdrawal rate would require a 60% increase.
  5. Get Rich Money: This one is pretty easy. Without regular income coming in that more than covers your expenses, you cannot put money away for higher risk, higher return investments.  Retiring early can negatively impact your ability to build a Great Family financially.  Having a Great Family financially makes creating a Great Family in all other ways easier.

Personal Consequences

Beyond the financial risk to retiring early, let’s look at some of the personal consequences as well.  I’m going to speak briefly from the perspective of a man with a family (because that’s what I am).  I’m going to generalize, but I think this is more true than not.  Men my age and older, with a solid career and a spouse and children, tend to focus almost exclusively on their family and their career.  There just isn’t time for much else.  I fall squarely into this category.  Oh, sure, I’ve got a few outside interests.  But those tend to take a backseat.  Depending on how old you are when you retire and how old your kids are, early retirement may include the loss of both (at least family living at home) at nearly the same time.  A man who had kids in his late 20s and early 30s, and retires in his mid to late 40s, would be both career free and an empty nester within a couple of years of each other.  Suddenly, all that free time looks pretty intimidating.  You haven’t been practicing your outside interests for years, and may not even know where to start again.  The personal loss can be pretty substantial.

Social isolation can also be substantial.  I am blessed with an incredibly flexible job, which means I can work when I want from where I want (within reason).  That opens up a world of possibilities, and to some extent, gives me a glimpse into early retirement.  What I’ve found is that while I can do any activity at any time, most of my friends and family do not have this flexibility.  Most of your peers are working Monday thru Friday, nine to five.  And they’ll probably keep working that way well into their 60s.  You’ll have to locate a new set of friends to do all those early retirement activities in off-peak hours; something more easily said than done.

The health benefits stated above as a benefit of early retirement can be offset by the health impacts of not working.  The National Bureau of Economic Research did a study in 2008 that found that retirement leads to decline in mental health and increases the chance of things like stroke and heart disease.  The NBER focused on retirees in general, which skews to an older population.  However, unless you are a disciplined individual, you can see how early retirement may lead to negative mental health impacts.  Social isolation, as well as the lack and availability of continual learning required with a career can lead to declining mental health.

Finally, do not underestimate the benefits of external validation.  I know it sounds petty, but it’s true.  We all enjoy receiving gold stars.  If you have a job, then every paycheck is third party validation that you’ve done well-enough to earn your paycheck and remain employed.  My wife struggled with this when she left the workforce to care for our children.  Replacing external validation with internal validation is challenging.

Find a Happy Medium and Change Your Attitude

Early retirement should not by itself be an end goal.  Being financially independent, on the other hand, can lead to greater flexibility in your ability to live your life as you see fit.  The first step in the process is to change your attitude.  Most jobs are pretty decent and no job is going to be without jerky coworkers or mundane tasks.  Having a sufficiently funded F-You account allows you to flip the tables on your boss.  Suddenly they need you more than you need them, and that by itself can make all the difference.  Confidence can benefit your career in more ways than one.

Early retirement, unlike financial independence, comes with a host of drawbacks.  Decreased wealth in all respects is a primary financial concern.  However, the personal drawbacks can be substantial as well.  Feeling lost, social isolation, and the lack of third party validation can all negatively impact our lives.

Instead, find a happy medium.  Change your attitude, maximize your earning power, and save like crazy to get F-You money.  Once you have that, feel free to move onto the next chapter in your life.  Stay at your current career but be bolder, change to a new career with lower earning power, or build a new business from scratch.  The possibilities are endless.

Keep building my friends.

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