Is the FIRE Movement Dead?
I’ve seen a number of headlines lately questioning if the FIRE movement is dead. Many critics of the FIRE movement claim that the bear market secondary to the global coronavirus pandemic has ended this financial philosophy. Some state that FIRE was only possible due to the record long bull market we saw over the last 11 years. As they say, everyone is a genius in a bull market. But now that this historic bull market is over, they state that it’s time for the followers of the FIRE movement to come back down to earth.
Given the current global circumstances, I think this is a fair question that I’d like to explore in my post today.
What is FIRE?
For those that are new to my blog or that may not know what the FIRE Movement is, you can check out my post Top 10 Terms You Should Know About The Basics of FI.
Briefly, FIRE stands for Financial Independence, Retire Early. The basic idea is that once your investments and passive streams of income earn enough money to cover your expenses, you have become financially independent (the FI). At that point, you no longer have to work to earn money, and some people choose to retire early (the RE). This is in contrast to the common narrative of “work until you are 65 and then retire.”
In case you couldn’t tell by the title of my blog, I am a big proponent of FIRE, at least the FI part. I don’t think you have to retire early to pursue financial independence. FI simply makes retiring early one option among many.
I believe that no matter what your financial situation is, everyone should be working toward financial independence. Why? Because financial independence grants you true freedom in life. Freedom from stressing about money, freedom to work as much or as little as you want, freedom to do those things that mean the most to you.
Over the last decade or so, the concept of FIRE has steadily grown on internet blogs, books, podcasts, YouTube videos, the mainstream media, and now there is even a major documentary. Some have latched onto it with both hands, while others claim it is just another financial fad.
So, with the coronavirus pandemic, is the FIRE movement dead? Was this all just a hope and a dream? A product of a long lasting bull market?
Let’s break this down from two different perspectives. First, those that have already achieved financial independence and retired early. Second, those that are in the pursuit of financial independence.
Those That Have Already FIRE’d
First, let’s consider those who have already retired. These are those individuals that have saved and invested enough money that it generates enough income to cover their expenses. They have decided to retire to pursue other interests and are living off of this income. They could be in their 30’s, 40’s, or 50’s.
While their sources of passive income could include real estate, a small business, side hustles, or a pension, for simplicity’s sake let’s assume that most people in this situation are living off of their stock and bond portfolio and are following the 4% percent rule (rule of thumb). If you are unfamiliar with this rule, at a basic level, 4% is considered the safe withdrawal rate from your retirement portfolio. Many studies have shown that with a balanced stock/bond portfolio (50/50 or 60/40), if you withdraw 4% or less of your assets each year, adjusting for inflation, you will not run out of money over the next 30 years or longer.
Are these people in trouble? Are they going to run out of money because the market has lost so much value due to the coronavirus pandemic? Did they account for this type of scenario in their planning?
The answers to these questions lie at the heart of the 4% rule, which again is more of a rule of thumb. The 4% rule was derived by retrospectively looking at how much you could safely withdraw from your portfolio without your money running out, no matter what year you retired. This rule, based on the original study and many other subsequent studies, takes into account all of the the market crashes of the past, including if you had retired in 1929, 1966, 1973, 2000, and 2008. Without the market crashes, you could have withdrawn 6-8% and been fine. But taking into account all of the market downturns of the past, it turns out this is right around 4%. Thus, the 4% rule is already accounting for the possibility of these worst case scenarios.
So, in answer to these questions, if these early retirees planned correctly and are living on 4% or less of their portfolio, they should be just fine. The 4% rule accounts for these worst case scenarios in the market. Furthermore, all of the studies assume you will never adjust your spending behavior in these situations; they assume you will continue to withdraw 4% adjusted for inflation every year like a robot. In actuality, nearly everyone living off of their assets would likely spend less in a recession scenario, which would further ensure their money would last for years to come.
Those Pursuing FIRE
Next, let’s consider those that have been working towards financial independence but have not yet reached FI. Let’s evaluate them in the context of what I consider to be the four primary principles underlying the FI mentality:
#1 Maximize Income
In the pursuit of FI, you need a strong offense. This means maximizing your income from all possible sources. This includes negotiating for the highest salary you can, receiving the company match for your 401(k), and taking advantage of all of your employer benefits. It could also mean increasing your skill set and education, as well as developing passive streams of income through real estate or a side hustle. The more money you bring in, the more you can save and invest.
How has the pandemic affected those that have maximized their income? This is probably the area where people have had the least amount of control over their financial situation. With government mandates to socially distance ourselves and shelter in place, businesses have been shut down and many have lost their jobs.
But I would argue that those that have worked to maximize their income up to this point have fared better than others. Through hard work, further education, and increasing their skill sets, they have made themselves more valuable to their employers/companies, making them less likely to lose their jobs. And if they did get laid off, in the post-pandemic marketplace they will be much more competitive for a new job.
And for those that have other streams of income, I’m certain they are grateful for that extra help to get through these difficult times.
#2 Reduce Expenses
Every good offense needs a good defense. On the path to FI, this means reducing expenses. This doesn’t mean you need to live like a monk, but it does mean cutting out those items from your budget that are frivolous and don’t bring you value. Cutting out unnecessary expenses leaves more money to save and invest, accelerating your progress towards FI.
How has COVID-19 affected those actively working to reduce their expenses? Well, I think there are at least three direct results of reducing expenses. First, it helps you to live within your means. Second, it keeps you from going into consumer debt. And third, it leaves more money for saving and investing. In the midst of this global pandemic, I can’t imagine anyone regretting these results from actively working to reduce their expenses.
#3 Increase Savings
It doesn’t do much good to increase your income and reduce your expenses if you don’t save that extra money. Saving has to be an intentional action, otherwise we tend to spend any extra money we have. The more you save, the more you can invest and progress towards FI. The percentage of the money you save is known as your savings rate. Traditional financial advice is to save 5-10% of your income. Those in the FI community often save 25-50%, and sometimes more.
One of the first places this money should go is to establishing an emergency fund. Traditional advice is to save 3-6 months of your expenses in an emergency fund, advice that seems pretty wise considering current events.
So how are people faring in this pandemic that save 25-50% of their income and have a 3-6 month emergency fund? I’m sure they feel much more secure than those living paycheck to paycheck.
#4 Invest Wisely
Finally, to pursue FI you have to invest wisely and harness the power of compound interest. In the FI realm, this typically means investing in the stock market through low cost index funds. It may also include investing in real estate, small businesses, or other alternative assets.
Has the COVID-19 induced market drop derailed any hopes for these investors to achieve FI?
Absolutely not. Remember, you don’t lose money unless you panic and sell. So, as long as investors keep their cool, they still own the same amounts of the same companies, despite the swings in the market.
For those that were close to pulling the trigger on retirement, they may find they have to work a little longer until the market recovers, but if they stay the course, they’ll still make it.
For those with a longer time horizon, the drop in the market essentially means that stocks are on sale and they can buy more for their money.
Conclusion
So, is the FIRE movement dead?
Definitely not.
For those that are already retired, if they just abide by the financial plan they’ve already established, which accounts for times like these, they will be fine.
And for those currently on the path to FI, no matter where they are on their journey, they are much more financially prepared and should stay the course. The four primary principles of FI will help anyone financially, even if they never intend to deliberately pursue financial independence.
And for those not currently pursuing FI, now may be a good time to consider it.
I would not be surprised if we look back on this global pandemic almost like a financial great awakening. For many, the pain of financial insecurity is likely so great that they will resolve to make the necessary changes in their lives so they never find themselves in this position again.
Here are some take home points to consider
- In these financially uncertain times, those that were already on the path to financial independence are undoubtedly better prepared to weather this storm.
- Regardless of circumstances, everyone can benefit from maximizing their income, reducing expenses, increasing savings, and investing wisely.
- For those living off of their investments, remember that the 4% rule takes into account times just like these.
- If you haven’t been working on reaching FI and find yourself in financial despair, there is no better day than today to start making the necessary changes so you never find yourself in this position again.
Thanks for reading. I hope you are doing well in your progress towards reaching FI. If you have any questions or comments that might help other readers, please list them below. In the meantime, keeping working towards Freedom Through FI!
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