Is Financial Independence Retire Early (FIRE) right for you?
I read a boatload of personal finance and investing articles within any given month. One thing that continues to get my attention is this FIRE movement – the desire of various blog authors to be financially independent and therefore retire early.
I think I’ve noticed this movement online now more than ever. I also remember reading about this in The Practical Guide to Financial Independence by Graeme Falco, a CPA from Toronto. It was a central theme in this book. In it Graeme wrote:
Financial Independence means having enough. “More specifically, FI is achieved when income earned from passive sources exceeds one’s expenses. Passive income comes from anything that doesn’t require a lot of time or effort, such as real estate, stocks, bonds, or a business that mostly runs itself.”
“The social commentary on this subject is nothing new and many people will be able to relate FI to the concept of “F—K you, money”. This money gives you power to say no (or yes) to bosses, co-workers, and just about anyone else.”
“Everyone seeking FI will have to make a decision about retirement, whether it’s early or not. It’s a personal decision and I can’t tell you which choice to make, but the freedom of choice should like a good problem to have.”
This movement has me reflecting on our own financial journey of late.
Is FIRE something we’re genuinely interested in pursuing?
If so, how serious are we?
It seems appealing but there are also drawbacks. The following questions have swirled in my head on this subject:
- What would it mean for us – financially – to get there?
- What changes or sacrifices would occur?
- What “freedoms” might we enjoy?
- What drawbacks or other considerations have we not thought about?
What would it mean for us – financially?
Mr. Money Mustache (the-retire-early-through-badassity-guy) claims he and his family of three live off about $25,000 USD per year. That’s give or take around $32,000 per year here in Canada. That seems pretty frugal.
I recall his blog makes close to 20 times this amount now – in a year. So, I guess what he used to live on in his frugal days has little relevance now. He could certainly spend much, much, more if he wanted to – but does not. My point is, most FIRE folks like MMM live rather frugally in their 20s, 30s or 40s to realize their financial independence goals. Based on my knowledge, unless you are a successful entrepreneur or have a very high income it’s not realistic to “retire” in your 30s or 40s without a very high savings rate. MMM happens to have accomplished both.
If we continue living like we do – a balanced approach to spending and saving – I’ve calculated my wife and I will not become financially independent until we are between the ages of 50-55. Even then, age 50 is an aggressive target. This is still early retirement by some standards but likely not early enough to be considered FIRE. (I don’t know is there is an age-related FIRE definition or not…)
I believe we could cut off a year or two from the age 50 target date if most of the following were to occur or continue:
- Avoid taking on any new debt in the future. (Meaning, kill the mortgage and be done with debt for good.)
- Significantly downsize from our accommodations. (See below for sacrifices.)
- Reinvest dividends and distributions paid from our investments. (We do this in all registered accounts today.)
- Obtain exceptional returns on our investments, close to 10% per year every year going forward. (We have no control over this mind you nor is this likely to happen.)
- Increase “side-hustle” / blog income in a significant way. (This may or may not occur. It is highly unlikely it will occur to the income stratosphere that is the MMM blog.)
At age 50, I’m forecasting our monthly operating expenses will be about $4,000 give or take per month – a solid $1,300 per month more than the uber-frugal MMM even when you factor in our Canada-U.S. exchange rate. These expenses include mind you about $400 worth on contingency money.
In any event it is our expectation that the income generated from our capital will cover basic living expenses. To realize FIRE sooner, some major changes or sacrifices would need to occur.
What changes or sacrifices would occur?
Some of the FIRE articles I’ve read clearly state a mortgage-free existence was a key ingredient to their early retirement. I could see why…
When I look at our home operating costs the math adds up real damn quick:
- Property taxes ($350 per month)
- Home utilities (heat, hydro = $250 per month) + (water/well, septic, telcos = $300 per month)
- Home maintenance (budget $400-$500 per month)
- Home insurance (approaching $180 per month)
The sum of these monthly operating expenses (excluding mortgage payments or prepayments) give or take is about $1,600 per month. Add up mortgage payments (and prepayments) and that’s thousands per month devoted to just shelter.
Just looking at that, you may assume a) we’re nuts to own a home and b) renting in Ottawa would have been a far better choice. Maybe to a point but home ownership is more than a financial decision. It’s very much a lifestyle choice. Let’s not forget we have some home equity to be thankful for. The smaller houses in our area now sell for >$500k. I have no idea what they may sell for in the future but I’d like to think our home will slowly appreciate in value.
The sacrifice for FIRE would be selling our home – soon or in the near future. By selling our house, the equity in our home could be put to work. The capital invested from selling our home could deliver some healthy investment income, likely close to $2,000 per month. That income could be used to rent in Ottawa. The alternative to renting would be to downsize our home rather significantly, moving within Ottawa or move to another city and buy a less expense home there. That would also have drawbacks. Moving away from family would certainly be one of them.
We’re ready to sell our home yet. It doesn’t feel right – right now.
What “freedoms” might we enjoy?
I would suspect working is much better (for the most part) when don’t have to do it for the money. I can’t say for sure but I would anticipate the freedom of time would provide us with opportunities to do a host of other things we’ve largely put off to date:
- Spend more time together
- Spend more time with family
- Visit friends
- Meet new people
- Enjoy existing hobbies and passions
- Try new hobbies or experiences
- Potentially travel more
- Become more fit (although we are trying to do this today)
- Eat healthier (although we are working on this today)
- Time to volunteer our time to causes and services in need.
I suspect the luxury of time can be a blessing or a curse to some people. It would be a blessing if you have many aspirations of doing more with your life, while you still can, since time is everyone’s biggest constraint. It would be a curse if you’re stuck in a rut or have little clue how, where, and with whom you want to spend your time.
What other considerations have we not thought about?
I don’t really know.
Maybe one drawback of FIRE is a social one. While you’re busy living within your frugal means, the relationships you have with others may change over time. After all, most people are working when you’re not. This is not suggesting you can’t maintain the friendships you have but I’m thinking your social circle would evolve – potentially for the better but maybe for the worse.
I suppose another drawback is stimulation. Work can provide lots of that for many of us. If there is no long-term career to be had I could foresee some people struggling with that. It’s good to be challenged in life. It’s motivating; it can give us inspiration.
In my early 40s now, I value and appreciate time more. FIRE is something I’ll continue to read up on and give some consideration to but my wife and I are not ready to make any radical changes. More time and freedom would be great but instead of rushing towards this we’re more or less inching our way in this direction – enjoying the journey. If and when those changes come though, I’ll let you know.
What’s your take on FIRE? Is this something you’ve read about, something you’re striving for or something you’ve already achieved? For those that don’t care about any sort of early retirement I’d like to hear from you too.
Other FIRE reads: