Being in the Financial Independence Retire Early community got me wondering whether we are actually being a cult, a movement, or just a community of people trying to inspire each other? Does everyone join to retire early, or are some people just looking for financial stability?
Personally I am not in the retire early part. I just want financial independence through passive income. I have no interest in retiring early, as I enjoy working and have yet to experience bad colleagues and bosses.
While Financial Independence Retire Early is not a cult, it has seen some extreme tendencies. Some people following the F.I.R.E. path force themselves into the same frustration and stress stages as having a job. FIRE can also be a relief for people with a healthy money/lifestyle balance.
The Idea of Financial Independence Retire Early
The idea of financial independence retire early is to have passive income or savings which can pay for expenses. The F.I.R.E movement uses the rule of 25 and the 4% rule. In other words, you need to multiply your income with 25, and then you can withdraw 4% from that amount annually to pay for expenses.
Example: Using the rule of 25 you multiply the expected income by 25. If it is expected to retire with an income of €50.000 per year your retirement/savings account will have to be €1.250.000.
The 4% rule is the idea of withdrawing 4% of the total portfolio to cover expenses. If the idea is to retire with an income of €50.000 you will need €50.000 / 0,04 (4%) = €1.250.000. Hence, the same as the rule of 25.
The part Financial Independence is to have the money to cover expenses. The “retire early” part is to retire early, obviously. By having money work for you, the idea is to retire from the normal 9-5 job on the earned passive income. The 4% rule is broadly accepted in the F.I.R.E movement as it will theoretically make you infinite money. The average return of the stock market is 9,8%. This means that withdrawing 4% will have enough headroom to cover taxes and therefore, never decrease the principal amount invested.
The picture above is an example of the 4% rule. The assumption is that you need an annual withdrawal of €50.000. Your investment account returns 7% on average per year, excluding taxes and recessions.
As illustrated the 4% rule makes sure that you will not drain your money fund, it even grows as time goes on, and you can withdraw more money as time goes. It is the principle of the 4% rule and is at times referred to as making infinite money (Only if you are not withdrawing more than you should).
Why Retire Early?
There are many reasons people want to retire early: Don’t like waking up early, stress, want to be your own boss, want to control your own time, etc. There are many reasons why, however, the purpose is to know if you want to?
Having no job but earning the same salary would be the ultimate dream, right? It depends, it all depends. If you have hobbies, a plan to be an entrepreneur or a side-hustle you want to become a full-time job (but for fun, not because you have to), then retiring early might be a nice idea.
However, if you have nothing to do and lay on the couch all day you could end up being lonely due to the lack of engagement you would normally get from your colleagues. This could ultimately make you even more depressed than having a boring 9-5 job. There are examples of people that did F.I.R.E. but became miserable.
Is F.I.R.E. a Movement, Community or a Cult?
There is no doubt that F.I.R.E. is a big topic on social media, the news, and blogs. There is a huge following towards the F.I.R.E. idea and with good reasons. On paper, it sounds like Pina Colada at the beach with your regular income, which you don’t have to work for.
First, let us take the definitions of a cult, movement, and community to determine if F.I.R.E. is one or another:
Definition of a cult: “Great devotion to a person, idea, object, movement, or work (such as a film or book)”.
Definitions of a movement: “A series of organized activities working toward an objective”.
Definition of a community: “a body of persons or nations having a common history or common social, economic, and political interests”.
F.I.R.E. is an interest of many, it is something many people have a great devotion to and it is something that many are working towards. Therefore, I assume you can call it whatever you want.
My take on it is that F.I.R.E. has seen some tendency towards being a cult. In the cult definition, a cult can be something which is unorthodox. F.I.R.E. is many things, also unorthodox. Some people take it to such extremes that “normal” living people cannot see the rationality behind. A guy from Danish Television had an empty apartment (sold his PlayStation, TV, and other entertainment) just to lower the electrical bill. Going towards F.I.R.E. with no purpose in life, other than to be F.I.R.E. seems more as a cult to me.
F.I.R.E. is not a cult. There are some people that take it to the extremes (but there always is). Personally I exclude myself from the R.E. part, hence I don’t care a lot about whether I can retire early or not. I care about the security in knowing that my income (not 9-5 jobs) can provide for me if unfortunate events were to happen such as unemployment, long recessions, long term illness, etc.
FIRE Criticism: Finding A Healthy Balance
FIRE has its pros and cons. Obviously the advantages are that you no longer depend on a day-job to provide an income for your household. You know that you can do what you like to do because of the monetary rewards from a job no longer have the same incentives. You can now work on that idea you had a long time ago, without worrying whether it will pay off because you have a passive income stream to cover your expenses.
However, it comes with the cost of a simple lifestyle. Most people who are not earning €100K-200K a year will do significant lifestyle changes to go through the FIRE transformation.
There are various ways to define when the right time to F.I.R.E. is. However, using the 4% rule (or 25x rule) or savings rate is the 2 acknowledged methods to determine the right time to F.I.R.E. Networthify.com has made a savings rate calculator to estimate when it is possible to retire.
Besides the savings rate is the 4% rule, which I described earlier. In the picture is illustrated how much is needed to retire, based on the income needed to cover ALL expenses.
It is quite obvious that saving between €600.000 to €4.000.000 is not a task done overnight. Therefore, the savings rate is just as important as the 4% rule. Without a high savings rate, it is not possible to attain enormous investment accounts. Therefore, it can quickly get unhealthy as you would count every penny as if you were living in severe poverty, even when earning six figures just to attain the highest savings rate possible. If you are to pursue F.I.R.E. I would recommend finding a better balance.
F.I.R.E. Requires Extreme Saving And Low Expenses
The saving rate to determine when to retire can be boresome to look at. Furthermore, it can make the process seem impossible. Personally, my savings rate is 17%. Based on my annual expenses I will be F.I.R.E. in 40 years. You can calculate when you can retire right here.
People on lower incomes such as myself will need to seek an extreme savings rate to ever be financially independent and retire early. If you are in a lower income bracket, it is possible that the journey to F.I.R.E. could create just as much stress, frustration, and depression as a 9-5 job.
The Mad Money Monster started to follow the FIRE movement, however, they realized after some time that retiring early was not for them. While they will be financially independent before the retirement age, they would like to go out for pizza, subscription TV and coffee, instead of frugally manage their nest egg.