The Financial Independence and Retire Early (FIRE)'s Paradox

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The origins of the Financial Independence and Retire Early (FIRE), a movement based on the notions of extreme savings and investments, can be traced to 1992 best-selling book “Your Money or Your Life” by Vicki Robin and Joe Dominguez. Why slog at a job (or worst, many of them) until you are about to drop dead when, instead, you can retire in just 10 years, before you turn 40? This is FIRE’s snake oil.

Before we delve into the math, and the type of acid commentary for which this author is renowned, let’s establish that FIRE is not just a moniker for a set of ideas about sound financial discipline, but, primarily, a cult. Yes, like Star Wars or Elvis Presley.

Today’s FIRE fans are most likely to be followers of younger members of the movement, such as Mr. Money Mustache, whose fame is more rooted on blogging, social media and YouTube rather than book writing. Not that all writers on personal finance are necessarily reputable; and there’s nothing wrong with social media. However, there’s an explosion of rising stars covering every possible angle to the movement.

A good close—UK—example is Jenniffer Kempson (MamaFurFur) who vlogs weekly from Glasgow and provides both a Scottish and female angle to FIRE which is refreshing in a market which is predominantly dominated by male American stars. Others, such as Ramin Nakisa (PensionCraft), do not openly address the FIRE market but his content is more well-researched than most other vloggers who cater for the FIRE audience alone.

Now, how FIRE can be a cult? There are no initiation ceremonies, nor rites of passage, and—most importantly—no leader. But it has charismatic stars and devoted followers. Most FIRE aficionados enjoy the encouraging videos, podcasts, and blogs that the movement’s stars post every week rather than actually implementing the preaching. What is cool about FIRE is its promise: the dream of showing the middle finger to the boss, living la vida loca in Phuket, or driving a brand new BMW all day long around Staines. Beans on toast? Not cool.

But it is not the addiction to avocado toast to be blamed. Neither is the iPhone 12 nor the sunbed sessions, nor any other–relatively speaking—cheap treat. The fundamental problem is that FIRE is unaffordable. Yes, too expensive. But “if people would apply themselves”, “if people had discipline and skipped the latte…”, just stop, please. I’ve been in this game since I was selling ice lollies as a kid. Let’s talk math, not Tony Robbins’ mumbo jumbo.

The FIRE belief system is rooted in the 4% rule. The rule suggests that you can retire when 4% of your investments equals your intended retirement salary. For example, if you want to retire on £25,000 a year, your portfolio should total £625,000. The 4% rule is based on the controversial Trinity study which suggests that this is the “safe withdrawal rate” for a portfolio consisting of a mix of stocks and bonds. The study was based on the American stock market and does not translate well to other markets outside of the United States, but this is a topic for another blog.

The promise of retiring in 10 years, works as follows. The 4% rule, thanks to algebra, can also be seen as the 25x rule; you should save 25 times your salary in order to retire. This means that if you are able to save one whole salary per year, you will retire in 25 years. However, if you manage to save two salaries per year, you can retire in 12.5 years. What if you could save 2.5 salaries per year? Well, you will retire in 10 years!

Some FIRE commentators even add whacky stock market growth assumptions to the saving process, further shrinking the required number of years, the percentage to be saved, or both. For example, assuming a 7% stock market growth, someone saving 2.5 salaries per year would “FIRE” in just 8 years, thanks to the magic of compound interest.

Let’s summarise the results, so that we can have all the numbers at a glance. Please note that I’m abstracting away from tax rates for simplicity.

Saving Rate Total Time to Retire
1 salary £25,000 25 years
2 salaries £50,000 12.5 years
2.5 salaries £62,500 10 years

The FIRE solution, as described in the introductory paragraph, is extreme savings—like 70% of one’s income. It is also no wonder that 70% of the FIRE content is focused on radical frugalism, and so-called “side hustles” (like driving an Uber on weekends), which is the only way to achieve such an extreme savings rate. Fine, let’s live like a monk and see what happens. 70% of £25,000 is £17,500. Let’s plug this result into our table:

Saving Rate Total Time to Retire
0.7 salary £17,500 35.7 years

What the hell happened? 35 years looks a bit higher than 10. Actually, this looks like a regular retirement for someone who is able to save money from their 30s onwards—i.e. retiring at 65. What is more, what the 4% rule, and the 70% extreme savings rule, combined, are telling us here, is that normal retirement, per se, is pretty much unattainable unless whacky assumptions are thrown in (a paid mortgage, extreme stock market growth, a sci-fi annuity, etc.).

I am surely missing something. An army of YouTubers and bloggers can’t be wrong. No, they aren’t wrong, they are rich. This is what I said in the beginning. The issue with FIRE is affordability. You need to earn £62,000 + your salary (because you have to eat whilst you save), in other words, £87,500, so that you can afford a £25,000/year FIRE dream in 10 years. But if you earn £87,500 and you want to retire on THAT salary, well, you would need to save £87,500x25 = £2,187,500. And here lies the paradox.

See, FIRE is not some smug, new outlook on how the world works, or some life hack that will give you a baby boomers’ “final salary pension” forty years earlier. If you are rich, which you must be, all FIRE does is brainwash you into convincing you that you could live on a fraction of your income. For example, if you earn £87,500, FIRE’s sales proposition is “all you need to be happy is £25,000/year”. But the club’s admission ticket is, for the majority of people, an upbringing in wealth and a matching education, probably in the likes of engineering, finance, or medicine. Mr. Money Mustache himself was a software engineer.

In conclusion, the paradox in FIRE is that the extreme investment and saving rates that it demands only work when applied to an extreme income to begin with. But if you are lucky enough to benefit from such an extreme income, you are unlikely to care about FIRE.