Of the many casualties endemic with the current society shutdown due to COVID-19, one of the most unexpected and counterintuitive fallouts is the injury to the FIRE movement.
FIRE, for those unfamiliar, is an acronym for Financial Independence, Retire Early. According to Investopedia, the movement is defined as “a program of extreme savings and investment that allows proponents to retire far earlier than traditional budgets and retirement plans would allow. By dedicating up to 70 percent of income to savings, followers of the FIRE movement may eventually be able to quit their jobs and live solely off small withdrawals from their portfolios.”
For many, playing with FIRE allowed them to take control of their lives – paying off debt, buying a house, traveling the world, whatever. I thought it was a wonderful concept and couldn’t understand how anyone could find fault with such a plan.
But in fact there is a fair bit of criticism out there from financial gurus. Some say those practicing FIRE aren’t taking advantage of the wealth-building opportunities of compound interest; others say pursuing financial independence doesn’t properly budget for future medical expenses. Yet others point out the faulty math used to calculate expenses decades into the future.
Now, it appears, one more piece of criticism can be lobbed at FIRE adherents: The movement doesn’t factor in the possibility of an economic collapse. Suddenly people who thought their entire financial futures were mapped out and secure are finding themselves in financial hot water – with no contingency plans.
“As the COVID-19 pandemic rages on, it’s looking like it could go a long way toward extinguishing the FIRE movement that had been spreading like wildfire through the Millennial community during the long bull market run,” notes Brian Anderson on the website 401(k) Specialist.
One FIRE participant, Sam Dogen of Financial Samurai, said the “economic impact of the coronavirus pandemic will send many early retirees back to work, and many people who have not yet reached FIRE will probably have to extend their working careers by three to five years to make up for their equity losses.”
It seems a flaw in the FIRE movement was its dependence on the stock market to provide interest from investments in lieu of income from work. “The FIRE movement was born during the stock market’s historic 11-year-long wealth-creating run,” notes this New York Times article. “Professionals in their 30s and 40s were saving up million-dollar nest eggs and quitting their jobs in the prime of life to live off investments. It was unheard-of in modern times, at least for anyone without a trust fund.”
Compounding the problems, many FIRE adherents operate as “digital nomads” – traveling the world light on their feet, using the internet as an umbilical cord to manage their businesses and investments. Many held no tangible assets, such as homes or property. As a result, a lot of young retirees have been abruptly yanked off the beaches of Bali and into their parents’ basement apartment, watching in horror as their investments drop in value by six figures.
“In 2018, many people in the FIRE movement believed they had the financial resources to enjoy retirements as long as six decades,” the New York Times article continues. “If they whittled their living expenses to nothing and withdrew no more than 4 percent each year from their portfolio (known as the 4 percent rule), all would be fine.”
Many FIRE adherents are learning their financial independence was built on a house of cards, and it underscores the importance of diversifying one’s personal economic foundation. “A lot of FIRE folks are putting on a strong face,” says Dogen. “But I can assure you that behind the scenes, there is a lot of devastation.”
Oh boo-hoo, you say. Join the club. Those who have lost jobs or businesses aren’t inclined to have much sympathy with the FIRE aficionados, and I fully understand the sentiment. There’s plenty of financial desolation to go around at the moment.
But I’m not mocking the misery of FIRE participants. Quite the opposite, in fact. A potential economic collapse is something most people didn’t anticipate or plan for. The reason I’m not scoffing at the FIRE fallout is because all FIRE participants did one thing right, and this one thing might help them recover from the pause in the economy quicker than most.
They are experienced in the art of extreme frugality.
Slashing one’s living expenses to the bone is something most people are being forced into, whether they like it or not. At least FIRE folks already know how to do this, and without complaining about it. They also are experts in generating side hustles to supplement their income.
I greatly doubt FIRE participants will be able to resume their financially independent lifestyle anytime soon. They’ll have to join the rank of the rest of us, scrambling for a living and hoping Starbucks is hiring.
But, as driven and dedicated as they were to achieve financial independence in the first place, their innate frugality may help them tread water. Most are also young, and have the bulk of their productive years ahead of them to rebuild their finances.
FIRE folks also know the dangers of debt. In a recent article on tips parents should teach their children about money, Australian millionaire Michael Yardney notes, “Today’s debt equals tomorrow’s misery.”
I know most of us don’t want to hear a millionaire’s financial advice at the moment, but he’s spot-on with this one. Too many people have overstretched their personal economic lives with too large a mortgage, too much student loan debt and too much other unsecured debt. Today’s debt is now becoming tomorrow’s misery.
“Ironically, many people today are making dramatic lifestyle changes that align somewhat with FIRE principles, such as taking extreme measures to minimize expenses (especially when it comes to discretionary spending), looking for side-hustles to increase income, and becoming more socially isolated,” notes Anderson.
As the worldwide economic misery deepens, take a page from FIRE: Pare your living expenses to the bone and (if possible) avoid incurring more debt. As our ancestors learned during the Great Depression, it’s the only way to survive.
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