Don't Sacrifice Your Long Run

Make sure you're fully informed on your retirement plan decisions.

The FIRE movement fascinates me. FIRE stands for Financial Independence/Retire Early. There is a lot that is positive about the mindset that goes with feeling independent and with having a solid financial foundation (which does not have to mean having millions in the bank) of being able to pay for emergencies like veterinary bills or car trouble, being to financially weather a change in jobs such that you don't get a pay check for a month or two or endure some sort of bigger financial hardship.

Like any path, there are of course drawbacks to FIRE and they seem to mostly effect the future you if you "retire" in your 30's, all the more so if your version of FIRE includes a tiny house.

In a lot of my posts lately, I've talked about optionality. Someone living the FIRE lifestyle in their 30's who is either not working or taking side gigs to make $15,000/yr to cover groceries, the cell phone bill and gas and living "permanently" in a depreciating house on wheels is depriving their future selves of a lot of optionality.

Some of the FIRE bloggers do in fact retire in their 30's with $1-$2 million and depending on how things work out, they absolutely can make it. Candidly I am not sure how someone on their 30's will accumulate that kind of wealth without a lot of stock options or inheriting it. Some can, but that is very rare. As a percentage of the population there aren't that many even considering the stock options or inheritances. If you're in those cohorts then you do have optionality in terms of retiring at 35 and making it work but that is very few people.

A common saying is that people's biggest investment in their lifetimes is their house. The idea of a house as an investment took a perceptual beating during the Financial Crisis and was a key contributor to the birth of the Tiny House Movement with the appeal being that you have a place to live without anywhere near the financial commitment while having the freedom to go anywhere and with little to no overhead, not really needing to work. The drawback here is the sacrifice of the long term for the short term. Part of the equation is an acceptance that the current generation (however you want to define it) would be the first one to not be better off financially than their parents.

In this context I have talked about the risk of waking up one day at 40 with $3000 in the bank, no marketable skills and living in a dilapidated trailer. That is of course extreme but is a threat and would be a bad place to be.

The optionality lost by going this route is the opportunity to build home equity, build other savings and to build Social Security. While I am not a fan of counting on a home to appreciate in value in some manner consistent with equities, regardless of the correlation, it can so appreciate. If not, I do absolutely believe that the vast majority of the time it can be a store of value that generally keeps up with inflation. Sometimes that is referred to as forced savings. I am not a fan of the term but maybe it's fair?

I've written a lot about the Social Security potentially lost by retiring at 35. At the very least, anyone interested in retiring that young should be informed about Social Security before they do so. As I have mentioned before, it is based on your top 35 years of earnings. Michael Kitces wrote a fantastic piece addressing every aspect of how SS is calculated. The basic building block is simply adding up your top 35 years of income (career earnings) and then dividing that number by 35 to get a simple average. If you retire with only 15 years worked, then it is still the same calculations, your career earnings divided by 35, that is your average annual income (it is then divided by 12 for a monthly number). Then a formula is applied to your average to derive your monthly SS payout as follows; you get 92% of dollars $1-$885, then 32% up to $4651 of monthly income and then 15% beyond that up to a maximum of $9875. In addition to all that, there is an inflation multiplier table for past earnings that Kitces includes which can help your average go up. As examples, if you had income in 1990 that would count in your top 35 years, you'd multiply that income times 2.44, the multiplier for 2010 is 1.231.

Kitces plays with some numbers to give an idea but the short version is that only having 15 or 20 years out of 35 will drastically reduce Social Security. That is a form of optionality lost. Again, not that this must be bad on its face, but being informed is crucial.

An observation I made when I was about 40 was to realize that at 25, I had no concept of what it was to be 40 or 45. I believe there is an element of this mindset in the thought process for someone wanting to retire at a very young age and not being able see themselves at 60 or 65 or older. Not that they'd be dead, just can't envision it.

How old are you now? Do you consider yourself young or maybe better put, do you feel young? Depending on how you treat yourself (exercise and diet) and if you have luck with genetics you could feel young and be able to do a lot of things you enjoy to a very old age, I've fought wildfires with guys in their 70's.

Instead of retiring at 35 to have independence in a downsized and more fun lifestyle, what about flipping that around to doing it at 50 or 60? In that age range, your house could easily be paid off and provide optionality in terms of selling and getting the equity out or renting it out and living off the income. You'd have the optionality from 20-40 years of saving to a 401k or the like and even of you only saved a little every year it would be a decent nest egg even if was short of your "number." You'd have the optionality of being close to a full 35 years of earnings for Social Security. All of this optionality is now at your disposal and if you're relatively young and fit you can then go do just about anything that interests you. To the extent youth is wasted on the young, this scenario can turn that cliche upside down.

If you're in that age range and not so healthy for whatever reason then you have some optionality to make changes to try to improve your health situation. All of this is much harder by retiring at 35 with far more uncertainty versus 55 with a solid foundation underneath you. The future you will be grateful for good decisions you make at a young age.

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