FIRE Fights Back

The actual cessation of work at 35 is still a terrible idea.

After the Suze Orman hit job on the FIRE movement (Financial Independence/Retire Early) and the recent declines in equity prices I've seen a few articles taking a stand to defend the concept against some of its critics and critiques including this recent piece rerun at Marketwatch by Mr. Money Mustache (MMM) who is considered to be one of the founding father of FIRE.

A quick review of where I am on this is that idea is intriguing but actually ceasing to work at 35 or 40 (or younger) takes on a ton of risks in terms of there being too many decades' worth of variables that could permanently impair your portfolio related to unlucky sequence of returns, one-off emergencies and having no opportunity for a meaningful Social Security payout waiting for you (retiring at 35 won't result in enough of earning record for a useful payout; simple math).

MMM did the exact opposite of ceasing work, he appears to have many streams of income, his story seems to be all about being financially independent and making his own schedule and not all about being retired but that's just my impression.

In MMM's post he tackles withdrawal rates, funds being in tax qualified accounts that impose penalties for early withdrawals, asset allocation, sequence of returns and a few other things. He goes through them and does lay out a plausible path to everything working out just fine, not be sarcastic, it is plausible but it requires a lot to go right and with very little to fall back on.

In talking about portfolio sustainability, he assumes taking $40,000 annually from the taxable half of a million dollar portfolio (the other $500,000 being in an IRA) that is 100% equities (best as I can tell) he says the taxable half can last for 23 years. Yes it can but what if year two is 2008? He has year two starting at $489,000 (this nets out growth, dividends and withdrawals on the $500,000). In 2008, the S&P 500 dropped 38%. Factoring in the $40,000 withdrawal, adding in the dividend and accounting for the decline this bucket now stands at $283,836. Assuming year three was 2009, the S&P 500 was up 21% so factoring the $40,000 withdrawal, dividends and the gain this bucket would be at $303,000 at the end of 2009. In 2010 the S&P 500 was up 10%, working through the same process the portfolio ends that year at $296,000--the portfolio dropped even though the market was up. In 2011 the market was flat so the portfolio ends that year at $262,000. For 2012 11% gain for the index resulting in $249,000 for the portfolio. 2013 26% and $270,000. 2014 12% and $263,000. 2015 unchanged and $228,000. 2016 11% $214,000. 2017 19% $212,000. YTD 2018 down 5% and the portfolio is at $167,000. Ten years in and the portfolio is down 67% in one of the greatest bull markets ever, save for 2008. If 2019 is down a lot, like 25% which would not be that large of a bear market, then a year from now the portfolio would be a hair below $100,000. Keep in mind that based on MMM's spreadsheet, the $500k is supposed to last for 23 years. One of the greatest bull markets ever (repeated for emphasis).

This can be done with many of the assumptions that FIRE proponents make, they don't factor enough real world variables. $1 million at 35 or 40 is a phenomenal start and could have a pretty good chance of lasting for someone who is 65 years old (a 65 year old taking or soon to take SS has more flexibility to take less than $40,000 out) but there are too many things that can go wrong for a 35 or 40 year old to rely on $1 million for 50 or 60 years at 4% withdrawn annually.

One other real world variable that I'd never thought of is divorce. A friend told me that MMM got divorced but has not blogged about it yet. I won't speak to MMM's situation as I know nothing about it but at a higher level this would seem to be a brutal variable for FIRE. A couple does all sorts of planning and mental heavy lifting to figure out how they can FIRE at 37 with $875,000 and then they get a divorce? Looking at the next 50 or 60 years with only four hundred and something thousand would seem to be a genuine abyss. Even still, a great start but not sustainable as the only source of income forever.

Saving a lot is a great thing, living below your means makes every aspect of your life easier and combing the two is very empowering, Pursuing these objectives allows for building a solid financial base and can allow you to pursue the type of "retirement" that MMM embarked on which includes blog income, passive income from real estate investments and a few other things. I will continue to aver for saving a lot and living below your means as a route to early financial independence or as I called it a while back FINR; financial independence/never retire.

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