Much has been said of the FI/RE movement in recent years, complimentary or otherwise. FI/RE, or Financial Independence, Retire Early, is a movement that typically focuses on spending less, saving and investing more to achieve a target retirement number or the amount of money you would need to be financially independent.
In other words, how much you need to save/acquire is the amount of money you need in order for you to live for the rest of your life without working.
The movement has made fans from all walks of life, ranging from young executives in their 20s to retirees in their 60s. Proponents of the movement are typically encouraged to save as much as possible, with some suggesting a rate of 70% of their income going into retirement.
What has made the movement such an attractive prospect is the idea for some to be so financially secure that they would not have to worry about work anymore; in essence, an early retirement of sorts to achieve whatever goals or plans they have that does not require them to slave away in a job that they aren’t passionate about.
Of course, the central idea of saving and investing is a great one to hold to. Making sure that we have enough saved for our later years is something that every individual should be working towards, instead of relying on a small stipend from pensions or even family members.
Of course, who doesn’t want to have the ability to do whatever they want with their mind at ease that whatever they’re embarking for the rest of their lives, financial insecurity will be the least of their worries?
What’s dangerous about retiring early and achieving financial independence? The assumptions made in order to get there, and the misconceptions made along the way.
Underestimating future costs
Most FI/RE bloggers and enthusiasts recommend having up to 25 times the yearly income you have in order for you to live forever.
Some, in their haste to achieve the “retire early” part of the equation, have resorted to what is commonly known as “lean” FI/RE, planning for an amount that cuts out a lot of wriggle room for play. Living a frugal lifestyle with minimal expenditure, coupled with governmental assistance for medical expenses and help is a very appealing thought to FI/RE enthusiasts.
The mental image of saving up for a small yearly expense of $600,000 for monthly expenses of $2,000 sounds much better to many than the daunting task of achieving $900,000 or even 1.2 million.
The idea of someone adopting a “lean” FI/RE approach is extremely appealing; having one’s needs fulfilled, leaving smaller margins for big-ticket wants by the wayside.
However, many in the community in their haste to achieve their financial independence and retirement have conflated the ideas of “lean” FI/RE with actual good solid advice to achieve FI/RE.
The biggest danger to this approach is under-estimating your future expenses. While a person is perfectly capable of living up to $2,000 a month right now with all their monthly needs covered, the inevitable rise of inflation and associated out of pocket medical costs that come with ageing will virtually guarantee that same $2,000 would not be enough for them to live off.
One needs to understand that the costs of living in an almost never drops – and if does, there should be cause for alarm – and it only ever increases.
In short, your pool of savings you’re living off shrinks while the cost of living increases.
In addition, a single unforeseen disaster could potentially set you back for good in your later years, with consequences. It is always better to overestimate your expenses for your FI/RE journey than to underestimate.
FI/RE does not mean deprivation
Second, the idea that FI/RE itself should never be conflated with deprivation. What most sceptics are sceptical about the movement is the idea that in order to reach FI, they would need to live like poor persons, and still live the same way once they have achieved some intangible goal they’ve set out.
Most people, when faced with the prospect of change, either become dismissive of it or embrace it wholeheartedly with little in between. Sceptics, more often than not, will be utterly dismissive. The idea of actually considering what it would take to adjust their lifestyle to create a high savings rate is an idea that most do not take kindly to.
No one ever said you had to live with extreme frugality in order to achieve FI. You merely need to understand the timing of your purchase.
The key difference in thinking is this.
Or as Paula Pant says, you can afford anything, but not everything. The difference is to find the right timing for everything.
Want a new fancy car? Sure, when you can actually afford it. It’s what the first part of FI/RE means after all.
Mr Money Mustache, in his own article explains, “Well, once you have the cash for it in the bank, your house and all other debts are fully paid off, and you are either retired or very comfortable with delaying your eventual retirement for a year or more to pay for this depreciating piece of luxury property, THEN you can roll into the dealership.”
“So you can borrow to buy the BMW today, and pay for it forever. Or you can pick it up with the spare change in your wallet in the surprisingly-near future, and be a happier person for the wait.”
The central tenet for financial independence is the act of delaying your current gratification for a later date. So if at this very moment, buying a car will set your financial goals back by a few years, is owning that car a worthwhile tradeoff? Would waiting a few more years when the money meant for the car’s loan has been invested, and its interest compounded and grown along with other investments made offset the inconvenience of not having a brand new car during that period of time?
If the answer is yes, it is not a need, but a want. Wait a few more years before purchasing that want.
You don’t have to be rich
A third misconception is that pursuing financial independence is for the rich.
While there is truth in having higher disposable income for investments leads to quicker FI, achieving it with a lower income is possible as well. Those of us with middle-class incomes don’t spend our money on investments, we spend it on liabilities.
We burden ourselves with a high mortgage instead of renting a cheap room, purchase luxury cars and vehicles we can only pay off achingly slowly instead of an older cheaper secondhand model.
The rich instead spend that same disposable income on investments that earn them returns.
Spend that same amount of liabilities you have on investments, compound said interest generated, and watch the wealth grow. As Joel from FI 180 so wisely said; “It’s the spending (or lack thereof!) that influences your financial trajectory, not the wealth itself.”
Remember, the more you save, the quicker to FI you get. It’s just that simple.
FI/RE is made out of two separate but equal parts
Another misconception is the emphasis most sceptics have on the retirement aspect of the movement. While early retirement is part of the literal definition of the principles, it is only the second half of the equation.
Early retirement amounts to flexibility for one to pursue their passions and dreams. Choice and the financial ability to choose their path, be it sitting at home vegetating in front of a screen all day or climbing a mountain to shifting to a lower paying career path for the rest of their lives. Some might even prefer staying on in their current jobs, secure in the knowledge that their financial worries are behind them.
The choices are endless, and it is the knowledge that they are financially secure that allows them the freedom to achieve their dreams.
As Tanja Hester, founder of OurNextLife, a blogging site on the movement says, “Financial independence ultimately means that you can shape your life without taking money into consideration.”