Boomers Exeunt
Boomers have ruled America’s economic, social, cultural, and political life for a long time now. Some would say that the late 1960s marked the emergence of Baby Boomers (1946–1964) and the beginning of the decline of the Silent Generation (1912–1928). The youngest Boomer will turn 60 this year, and their progeny will want their turn.
Millennials (1981–1996) are different. We hear that all the time. And it’s true: Millennials are more educated and more racially diverse. They tend to defer marriage, and relatively speaking, they are less wealthy than older generations. They have more personal debt, but they are also considered more progressive and creative, not to mention tech-savvy.
Readers may notice that we jumped GenX (1965–1980). Also known as the Sandwich Generation because they often have to support both children and aging parents, Gen Xers have not earned the kind of unique generational personality that Millennials have. Gen Xers have a claim to inventing the FIRE movement, but it’s Millenials who fully embraced it.
The FIRE Movement
One way the Millenials are different is how they approach money and investing. Where Boomers planned retirement at or near 65, some Millennials are looking at retiring much earlier than that. FIRE is an acronym for “Financial Independence, Retire Early,” and it’s gaining in popularity.
If you’re a Boomer reading this, or even a Gen Xer, you may not find the FIRE movement very attractive. In fact, you might even find the idea a little crazy. That’s because the movement encourages people to live a very frugal lifestyle, aiming to save between 50% and 70% of their income. As a group, Americans don’t like to live well below their means: the savings rate in the U.S. last month was 3.4%.
Those savings are not intended to go into a mattress but to be invested wisely in low-cost, diversified index funds, real estate, and other income-producing asset classes. The goals are long-term growth and passive income. The target is 25 times their annual spending, which would allow them to withdraw 3% to 4% of the corpus every year virtually forever.
Some may find a flaw in this math, concluding, and perhaps rightly so, that FIRE will mean an entire lifetime lived below one’s means. No big houses, no fancy cars, no luxury cruises, no bling. Ever. FIRE seems to be mostly about a rejection of careerism in favor of personal freedom.
You can imagine that a life of poverty won’t appeal to everyone. As a result, there are several variations of the FIRE philosophy. These include “lean FIRE,” “fat FIRE,” “Barista FIRE,” and “Coast FIRE.”
Lean FIRE is what it sounds like: a minimalist lifestyle. The goal is to exit the rat race and live a simple life—a life where basic needs are met and wants are few. Financial advisors rarely meet this type of person. This would be a choice best made very early in life before things like mortgages and car payments capture a high share of one’s paycheck.
Fat FIRE would be a good description of many people’s preferences. They want a higher standard of living but strongly desire an early retirement. According to Empower, the average American man retires at 65, while the average woman retires at 63. A person in their 30s could set a goal to retire 10 years sooner than average and, with the right discipline, could get there.
Barista FIRE means, essentially, quitting your rat race job to take on work you find more enjoyable, fulfilling, or less stressful. Part-time income would supplement nest egg withdrawals. One imagines there are a lot of people who’d find this attractive.
Financial planners might find “Coast FIRE” laudable. The idea is to begin saving early in life so the magic of compounding can do its work. Under the “rule of 72”, an account with a net 10% yield will double in value every 7.2 years, and an 8% return will double the account’s value every nine years. Money saved at 8% can multiply eightfold in 27 years.
Thinking it Through
Planners will also recognize some pitfalls with FIRE. For one, living a frugal lifestyle may not be sustainable for most people. Even Millennials, who say they value experiences over objects, may grow tired of beans and rice. This is particularly difficult in America, with its saturation advertising and culture of luxury.
Whether frugal or not, healthcare costs can make FIRE very difficult. Most American workers get their insurance through their employer, and this is a much less costly way to get healthcare before Medicare kicks in at 65.
There is also the phenomenon of timing risk, sometimes called market risk, that can deplete an account shortly after retirement begins. Imagine you retired in December of 2008 with $1,000,000 in an S&P 500 ETF. Three months later, in March of 2009, your account value would have dropped to $420,000. That’s timing risk.
There’s another thing, and it could be the biggest of all: many people derive their sense of identity and personal worth through their work. Many complain about their job or their boss, but work provides social interaction, a sense of purpose, and a structure to life that can be very personally enriching.
No doubt there are some readers who are thinking FIRE sounds pretty good. Without question, saving and investing wisely is a smart thing to do, and financial independence is a laudable goal. For most people, FIRE will mean some hard choices and real discipline.
