Millennials are blamed for many of the world’s worst trends. As a millennial myself (a very old one at that), I’ll admit I'm not into avocado toast. One trend in personal finance is F.I.R.E., or Financially Independent, Retire Early. The concept is essentially saving as much money as possible in your 20’s and 30’s, then retiring as early as your 30’s or 40’s. The prospect of kicking your feet up at 35 and enjoying afternoon frozen drinks on the daily sounds enticing, but is it realistic?
On paper, I love the idea. One of the most basic financial tenets is time value of money. Applied to personal investments, if you can stash a substantial amount of your income in a 401k or Roth IRA early in your career, the compounding nature of your investments by mid-life will be huge. For example, if you were 25 years old and saved $500/month for 20 years with a return on investment of 7% annually (comparable to the stock market), you would have $260,000 by age 45! But, let's say you waited until 35, but invested $1,000/month. By 45, you'd only have $173,000. You would have put the same amount of money in, but waiting until 35 and doubling your monthly savings would cost you $87,000!
F.I.R.E. followers typically aim for the 4% rule, meaning they save up at least 25 years of living expenses before retiring. That rule was created for more traditional retirement ages, with the thought that you could withdraw 4% of your retirement savings safely each year and live off the returns of your investments and leave the principal alone. Of course, investments can fluctuate, but over time this axiom holds up. If you’re sitting on $3 million in retirement assets at 35 and want to live off your hard work and investing, enjoy that piña colada! Using the 4% rule, you'd have $120,000/year to spend and plenty of savings and time to keep appreciating your assets.
Now, here’s the dose of reality - you don’t know what the future holds. If you pull the ripcord too early, what happens when the unexpected strikes? You’re single, then you get married. You have kids. Sick parent you need to care for. Downturn in the stock market. Do you want to jump back into the job market? Chances are you had a six-figure income to pull this off in the first place, so how likely is it you can find a comparable job after years of retirement? And, missing out on prime career years, will someone hire you? And if that doesn't scare you... for my example with our friend sipping piña coladas, guess how much you would have to save monthly to get $3 million by age 35? Assuming you started at age 22 (after graduating college), you would need to save $12,000. Per. Month.
If you can overcome those obstacles, you also have to consider how liquid your assets are. For example, if most of your money is in a 401(k), it’s essentially tied up until you’re 59 1/2 unless you’re willing to take a 10% tax penalty (on top of standard income taxes) for early withdrawal. Note - hardship exceptions exist in certain circumstances, including during the COVID-19 pandemic. Ideally, you have enough post-tax or low-tax assets (Roth IRA, CDs, high-yield savings, etc.) to draw from until you’re old enough to tap your 401(k).
Finally, ask yourself this question: how frugal do you want to be, both while working and in retirement? Personally, I live fairly conservatively and can go without luxury purchases easily. However, I hope to travel and treat myself and others in retirement. When it’s time for me to punch the clock one last time, I will have piled up enough money to live comfortably. For those F.I.R.E. folks, they typically have to keep their budgets tight their whole lives to make it work.
My recommendation? Follow the principles of F.I.R.E. while you save, then take a hard look at your finances, lifestyle, and goals before your retire. Maybe you can‘t retire by 35, but you’ll have the financial security to know you can move on to your life’s work - without looking over your shoulder.