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A new take on "Financial Independence, Retire Early": Phaser FIRE

This post is periodically updated with new thoughts.

Contents

A simple case for FIRE

The simplest way to see the light, to me, is through a comparison of two approaches:

Individual A (conventional): a thirty-something starts saving 10% of their income every year. After 30 years they will have accumulated enough to stop working ($500/month * 12 months * 30 years = $210,000, compounded annually at 10% = $986,000) and can retire.

Individual B (FIRE): a thirty-something starts saving 50% of their income every year. After 15 years they have the same amount saved as Individual A ($2,500 * 12 months * 15 years = $300,000, compounded annually at 10% = $956,000).

That comparison is too simplistic, you say. Sure, those individuals may have the same total savings, but Individual B has 15 more years of life to finance than Individual B.

Consider this: Individual B, who has been spending the last 15 years on an annual budget that was just a fraction of their take home pay, doesn’t need to significantly adjust their lifestyle, post Working Era. In contrast, Individual A (who was only saving 10%, putting the additional 40% toward discretionary spending) presumably will now need to downsize their lifestyle significantly to maintain retirement viability.

But what about social security? you say. If you work only 15 years, you’re going to have a lot less social security to draw on.

The FIRE math doesn’t rely on social security as an assumed income stream. Social security should be seen as a fallback/bonus, not a necessity.

Critiques of conventional wisdom

“Buy as much house as you can afford”

Conventional wisdom says you should ‘buy as much home as you can afford’ (1). For the cynics out there, note that the people frequently giving this advice – homebuilding conglomerates, real estate agents, and mortgage lenders – profit more when you spend more. Cynicism aside, given this ‘wisdom’ contradicts the more intuitive “buy the least expensive house that meets your needs” motto, some justification would seem to be in order. The justification as I understand it, frequently only implicit (2), is:

Whoa, whoa. Multiple problems.

  1. A more expensive home means a larger down payment. That means you’ll be taking a large chunk out of your current investment savings when you need it most (due to the way compound interest works).
  2. A more expensive home also means more expensive repairs, utility bills, property taxes, furnishing costs and – the biggest hindrance to early retirement of all – a larger mortgage that will take longer to pay off. All of these expenses means you’ll have less money each month to put into investments.
  3. This advice was apparently most common in the US in the 1970s, when inflation was high and house prices compared to salary levels were relatively favorable. Given how much more houses prices are relative to income fifty years later, the same math doesn’t work.

Others who have come to the same conclusion:

“Save 20% of your monthly income”

If you go seeking financial guidance, you’ll invariably run across the 50/30/20 rule or variations (see the 80/20 rule). Whatever the flavor, the basic idea is to set aside a specific proportion of your income for saving, the rest being yours to do with. In the case of the 50/30/20 rule, that’s 50% for fixed costs, 30% for discretionary spending, and 20% for saving.

Chalk it up to nature’s problem with vacuums or money’s unusually flammable state in wallets: this approach could have been designed by evil-genius behavioral psychologists. By framing disposable income as anything – more precisely, everything that is left over after you pay your bills and save something, this rule disincentivizes future-thinking and wise spending. Savings becomes another fixed cost that reduces your available cash, while the discretionary chunk is treated like free money that you can’t even consider saving: it must be spent whimsically because it’s in the discretionary spending bucket.

Instead of “Save X percent of your monthly income, then spend the rest as you like,” try on “Save all your monthly income, then figure out how to cover your costs.”

Jasmine starts the month by saving all her paycheck, minus a calculated typical amount for fixed monthly costs and just a lagniappe of cash for discretionary spending. Halfway through the month, she finds something she’d really like to buy but doesn’t have enough money in her lagniappe. There’s nothing stopping her from drawing on savings to buy it. In fact, it should be perfectly okay to do so. But because it’s coming from her savings, it’ll probably be a bit unpleasant and Jasmine will think a bit more about whether it will really increase her happiness/comfort. Discretionary spending becomes a cost, not a freebie. Et voila: no more evil-genius behavioral psychology.

People who have large fixed costs or high rent may only be able to save 20% most months. Even so, the “save it all” mental shift will end up saving more: when an unplanned cash inflow comes along, that money goes directly into savings.

This highlights what I think is a misconception about the FIRE approach, namely, that once you put money into your saving engine it can’t come out until retirement. There’s nothing wrong with drawing on savings to cover even discretionary spending. But if your money’s first stop is savings, it’s less likely to ever make a second stop at discretionary spending.

FIRE is only an option for folks with six-figure incomes

“Alright,” you say. “I accept that FIRE works. But it’s out of the average person’s reach.”

Financial independence is not available to many people. Saving money every month is just not possible if you’re living paycheck to paycheck. But if you can save, early retirement may be more realistic than you think:

  1. In 2021, the median annual salary in the US was $56,310. (3)
  2. After taxes, that’ll leave you with $42,232.
  3. If you budget 50% for savings, you’re left with $21,000, or $1,750/month, to cover expenses. (That may seem austere; see “Playbook for early retirement,” below.)
  4. The other 50% ($1,750/month) goes to savings.
  5. If you invest $1,750 monthly for 16 years, assuming a realistic 7.5% return from the stock market, you will amass $702,000 (4).
  6. That $702,000 will allow you to spend $40,000 annually, indefinitely, without running out of money. (That’s $20,000 more than you were living on, Work Era.)

FIRE requires penny-pinching minimalistic asceticism

It’s true that many blogs on FIRE promote little life hacks that save a few bucks here and there. While I find those life hacks cool, realistically speaking, this is mostly “penny-wise” thinking. The takeaway from the table below should be that FIRE shouldn’t be about stripping your lifestyle to the bone. It should be about making intentional decisions about most the high-impact expenses. The rest – to paraphrase Rabbi Hillel – is just spare change. Go forth and save.

Behavior Rationale Environmental benefit? Estimated savings
Don’t have children Children are the number one fixed cost of a family “Having a child is 7-times worse for the climate in CO2 emissions annually than the next 10 most discussed mitigants that individuals can do” $233,610 per child
As soon as possible, buy the least expensive small home that meets your needs. Rent or a big mortage are sunk costs; big homes require more energy An average tiny house uses 7% of the energy compared to an average traditional house. $63,240 in energy costs + tens of thousands in rent/mortgage
Never buy new cars New cars depreciate in value faster than just about anything Buying used cars reduces the demand on raw materials $130,000
Only own one car at a time Cars are not an investment Buying fewer cars reduces demand/consumption $65,000
Work long enough to be eligible for employer-provided health insurance in retirement Health care costs significantly increase as you age N/A Variable, but significant
Live healthy It’s about quality of life. The meat industry contributes significantly to greenhouse gases via methane Variable, but significant

Things that will save you money but not affect when you can retire

It’s well and good to do any of the things below. But don’t think that they will significantly affect your retirement age or lifestyle.

Behavior Reason it’s not significant Environmental benefit? Estimated savings
Coupons (1) Coupons sometimes make you spend more on a “discount” item over a cheaper equivalent. (2) Even estimating a generous $50 saved per month, you’ll save less than one year’s of expenses in retirement None to net negative (increased consumption) $19,200
Rewards credit cards (1) These cards give you a small percent of money back on money you just spent. (2) If you are getting thousands of dollars in cash back, that means you’re spending many times more None to net negative (increased consumption) $15,000
Finding the cheapest gas in town   None $10,000

My variation: Phaser FIRE

What follows is a radically candid template for how to retire early. It focuses on techniques, in order of impact, to reduce your living expenses so that you can put the money into investments instead. My goal is not to judge people whose lifestyle requires that they cannot do some of these things.

A better retirement calculator

The ‘second best’ retirement calculator I’ve found is the FIRE Age Calculator. The thing I don’t love about it is that it calculates the age you can retire at based how much you can save, rather than calculating how much you should save based on what age you are going to stop working. It’s just a perspective shift, but I think it’s important to frame the age you want to stop working as the fixed value and the amount to save as the variable.

It may seem subtle, but I think there’s a practical effect, instead of asking the question If I save X, when can I retire? to ask If I stop working at age X, how much do I need to save?

Enter my own retirement calculator: https://fire.markfullmer.com

Footnotes

1: Conventional wisdom says you should ‘buy as much home as you can afford.’

Web search results suggest that nowadays this would be more accurately described as “the common wisdom is that the common wisdom has been ‘buy as much house as you can afford’.” The concept apparently came about in the 1970s as a strategy against inflation. Nowadays, with a few exceptions, there are more results from frugal-living websites that cite this advice as common only to use it as a straw man argument to prove why FIRE is more sound than “conventional” thinking.

2: Contemporary justification for buy as much home as you can afford is usually implicit.

Maybe lenders and real estate agents realize that making this statement explicitly is suspect; web searches more commonly turn up sites framed around “How much home can you afford?” which gives the impression that they’re trying to figure out the right amount to spend to fit your budget. In actuality, what they’re calculating for you is the maximum amount you can spend on a home, which, for me at least, is something quite different than what can be afforded.

3: The US average salary in 2020 was $56,310

Per U.S. Bureau of Labor Statistics (BLS): https://www.bls.gov/oes/current/oes_nat.htm#00-0000

4: Calculating retirement.

Variations on saving/retirement can be tested using https://fire.markfullmer.com. If you assume a 10% rate of return, for example, and live on $30,000 in retirement, you can stop working in 10 years by saving $1,750 a month.