Retirement Read Time: 3 min

Don’t get burnt with FIRE

In recent years, a new personal finance concept has caught FIRE: Financial Independence, Retire Early.1 Some young professionals embrace the FIRE movement, working to save at least 50 percent of their income in a bid to live frugally now and retire while young. The theory goes that the savings, amplified by investing, will quickly accumulate to be enough money to retire by age 40.

The reality

As an idea, FIRE is intriguing, and saving for the future is always a good plan. But there’s more to it than that. FIRE method requires a single-minded focus that can be exhausting and cost you relationships and experiences.1 You also risk running out of money before you die. To retire early, you need to start with a substantial nest, account for a much longer retirement as life expectancy increases, and plan to pay healthcare costs yourself, including potential disability, accidents of illness cover, until Medicare kicks in. 2 Further, there is an inflation concern that gets skipped over: If your retirement lasts 50 or more years, which it easily could if you retire at 40, your purchasing power could be cut in half—twice—over that time period.

An alternative strategy

Another method seeks to help protect yourself today, while saving for tomorrow. This can be implemented in place of FIRE or be a complement to it, depending on your personal preferences.

Protect your todays

Just imagine for a moment: What would happen if you were too ill to work? It’s not far-fetched.3 Often this kind of income interruption drains savings accounts or drives people into debt to cover basic expenses. A disability income insurance policy can help to keep a portion of your income flowing in the event of an injury or illness. This can help you to stay focused on getting better and keep up with expenses. Similarly, whole life insurance can give families financial protection if an income earner dies unexpectedly.

Become a world class saver

As we’ve said from the start, it’s important to save for the future. But a 50 percent savings rate is extreme and simply not achievable for most people. Many financial experts recommend saving 20 percent of your income.2 That’s because saving for the future should be a sustainable, lifelong habit. The immediate goal is to have a year’s worth of expenses in your savings account. Once you have this kind of financial cushion in place, you can weather the unexpected without accruing debt through credit cards or unsecured loans.

Pay down debt

Many people get caught in a debt cycle and are motivated to pay it all off as fast as possible. This is a good thing to do, certainly, but not at the expense of protection. Think about it. You could pay down every last cent one day, and be unable to work the next, because of an unexpected event. Then, you’re quickly back where you started.

Certainly, one of the great things about the FIRE movement is that people are really talking about ways to live within their means and save. However, there may be a better way to live today without sacrificing your tomorrows, that can also lead to greater overall financial and emotional confidence for the rest of your life.

SOURCES:

  1. Rethinking the Early Retirement Movement. Why ‘FIRE’ Isn’t Right for Everyone, CNET, 2022
  2. Want to Retire Early, Think Again, Investopedia, 2021
  3. Social Security Basic Facts, SSA, 2023
  4. Here’s Why You Shouldn’t Retire Super Early, even if you can, MarketWatch, Jan 11, 2020
  5. How Much You Should Save by Month and by Age, USA News, 2023

DISCLAIMER:

Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, medical or financial advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Guardian, its subsidiaries, agents and employees do not provide tax, legal, medical or financial advice. Consult your tax, legal, medical or finance professional regarding your individual situation.

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