Part of the job of a financial adviser is focused on helping clients achieve financial independence and to accumulate a sufficient amount of resources to fund the retirement lifestyle they desire. Arising out of the 2008 financial crisis, the FIRE movement - which stands for financial independence, retire early, has caught the attention of many, from Gen Xers to millennials.
Here are some thoughts on how to advise clients who might be embracing the goals of the FIRE movement.
The FIRE movement embraces the goals of achieving financial independence at a relatively early age and then retiring early. Both the “FI” and “RE” parts mean different things to those trying to “achieve FIRE” as the saying goes.
The premise of FIRE is that by slashing expenses and saving and investing a very high percentage of their income, these folks can achieve financial independence and be able to retire at a much younger age. This might be as much as 70% of more of their annual income that goes toward saving for retirement. FIRE disciples hope to accumulate enough to retire early and live off of their nest egg. How early is early? I’ve read about some folks pulling the plug in their 30s and 40s, and in some cases in their 20s.
As with any client, you need to help them define what financial independence means for their situation and what early retirement means. Often, early retirement doesn’t mean a total cessation of work for FIRE disciples, but rather it means retiring from the 9-to-5 daily work grind. There are many FIRE folks who earn money writing about their experiences on blogs, discussing them on podcasts, providing coaching to others looking to achieve financial independence and selling courses on the topic. Others may use their exit from being an employee to pursue self-employment of other types in areas of interest to them. Others do truly retire in the traditional sense as well.
Regardless of your client’s goals, it's important to work with them to define the amount needed, when it is needed and how it will be invested both before and after their retirement -- whatever that looks like.
The Impact of a Long Retirement
A concern for those retiring at a more traditional age, in their 60s, is whether or not they will outlive their money. Given current life expectancies, the financial aspects 20 or 30 years of retirement funding takes planning. A retirement that might last 40 or 50 years (or even longer) takes a ton of planning.
It’s important to ensure that clients looking to go the FIRE route, in whatever format they choose in terms of total or partial early retirement, understand the stress that the normal ebbs and flows of the financial markets over a long time horizon will put on their retirement savings. Asset allocation for these clients will need to focus on growth potential within their level of risk tolerance.
Healthcare and Tax Issues
In advising clients looking for an exit from the corporate world at an early age as part of their FIRE goals, there are some issues that these clients need to consider. Some of these include:
Health insurance is always a consideration for anyone leaving the conventional workforce prior to Medicare eligibility. If the client is a married couple and only one spouse is going this route, they could use the other spouse’s employer healthcare plan if that spouse will remain employed. Otherwise it's important that the client consider what they will do to cover this necessity, a serious illness without adequate insurance can be financially devastating.
For clients who have been using tax-deferred retirement plans such as a 401(k) to accumulate funds for their early retirement, they will need to have a plan to tap these accounts early if needed. Money in a traditional 401(k) or IRA will be subject to both taxes and potentially a 10% penalty if tapped prior to age 59½. Roth accounts do allow the withdrawal of contributions if certain conditions such as the five-year rule are adhered to.
Overall, the issue of where the money will come from to support their needs once they leave their job is a huge planning issue that you can help these clients with. Which accounts should they tap first? If they are going to be doing something that generates income, will this income be enough to meet their needs?
The FIRE movement is exciting and appealing for many people these days. Like anything else in the financial planning realm, successfully achieving a very early retirement takes planning. For any clients looking to go this route, your expertise and perspective can be crucial to their success.