What is the FIRE Movement? Could it be Hurting Our Economy? - YouTube

The Fire movement is a growing trend  amongst young workers which is growing  

in popularity thanks to its very enticing  goal which is spelled out in the name.

FIRE is an acronym of Financial  Independence and Retiring Early.

The idea is that by following a very aggressive  saving and investing strategy people can get to  

a point where they are effectively retired at  a very young age, sometimes younger than 30.

In a world where we are being told that pensions  are running dry and the average person may  

have to work in some capacity for their entire  life, this sounds like a bit of a lofty dream.

Sure, there are trust fund babies and  young tech millionaires who may earn  

millions within their first few years in the  real world, but surely kicking back on beach  

and never thinking about work again is not  attainable to a regular wage slave right?

Well if some figure heads and internet  forums are to be believed then well,  

yeah actually it is for pretty much anybody.

Now in the interest of full disclosure I  am a passionate advocate for the financial  

independence movement. But that does not  mean that I don’t see issues with it.

Now many of those issues are glossed  over in the sheer simplicity of it,  

which is also part of the  reason it is so powerful.

So long as someone can get to a point  where their investments are making as  

much as their living expenses long term,  they have achieved financial independence.

Getting to that point is harder for some  than others, but advocates of the movement  

argue that this difficulty has more to do with  personal lifestyles rather than personal incomes.

So what are the mechanics of the FIRE movement?

How could someone use it to stop working forever?

Is this actually attainable  for anybody like they say?

And finally

What would this movement do to the wider economy?

If everybody strives towards a goal  where they quit working at age thirty  

shurely this would bring our  world to a grinding halt right?

Well if we can properly explore  and answer these questions  

we will be able to reveal if this  whole thing is grounded in reality  

or if it’s just a fanciful pipe dream  for people who really hate their boss.

INTRO ADD

Now if you are thinking to yourself that this idea  of retiring at age thirty sound pretty compelling  

the first thing you need to do is  really understand how this system works.

So outside of broad statements like  saving and investing, what are the

NUTS & BOLTS OF FIRE

There are historical figures for a range  of very important factors in the economy  

which help us in a sense make  projections into the future.

The assumptions that are relevant to the idea  of FIRE are that a well diversified investment  

portfolio should return around 8% per year,  and that inflation is around 2-3% per year.

Some of these figures can change  

but with this we get the foundation of being  able to live forever off your portfolio.

For example if you had a million dollars  invested into a broad market index fund  

you would normally expect that over time the  returns from this portfolio to be around that 8%,  

and for the past 100 years or so  that has been correct, on average.

This return would be split up between  dividends and capital appreciation,  

in otherword the rise in the price  of the stocks within the index.

What this means is that effectively  you would be able to draw $80,000 from  

this portfolio every year and  it would maintain it’s value.

Now $80,000 is a pretty comfortable lifestyle  for most people in most cities around the world,  

and while saving a million dollars is obviously  hugely difficult, it’s not impossible for people  

in good professional careers, especially if  we are looking at a dual income household.

But there are two factors that make this a little  bit more difficult than it would initially seem.

The first is inflation, the Federal Reserve Bank  of the United states targets a 2% inflation rate.

In 1960, the equivalent of an 80,000 salary  today was around $5,600 per year. Since the  

FIRE movement is all about retiring at a  young age and enjoying a long life without  

the need to work you should realistically  be planning for at east the next 50 years.

At a 2% rate of inflation in 50 years time,  that $80,000 a year that you are pulling from  

your investment portfolio would only be  the equivalent of a $32,000 salary today.

I mean you could still scrape by in  a low cost area of the united states,  

but it’s far from comfortable and it might  put you in a position where you need to go  

back to work at the age of 70, after 40  years out of the workforce…. Good luck...

What that means is for this million dollar  portfolio to maintain its real value,  

you would need to put back in $20,000 per  year, to fend off that 2% inflation rate.

Not a huge deal, but that means now you are  only left with $60,000 per year to live on.

Beyond that some people want a bit of  a buffer in their investment growth so  

it is normally suggested to reinvest at least  3% back into your portfolio year on year.

Alright so now all of a sudden we  are living on $50,000 per year for  

the rest of our lives and this  is before we get to problem 2.

There is a strategy in investing  called dollar cost averaging  

and it is a really powerful thing to understand.

The idea is that the market is erratic and mostly  unpredictable, but over time it trends upward.  

So if you consistently invest at a set  time interval, like lets say once per month  

you are going to get the most  out of the market for 3 reasons.

Reason 1 is that it takes  the emotion out of investing,  

if you automatically set money aside and  don’t think about it you aren’t going to  

be tempted to buy into the next hot stock or  pull your money out at the bottom of the market.

Reason 2 is that it gets your money to work  right away, if you hold off on investing for  

a year or until you have done research on  a particular stock or whatever you will be  

missing time in the market to generate returns.  Since on average the market returns 8% per year,  

if you hold off investing $10,000,  you would already be $800 behind  

someone dollar cost averaging. Time in the  market beats timing the market as it were.

Now the third reason is the most powerful  and also the hardest to understand.  

The key to investing is buying  low and selling hight right?  

Well by investing at set intervals  you are kind of doing this by default.

If for example you invest $1,000 a month  into walmart stock it would depend on the  

price of the shares as to how much stock you  buy. For example if it is trading at $100  

per share you would be able to  buy 10 shares, simple enough.

But lets say the price doubles to  $200 per share, well at that price  

your $1,000 monthly investment is only going  to buy 5 shares, and the same is true if the  

price drops to $50 per share where suddenly  you are going to buy 20 shares per month.

By maintaining a consistent investment  pattern this hypothetical investor  

has bought more shares when they are cheaper,  and less shares when they are more expensive,  

giving them a win in atleast one  side of the buy low sell high debate.

The problem with all of these benefits  of dollar cost averaging on the buy  

side is that they are drawbacks on the sell side.

If someone is drawing $5,000 per month from  their portfolio to maintain their living expenses  

then they are naturally going  to sell of more of their shares  

when they are cheaper then  when they are more expensive.

For all of these reasons most people in  the fire community work around the 3% rule.

This rule is created by starting  with an 8% expected return  

and then deducting 2% for inflation,  1% for market volatility, 1% for the  

impacts of negative dollar cost averaging  and 1% as a comfortable margin of safety.

In plain english what this means is that  if you can live off 3% of your investable  

net worth every year before considering  taxes, congratulations you are financially  

independent and you will continue to be  into eternity, all other things being equal.

But 3% is not huge, if you wanted  to live off $100,000 per year,  

you would need $3.3 million dollars invested.

There are some people that will push this  3% rule to a 4% rule to be a little riskier  

but retire a little sooner but the fact of the  matter it you still need to be pretty damn rich.

The idea that anyone can do this is  simply not true, but it might still  

be less daunting than these numbers would  suggest, and infact there are even Tiers  

of the fire movement to account for  this so how could an average person,

Stop Working Forever?

While making enough money to live forever on  $100,000 a year might sound almost impossible,  

many pundents of the movement argue that this  is far from necessary. And that infact FIRE  

is more so about really assessing what you  value rather than earning lots of money.

If you value material things and want to be  able to go on multiple holidays per year to  

exotic destinations thats fine but you are  going to have to give up a little bit more  

of your time and spend slightly longer in a  career building up an investment portfolio.

Other people might be perfectly content to  live in low cost of living areas and pursue  

low cost hobbies which means they will need  far less money to be financially independent.  

What this means is that how quickly you can retire  

is determined by your savings rate,  rather than your gross savings. 

A nurse earning 60,000 per year after  taxes and living on $30,000 per year,  

should be able to retire within 16  years at a 3% safe withdrawal rate.

A neurosurgeon on the other hand might  be earning $500,000 per year after taxes  

but after an expensive  mortgage, private school fee’s,  

exotic holidays, and student loans they  might end up spending $400,000 per year.

What this means is that it would take  this doctor 28 years to get to a point  

where they could maintain their lifestyle  indefinitely off their investments.

Now both of these instances are the result of  personal choice, if the neurosurgeon loves his job  

and loves his nice things then all power to them,  but if they dislike their job the fire movement  

advocates for properly assessing if you like that  new porsche as much as dislike 6 months at work.

Now of course for some people this maths  simply doesnt work, you can only lower your  

living expenses so far before you push  yourself into poverty and unfortunately  

the reality is today that alot of people out  there can’t afford even a basic lifestyle  

while still having money left over to save.

But for those who can its extremely important to  think about major financial decisions in terms of  

opportunity costs, with the missed opportunity  being years that you could spend, sleeping in,  

working on hobbies, or traveling  rather than sitting in an office.

Now this is all well and good  on a macro economic level  

if this was to really take off  surely it is not sustainable.

How would a world without workers Work?

We have explored the labor market  twice in the last 2 months and  

both times we have found that  human labor is very important  

to maintaining a functioning economy,  not to mention a functioning society.

This shouldn’t be a huge surprise to anybody  

least of all people who sit down  to watch video’s on economics.

But what might surprise you is  that there might be an alternative.

Consider this thought experiment.

Someone is working and  saving half of their income. 

With that money they buy a farm, they then  pay to have a workshop put on that farm,  

and then they pay to have machines automate  the planting and harvesting of crops.

They also pay to have a mine with access to  basic materials set up, and robots to harvest  

and refine those metals aswell. Finally their  workshop is kitted out in all of the latest  

technology to allow them to produce anything  their little heart desires, from scratch.

Well in this example this  person would be completely  

financially independent (assuming  they don’t have to pay land taxes)

Now this hypothetical is sure to make alot of  ranchers and off the grid folks very excited  

but its not too different from  what FIRE practitioners are doing.

All of the things our hypothetical worker  bought were either land or capital goods,  

as in machinery or technology  that makes making stuff possible.

Now in this very direct example, this individual  was investing in things that would be used to  

produce goods and services for themselves. But  more realistically a real person would use their  

money to invest in things that would be used  to produce goods and services for everybody.

They would then charge everybody  the rights to use their productive  

capacity in the form of profit which  would be paid out to them as dividends  

and would in the real world likely have  a company acting to facilitate this.

In a sense Financial Independance  is like crowdsourced independence,  

using financial instruments to make the process  of living off machinery and land more efficient.

So would a mass uptake in FIRE practitioners  ruin the economy? Well short term  

yes, the drop in consumer spending and  rush to financial markets would cause  

alot of volatility, but long term  it is theoretically possible.

We explored this idea of an automated  future where capital goods completely  

replaced labor in the factors of  production in our video on Automation.

I don’t want to repeat too much of that hear,  

but a big takeaway was that this capital  intensive future could be a utopia,  

or a complete disaster depending on how  this inevitable transition was handled.

Final Thoughts

The financial independence retire  early movement is certainly not  

something that is going to be  the right fit for everybody.

For many the cuts to their lifestyle are just not  worth the extra few years out of their careers.

There is also of course the psychological  aspect of not having anything to work towards.  

Go play a sandbox game with unlimited money hacks  to get an idea of how quickly it can actually get  

pretty boring without some kind of a challenge.

There are theories and suggestions that go  a long way to remedying some of these more  

psychological issues, but again that is not our  area of expertise here at Economics Explained.

Instead from a pragmatic economist point of  view the FIRE movement’s biggest takeaway  

might be the lesson it gives us in  the trade off of time for stuff.

If you start thinking about purchases in the  form of how many hours you need to work to buy  

something you might be less tempted to splurge.

70 hours of team meetings for that new  iphone, 30 hours working through excel  

macros to pay for that new outfit, 10 lame  excuses as tyo why you were late to buy  

dinner at a fancy restaurant. For some people  it’s worth it, but for many people it isn’t.

For the people that don’t think it’s  worth it, sometimes the daunting prospect  

of actually starting to invest is  the only thing holding them back.  

Fortunately this first step  can be made a lot easier.

With acorns.