FIRE Planning: What Can Go Right?

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So much of planning for financial independence and early retirement involves spreadsheets, sequence of return risk, and figuring out exactly when there will be enough money to quit.  I found myself obsessed with these variables before leaving my career. Is my plan safe? Will I have enough? Exactly how should I be invested?   Ultimately none of us know the future.  We can only use past history, data, and observation to evaluate probabilities then decide when we feel safe taking that plunge. Instead of talking about everything that could go wrong, I present the financial reasons your FIRE plan may go right: 

#1 – The 4% rule is likely to leave you with more money than you need.  

The 4% rule is based on a success rate of 95% over a thirty year period.   Meanwhile the average return of the S&P 500 for the last 100 years is 10.84%.

Just a normal Thursday…

The main failure points when testing the 4% rule are the Great Depression and a period of significant disruption from the late 1960s through the early 1980s that included a major armed conflict, a valuation bubble, and the disruption from the gold standard.  Maybe we experience this again, but maybe we don’t.  The economy has more central management today.  My opinion on this is it will result in lower returns in exchange for lower volatility.  Europe and Japan have experienced this as they’ve converted towards a centrally managed economy.     

These failure scenarios are from a significant market crash in the beginning of the scenario followed by a slow recovery.  The intelligent early retiree would modify their plans and likely go earn some additional money.  Even during the Great Recession, the unemployment rate for college graduates only rose to 4.3%. 

#2 – You’ll likely earn money

I have studied early retirees for nearly a decade, declared FIRE more than two years ago, and the reality is most people still earn something.   Reaching FIRE requires human capital, brainpower for optimization, and discipline.   These skills are valuable in the marketplace, businesses and not for profits can always use smart people.  The abundance of free time creates opportunities that might not otherwise exist to trade time for money.  Hobbies may be something that can be monetized.  

Personally I’ve found a couple of consulting niches I enjoy.  I can sell my time at $100+/hr for 10-15 hours a month and generate 20-25% of our monthly expenses pre-tax.   When our travel was grounded and local entertainment options were closed, we turned to Instacart and made $30/hr to get paid to go shop at Costco.  I still churn credit cards and bank bonuses for a couple thousand dollars a year.  

The reality is most retirees still earn something.  Setting a plan to “never earn another dollar” could mean working longer than required in what might be a stressful career.   

#3 – Expenses might not be as high as you think.

There are lots of money saving things about FIRE:  No commute cost, no work attire, and no convenience food.  Repairs and projects suddenly become puzzles to be solved with YouTube and some work instead of outsourcing the work.   We also saw a noticeable drop in our food costs:  we consciously grocery shop and use meals out for experiences with friends or for high quality food we can’t replicate at home.

Travel expenses are a mixed bag:  It is much cheaper to stay in a destination for an extended period of time, but unless you’re renting out the current residence it can result in some duplicate expenses.  Flight costs go down based on a more flexible schedule (Tuesday and Wednesday flights for the win!) and it’s easier to churn <link> credit card rewards and the rewards become more valuable via a flexible schedule.  

One of the first questions I am asked is “what are you doing about health insurance?”   Health care in the US will be more expensive for most.   After shuffling through Cobra and a brief arrangement with a friend’s company, we settled on a High Deductible Health Plan through an Anthem subsidiary.  The plan is nearly identical to my old corporate plan in coverage and deductibles, we just pay $675 instead of $500 because it lacks the employer support.

#4 – There could be an inheritance in your future.

According to 2020 Federal Reserve data, the median net worth for Americans in their early 70s is $266,000.  The average net worth is just over $1,000,000. 

Fortunately and unfortunately, I happen to be the first born on both sides of my family and am a product of young parents and young grandparents.  The average age of my grandparents was 45 when I was born.  That plus being the professional “numbers” guy in the family, I’ve already been involved in a few estate issues.

My observation is inheritances are a likely outcome, but also not something that should be counted on in a FIRE plan due to a wide distribution of outcomes.  The range of distributions can be anywhere from financially positive to financially negative if someone needs to support their parents. End of life care in the United States is expensive.  If someone can live independently up until passing, they are likely to pass down an inheritance.  If someone requires significant end of life care, they may be forced into a Medicare spend down arrangement for nursing home care.   The other factors that make a significant difference include whether or not there is a COLA adjusted pension and when did they choose to take social security.

Personally I’d love to see all of my relatives live independently and spend every last dollar they have.  Unfortunately things can happen to disrupt that plan and the outcome may be an inheritance.

#5 – Social Security will likely still be around

It is unlikely Social Security is going anywhere.  For someone approaching FIRE, they have likely worked for 10-20 years and paid a significant amount into Social Security.  Throw in a little earned income for the second half of working years and there will be a meaningful amount of Social Security.

For an early retiree, the decision on when to take social security will come down to maximizing net worth at death (take it at 62) or have the largest inflation adjusted annuity possible (take at 70) to help offset longevity risk.

It’s worth pulling Physician on FIRE’s social security bend point calculator to see what your payment is estimated to be.

Note:  There’s a funding issue with social security, but this has numerous mathematical fixes.  One is already quietly being done with the cap on Social Security Taxable Earnings increasing faster than annual increases on the overall payout.   My opinion is the probability of Social Security “going away” is non-existent.

So what does this all mean?

The original FIRE narrative is to work as hard as possible at the highest potential rate up until 25x expenses are saved, then quit your job and never work again.   Maybe you can even save 30x expenses to ensure a 100% success rate on the plan, assuming no expense flexibility and zero dollars ever earned.    But how do you decide what is right for you?

A high savings rate and a decent amount saved up can afford you significant life flexibility.   Then it comes down to evaluating probabilities.  My opinion is that 18x expenses is an inflection point to begin considering alternatives.   The success rate as planned becomes greater than 66%, then it’s about evaluating the other probabilities in your plan:

  • Do you know yourself well enough to think you’ll earn more money?
  • Does your budget have flexibility in expenses?
  • Can you publicly announce a sabbatical and give FIRE a test drive?
  • How durable are your job skills if you want to re-enter the workforce?  

The amount of time financial independence should close quickly during that final 1/3rd.   Investment earnings will increase thanks to larger account balances and people generally make more money with more experience.   Time is finite and we all have different risk tolerances.   Take into account all of these probabilities and make a decision about what’s right for your situation.  

I want to conclude this with a by referencing a classic post from Carl @ 1500 Days, The Death March to FI and quote the same line from Ferris Bueller: “Life moves pretty fast, if you don’t stop and look around once in a while, you could miss it”. 

12 Replies to “FIRE Planning: What Can Go Right?”

  1. I just published a post where I cited 15x expenses as an acceptable “Coast FI” starting point, so it’s nice to see someone who’s written so much about this give some credence to my guesstimate. I was more focused on people who quit too early, but of course the flip side is those of us who end up working too long, unnecessarily. Nice post.

  2. Great post! Being overly cautions, my personal SRW is 3%, but 4% does have a very high rate of success. Reading posts like these give me confidence that when I finally pull the trigger, I’ll be fine.

    1. Absolutely. I was also conservative and waited until I was under 4%. Don’t get me wrong, being 27 months into FI with more money than I expected is a great thing, but I wonder for people who have stages of life with a finite end: Your kids are only a certain age for a while, your parents may or may not be around, and physical fitness and limitations become an issue as we age. All the probabilities of success need to be taken into account, not just investment returns!

  3. I love the FIRE success rates graph. That is something I am not sure I have seen. I’ve focused a lot on ERN’s early retirement withdrawal series and have been aiming for a 3.25% withdrawal, but healthcare costs and additional taxes this year have caused it to spike closer to 4%. But this article is a good reminder that this is all a paper exercise. In reality, I can go and get a job if need be, or build up my own small part-time business’ to help fund any gaps that I may be looking at. Therefore, I have deemed the one thing you need for early retirement is flexibility. Once you have that and like you said 18-20x in the bank, you are still in a very good spot indeed.

    1. Thanks for reading! It is a paper exercise indeed and we’ve happily been under 4% since leaving. Hopefully this inspires some to look at all the probabilities of success!

  4. The 4% rule from the Trinity study gets talked about a lot, but one thing that is frequently overlooked is the median account balances after 30 years. The median account balances are generally much larger that the starting point. To me, that is another good thing about ER, since it is possible to increase wealth when you FIRE.

    1. Correct! A 95% success rate means there’s also the 80-85% probability someone ends up with a lot more money than expected

  5. Thanks for taking the time to post these. I’m completely paralyzed by seeing my numbers grow and thinking it’s actually possible to step away. I’m 45 and I’m at 33x of an annual spend that’s 25% more than I’ve ever spent in a year. Still scared to death of pulling the trigger even after 30 years in the crazy retail world. These post at least give me a little hope. #stuckinthespreadsheet

    1. … 33x of 125% of spending means you are at 41X, rounded. If I were in that situation there are a limited number of things that might hold me back. First would be legacy needs, especially if you have children with special needs. Second would be a large possible expense, such as tuition for a child, or extended care for a parent, that you might need to fund. You probably can already handle both of those. Third would be if I had no clue what to do once retired. Nobody likes to feel useless, so it’s important to think about how you make your next act meaningful for yourself, so you have goals to achieve and enthusiasm to tackle those goals with, whether it’s learning a language, completing a marathon, taking up pottery or painting, starting a non-profit, volunteer work…. I suspect that once you have something to look forward to in retirement, the prospect of leaving work will become less anxiety provoking.

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