At first glance, extreme frugality coupled with laser-precision planning and investing probably may not sound too appealing to most people.

But what if that very combination put you on the path to an early retirement at 45? Or even 35? You might warrant it a second glance, after all.

The FIRE (Financial Independence, Retire Early) movement sets out to do just that: retire at an age much earlier than traditional retirement planning through a well-planned strategy of serious saving and investing.

How It Works

Proponents of FIRE dedicate between 50-70% of their income to savings and income-producing investments while they are still part of the workforce. The goal is to generate savings 30 times the amount of what expected annual expenditures are and retire at that point, while withdrawing 3% to 4% annually from investment accounts. Depending on how much individuals have saved and what their spending budgets are, FIRE may call for continued diligence and budgeting during “retirement.” Some followers of FIRE completely retire from their day job, while others choose to work part-time to cover current expenses.

Pros and Cons

To some people the possibility of retiring early may seem like the only benefit they need when considering adherence to the FIRE doctrine, but there are other pros when following the guidelines, even if individuals fall short of their lofty early-retirement goals:

  • The FIRE movement is inspiring younger people to start thinking about their finances and retirement. With almost half of Americans not having any retirement plan, setting a retirement goal and creating a strategy is a positive step.
  • The expense-cutting philosophy advocated by FIRE practitioners serves to help individuals cut back on frivolous expenses, no matter at what age they plan on retiring. Learning to live within one’s means, if not below, is an important personal finance lesson.
  • Saving at least 50% of your money also means looking for ways to make more of it. Whether that’s putting in hard work and moving up in a high-salaried job, starting a side-hustle or investing in rental properties, FIRE can inspire people to work harder and look for alternative ways to increase their income, in and of itself a good financial practice.
  • Saving and investing are prioritized. Lifestyle creep, or increasing discretionary spending on nonessential items as one’s standard of living increases, is a setback many people deal with that causes them to perpetually push investing to the backburner. With FIRE practices, priorities are rearranged and more of an individual’s income is earmarked for investing rather than spending.

Despite the obvious appeal of achieving financial independence while ditching a traditional 9-to-5 job, FIRE carries its own set of disadvantages:

  • Saving 50-70% of one’s income may not work for most people. Many followers of FIRE come from high-paying, six-figure jobs where they may have earned enough to have saved a significant portion of their income. The median household income in the U.S. was $68,703 in 2019, making it difficult, if not impossible, for most families to save upwards of 50%.
  • The notion that FIRE retirees are fully retired and rely only on their nest egg can be false. Because many FIRE practitioners came from highly skilled fields, they still have the ability to consult and freelance, while others take on part-time work. Many have built passive income streams from investments such as real estate.
  • Rising and unexpected healthcare costs can drain the savings of FIRE retirees. While the 4% rule for withdrawals does take inflation into account, healthcare costs are rising at a much higher rate; for example, prescription drug costs have risen three times faster than inflation in the last decade. Add on that according to one study, an average 65-year-old couple needs $285,000 to cover healthcare costs over the course of their retirement. The humble annual incomes FIRE retirees plan on living on may not stand a chance against numbers like these.
  • And then we have market cycles. Many in the FIRE community are invested in low-cost index funds. Through bull markets these funds may grow investments quickly, but a bear market may deplete funds to the point where retirees must return to work.
  • Frugality can be taken too far, potentially depriving those who are penny-pinching the small joys in life that those who are following more traditional work and retirement paths may enjoy. A fixed and limited income from age 35 for the rest of one’s life can be a difficult and often joyless feat.

Focus on Financial Independence

Given these pros and cons, many FIRE proponents agree that the focus shouldn’t necessarily be on retiring early but rather on the financial independence aspect. Even those individuals who are following a traditional retirement path can learn a lot about saving, investing and spending more consciously. And that can have a major impact on their current and future quality of life.

Many of those who set a goal to become financially independent through investments and passive income, turn to dividend paying investments. Dividend investing, unsurprisingly, means making investments that pay dividends and using those distribution payments to build an income stream on top of any growth in share value.

Investors pursuing this strategy may handpick a few dividend paying stocks or invest in an entire portfolio of them. They can also choose dividend focused exchange traded funds (ETFs) or mutual funds, as well as purchase shares in a real estate investment trust (REIT) like Modiv - which pays monthly dividends. 

To Sum It Up

How the FIRE movement works out for followers over the long run remains to be seen. Not even the most extreme frugality may be enough to fully fund a long retirement and all of life’s unexpected expenses. But the focus it places on investing early and cutting unnecessary expenses can be valuable lessons for everyone. Financial independence is certainly something to strive for.

Whether you’re a proponent of FIRE and aiming for retirement at 40 or are focused on a more traditional retirement path, one thing is certain – you need a plan. At its most basic level, retirement planning means knowing how much you need to have saved by your ideal retirement age and how much you will have to save to reach that goal. Whatever the case may be, it’s best to establish savings goals early, no matter how far in the future those days of retirement may seem.

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The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.