The Ugly Truth Behind the RE in FIRE
What does it mean to retire early? Social Security defines full retirement age as 67, but it allows one to claim benefits as early as 62. The IRS allows one to start withdrawing from retirement accounts without penalty at 59 ½. Under certain conditions, one can tap into 401ks without penalty at age 55. So, perhaps retiring early can be defined as retiring at any time before the age of 60 or maybe 55.
Surveys in 2018 revealed the average American intended to retire at age 66. Thus, it would be tempting to think that the vast majority of us can safely ignore the concepts and strategies of the FIRE movement. Unfortunately, recent research by the Urban Institute and Propublica showed that more than half of Americans over the age of 50 are forced out of long-held jobs before they choose to retire. Many of those over the age of 50 who are forced out of their jobs never find work again. Of those that do find work again, many have to take significant pay cuts in their new jobs. Only 10% of the laid off workers find new jobs that pay about what they were making before their job loss. So, a good portion of us are going to “Retire Early” whether we want to or not. Thus, the FI (Financial Independence) in FIRE is something all of us need to strive for, regardless of our retirement plans.
Imagine being a worker in your early 50s. Congratulations. You are in your peak earnings years and are making more money than you ever have before. Unfortunately, this makes you a prime target for downsizing when your company is looking to cut costs. Ah, but isn’t age discrimination illegal? Yes, it is, but age discrimination is incredibly hard to prove. In addition, there are plenty of legal ways to fire older, more expensive workers. Often, workers of a certain seniority and pay scale will reach a similar rank or job title within a company. The company will then decide that the entire job category is no longer necessary and offer to try and find positions for the workers who have been laid off. If the company can only find new jobs for the lesser paid workers….
Even if your company is not looking to cut costs, you might have an accident or come down with a debilitating illness. More than 25% of workers will file for long term disability at some point in their lives. If we subtract the 25% who do so due to pregnancy, this still leaves about 20% of us who will have our work interrupted due to accident or illness. In the end, over half of us can expect to see our wages go to 0 or be significantly reduced after the age of 50.
Now imagine that you have been saving for the with the goal of achieving financial independence. If you are financially independent, you can take your layoff notice (along with any severance package you might be lucky enough to receive) and ride off into the sunset to live happily ever after.
If you have not achieved financial independence, hopefully you are close. If this is the case, it means the following: you will have at least six months of savings to use before you have to significantly cut back your spending, you can convert your non-tax-deferred savings into high yield holdings to generate current income to replace some of your lost salary, and that you have a good idea of your desired post retirement budget along with a good idea of what you can acceptably cut from it.
This gives you choices. You do not have to take the first job offer that comes along. You can afford to wait for a more ideal job. You do not have to make as much money as you did before your job loss. You can reduce your savings rate and work a little longer in order to achieve your goals. $500,000 in an index fund will gain $40,000 in value in a single year of the index goes up by 8%. Meanwhile, the 401k contribution limit in 2019 is $19,000 ($25,000 if you are over 50). So, you could easily make up for 2 years of not saving by adding 1-2 years to your retirement date. Or, you could keep your original retirement schedule by cutting out a “luxury” item or two from your ideal retirement spending plan.
In contrast, if you had not been saving adequately, then it is likely that you have much less than six months of living expenses in savings. You would immediately need to cut back on your spending. You would have to apply for as wide a variety as jobs as possible. You would probably have to take the first job that was offered, and you almost certainly would have to accept less money than you were making before. The end result would most likely be a permanent reduction in your standard of living. So, regardless of our desire to retire early, we should all be saving to achieve financial independence by our mid-fifties at the latest. While following FIRE is a choice, The odds are that we will all be part of FTRE (Forced To Retire Early) whether we want to or not.