For Next-Gen Clients, This Retirement Savings Strategy Is Catching FIRE

Keywords: portfolio management, risk management, financial/
estate/retirement income planning, tax/debt management, charitable planning,
women investors, financial literacy, ESG/sustainable investing

The FIRE (Financial Independence, Retire Early) model is gaining traction among the next generation. But how realistic is this aggressive retirement savings strategy for your clients? There are benefits and drawbacks to the approach. Understanding the principles of this growing movement can support your conversations with clients looking to achieve early financial independence during their retirement savings years.

The Thinking Behind the Movement

The main ideas behind FIRE originated in the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez. But it has been increasing in popularity among millennials over the past several years. The core tenets are simple: maximize savings early on in working years and retire early, living off income from investments.

Achieving this lifestyle, however, requires incredible diligence. Those seeking to attain a FIRE lifestyle generally save 50–75 percent of their income (sometimes even more) and aim to work until they have at least 25 times their annual expenses saved, usually invested in low-cost index funds. For many, their target number is $1 million in savings, but many factors can affect that target, as well as the means to achieving it.

It’s easy to understand why this retirement savings strategy may not work for everyone—individuals who live paycheck to paycheck on a low- or lower-middle-income salary may not find it possible to ever achieve financial independence. Often, the success stories that clients may read about involve individuals in extremely high-paying jobs who can save a considerable percentage of their income while still living a comfortable lifestyle; however, there are several FIRE variations that may permit lower earners to still achieve some level of financial independence. These include:

  • Fat FIRE: Following a more traditional lifestyle while saving more than the average retirement investor

  • Lean FIRE: Keeping stringent adherence to minimalist living and extreme savings, necessitating a far more restricted lifestyle

  • Barista FIRE: Quitting the traditional 9-to-5 job but keeping some form of part-time work to cover current expenses and keep retirement savings intact

  • Coast FIRE: Retaining part-time work while saving enough to fund retirement and cover current living expenses

Attaining Financial Freedom

Proponents of the FIRE movement claim they are willing to work long hours, live a frugal lifestyle, and be diligent with their finances for one simple reason: freedom. For some, this means the ability to travel. For others, it allows them to pursue a hobby or passion that they can’t devote their time to in the traditional workplace. And some just want to watch their children grow up. Whatever the reason, adhering to the FIRE lifestyle allows these individuals to spend more of their life doing the things that matter most to them.

It’s important to note that FIRE supporters don’t view the lifestyle as a way to get out of a job they hate. Your clients shouldn’t be spending years earning as much as they can in a job that makes them unhappy, simply to leave that job and never return; rather, they should consider a different career path altogether.

It’s a Commitment

Even without additional impediments, the FIRE lifestyle requires extreme diligence. Individuals must be comfortable thoroughly examining their expenses; they need to be realistic about what they are and are not willing to give up to achieve their savings goals. For this retirement savings strategy to work, adhering to a strict budget is necessary, as is careful investing. Once they achieve those goals, retirees need to stick to their planned budget and ensure that their investment portfolio earns enough to sustain their lifestyle.

The biggest risks in the FIRE lifestyle are the factors that are out of individuals’ control. If interest rates fall, inflation rises more than expected, or there’s a prolonged down market, savings may not be enough to last through their retirement. In addition, they will likely experience a life event that requires them to tap into more of their savings than they expected; anything from home repairs or purchasing a new vehicle to a long-term care event for themselves or a family member could derail FIRE retirees from their retirement budget.

FIRE devotees need to be comfortable with the prospect that, should their savings deplete faster than expected, they may need to reenter the job market. Depending on their preretirement career, it may be difficult, or even impossible, to get back into a similar career after a prolonged absence.

Discussions with Clients Who Want to Retire Early

The role of a financial advisor for clients who want to pursue the FIRE lifestyle as a retirement savings strategy is much the same as it is for a traditional client: identify their goals, help them determine whether those goals are realistically achievable, and monitor their progress, making adjustments as necessary. You should start by asking clients a few questions:

  • How do you want to live in retirement?

  • What is your current income, and how much do you expect that income to grow while you remain in the workforce?

  • How frugally are you willing to live to achieve the goal of your ideal retirement?

Once you work with clients to create a plan, you’ll want to help them adhere to it, too. As mentioned earlier, being diligent is a key aspect of achieving a successful FIRE lifestyle. There are several strategies you can help them implement to work toward their goal:

Budget and trim expenses. Developing and sticking to a budget from the start is an essential aspect of this retirement savings strategy. You should recommend that clients cut their expenses as much as they are willing to. This often involves paying off all debt, lowering housing costs, saving money on subscriptions (like eliminating cable), shopping for inexpensive groceries, staying away from high-end clothing labels (or shopping at second-hand stores), driving used vehicles, cutting out or reducing travel expenses, and minimizing tax liability by maximizing contributions to tax-deferred vehicles.

Find alternative income sources. Whenever possible, you should discuss seeking out other sources of income. Many FIRE followers look to purchase rental real estate as a way to ensure a steady stream of income during retirement. Others tout the use of annuities or recommend building an investment portfolio heavy on dividend-paying stocks and fixed income assets.

Diversify, diversify, diversify. Diversification may be even more important for FIRE clients than for traditional ones. Since they likely cannot sustain a prolonged Wall Street downturn, they’ll need a portfolio that can provide reliable growth regardless of market conditions.

Be mindful of health care costs. Because FIRE clients will be out of the workforce much earlier than traditional clients, one of the largest expenses to address is health care. Clients will need to access health insurance from the marketplace and be mindful of the out-of-pocket costs associated with those policies. In addition, to hedge against the potentially catastrophic effect of a long-term care incident, clients should consider a hybrid or stand-alone long-term care insurance contract.

Don’t forget about social security benefits. FIRE clients who drop out of the workforce very early should also be aware of the effect on their social security benefits. The Social Security Administration calculates benefits based on a worker’s highest 35 years of earnings. If a FIRE client doesn’t have 35 years of earnings, any missing years will be replaced with zeroes, significantly reducing potential social security benefits. The same is true if the worker has several years of low wages from part-time work or work early on in their career.

It’s Not for Everyone

While the idea of financial independence, retire early may have broad theoretical appeal, adopting the lifestyle to achieve it isn’t practical for everyone. Clients considering this retirement savings strategy need to prepare to be diligent and adhere to a strict budget. They need to be aware of risks as well—including the possibility of reentering a potentially unfriendly job market.

Understanding this strategy puts you in a great position to integrate it into your retirement planning conversations, particularly with next-gen clients. And, while a more traditional retirement savings strategy may make sense for most clients, you might explore borrowing some tenets from the FIRE lifestyle for those looking to achieve an earlier retirement date or build a bigger nest egg.

This material is for educational purposes only and is not intended to provide specific advice.

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