5 Hidden Downsides of Chasing Early Retirement in the FIRE Movement
The movement known as Financial Independence, Retire Early (FIRE) has grown more popular among many people. By saving aggressively, cutting expenses and investing a large portion of your income, the FIRE movement allows you to retire in your 30s, 40s or 50s rather than the traditional age of 65.
While this movement sounds like a good strategy, it comes with downsides. Here’s what finance experts say you should be aware of before you start chasing early retirement.
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1. You Could Outlive Your Savings Sooner
FIRE followers use the 4% rule to withdraw their savings annually to cover living expenses. However, this may not always be the case since returns aren’t consistent.
Steven Rogé, chief investment officer and CEO at R.W. Rogé & Company, said many FIRE plans operate under the assumption that investment returns will be relatively predictable. In reality, markets are volatile.
“Your money is most vulnerable right at retirement. A big drawdown in those first years is hard to recover from, because you're still pulling money out to live on rather than leaving it alone to rebound, and that can send a portfolio into a death spiral,” Rogé said. This is known as sequence-of-returns risk.
2. Healthcare Costs Can Blow up Your Budget
Medical expenses are one of the most overlooked costs in early retirement. Early retirees lose their employer-provided health insurance years before they’re eligible for Medicare at age 65, creating a gap that can be shockingly expensive to fill.
"Healthcare costs can be a lot more expensive than people expect," said Elias Friedman, financial planner and founder of Kadima Wealth. "This is especially if clients plan on retiring years before Medicare eligibility."
"Healthcare has historically run roughly 1.5 percentage points a year faster than overall inflation," Rogé said, "and insurance premiums have run faster still. FIRE plans typically assume modest inflation of around 3%, but that assumption falls apart when it comes to medical costs."
3. You're Sacrificing Your Peak Earning Years
Many workers reach their peak earning potential in their 50s and early 60s. Retiring early means missing out on years when salaries, bonuses, and retirement contributions may be the highest.
"Retiring early means giving up your highest-earning years," Rogé said. "And because Social Security benefits are based on your top 35 years of earnings, the missing years, which often would have been your best, drag down the benefit you eventually collect."
If the math doesn’t work out and you have to go back to work, re-entering the workforce is harder than most people think.
"If an individual has already been in retirement for a handful of years, finding new employment may be difficult," said Daniel Gleich, board member and shareholder at Madison Trust Company. "Connections may no longer carry the same weight, and knowledge of modern software and practices may no longer be current."
4. You May Lose the Purpose and Structure Work Provides
Financial independence doesn’t equal personal fulfillment. "Just because someone can retire doesn't mean they should," Friedman said. "Many people underestimate how much purpose and structure they get from their work."
For some retirees, the thrill of leaving work behind wears off quickly. Without daily chores, professional goals, and social interaction, boredom can take over. That’s why many financial advisors suggest clients consider not only what they’ll retire from, but also what they’ll retire to.
5. Extreme Frugality Can Come at a Personal Cost
The FIRE movement often needs many years of aggressive savings and cutting spending. Extreme frugality will get you to your financial goals faster, but sometimes you might be giving up too much in the process. Friedman said that some clients get so focused on retirement that they put off vacations, hobbies, and experiences they enjoy.
Building financial security is important, but it’s important to find a balance between planning for the future and enjoying the present. As Friedman said, “Saving is important, but so is living. We are not promised tomorrow."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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