Early retirement sounds like a dream, but it could easily turn into a nightmare for many, says financial guru Suze Orman.
Orman was recently a guest on the Afford Anything podcast, and when host Paula Pant asked her what she thought about the FIRE movement – short for “financial independence, retire early” – the author of The Courage to Be Rich and other best-selling books didn’t hold back.
“I hate it. I hate it. I hate it,” she said.
What is FIRE?
The FIRE movement has caught on in a big way in recent years. Roughly 434,000 people subscribe to the financial independence discussion on Reddit, where they discuss how to accumulate as much money as they can so they can quit their 9-5 jobs well before traditional retirement age.
Articles profiling people who’ve achieved the dream popping up everywhere, like this one featuring the 28-year-old couple who saved $600,000 and quit their jobs to travel the U.S. in a van. For anyone who’s ever felt trapped by their day job, the movement has undeniable appeal.
But there’s a big problem, says Orman. Life’s unexpected events are going to get in the way of your carefree retirement dreams.
The problem with retiring early
“I know you want to retire at 25, at 30, at 35, but here is the problem,” Orman said. “As you get older, things happen. Not only do things happen as you get older, things happen when you are younger. You’re hit by a car. You fall down on the ice. You get sick. You get cancer.”
Early retirees may be able to live comfortably for a time by withdrawing 4% every year from a $2 to $3 million portfolio. But if catastrophe strikes, it could be financially devastating. An illness could wipe out your savings, and getting back into the workforce could be difficult. You might end up spending hundreds of thousands of dollars caring for your aging parents. (Orman said she spent $30,000 a month on a nursing home for her mother.) A stock market crash could wipe out your net worth.
Orman also warned of the risk of rising tax rates. With increasing automation, she predicts that unemployment could hit 25% by 2030. Taxes will go up and social programs like Medicare and Social Security will be in even worse shape than they are today.
“If you think these things can’t happen, I have a bridge to sell you,” Orman said.
How much money you need to retire early, according to Orman
Retiring early is foolish if you don’t have at least $5 to $6 million saved, Orman says. But $10 million is a safer number. You might be able to retire on less, but you’re gambling with your future. “I personally think it’s the biggest mistake, financially speaking, that you’ll ever make in your lifetime,” she said.
Saving enough to fund a retirement that could last as long as five decades is indeed a challenge. “There are two problems with retiring that early,” advisor Mark Hogan told Financial Planning. “First, not enough time to accumulate sizable wealth and second, by retiring that early, a person would need assets to last for 40 to 50 years. Retiring at 60 causes a person to only need assets that would last 25 to 30 years.”
FIRE devotees argue that a smaller nest egg is fine, provided you manage your expenses and save aggressively. People who embrace the FIRE lifestyle might save 50% of their income or more in order to hit their goal of “not having to work for money.” To get there, adherents radically rethink their approach to money, work, and consumerism.
Here’s how Elizabeth Willard Thames, who runs the Frugalwoods blog, which chronicles her family’s store of achieving financial independence, put it in a post:
Achieving financial independence is about achieving the life we were meant to live, not the life we have to live. Through frugality, we all have the option to pursue a passion outside the norm and chart a non-traditional path that brings us internal satisfaction. When we remove ourselves from the “shoulds” of consumer culture, we open our minds to the possibilities of what we want to do with our lives, not what we want to buy.
The one thing Orman and FIRE advocates agree on
Orman clearly sees early retirement as a move that’s too financially risky for most Americans. But there’s one area where she and FIRE advocates seem to be on the same page: You need to start saving early.
During her interview, Orman discussed how a person who started saving for retirement in their 20s would have hundreds of thousands more dollars than someone who put off saving until their 30s. If you hope to retire at 40 or 50, getting that early start on saving is even more critical.
Unfortunately, younger people might not be getting the message about the importance of saving. Millennials expect to retire at age 56, a recent TD Ameritrade survey found. But they don’t expect to start saving for retirement until age 36. That leaves just 20 years to accumulate a nest egg to get you through the rest of your life. Chances are, that just won’t cut it.
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