Those unfamiliar with the FIRE movement often respond with incredulity when they first encounter it. Retirement in your 30s or 40s? Pfh, only if you win the lottery.
Dozens of reactionary questions often follow, usually with intent to expose FIRE as some Polyanna dream world cooked up by a daydreaming corporate burnout.
As shocking as the idea of early retirement is, people may be even more shocked at the answers to their most common questions.
- 1) Won’t private health insurance cost a fortune?
- 2) Won’t I pay penalties for accessing my 401K early?
- 3) Do I need investment expertise?
- 4) Do you need to make more than 6 figures?
- 5) What if there is a recession?
- 6) Can you still FIRE in a high cost-city?
- 7) Can you FIRE with children?
- 8) But what about paying for college?
- 9 ) What about income taxes?
- 10) Should Social security factor into early retirement plans?
1) Won’t private health insurance cost a fortune?
It did before the ACA, but that hasn’t been the case for well over a decade, and millions have retired early and accessed affordable healthcare since.
In fact, ACA can be even more affordable than employer-subsidized health insurance.
A quick math lesson. Most employer healthcare coverage has moved to high deductible plans, that pay zilch until you meet a $10,000 family deductible, on top of ~$250 monthly premiums. Let’s say instead you retired early with a $2M nest egg, with $70K in annual expenses (the American average): a similar ACA bronze plan would cost your family of 4 only $35 a month!
But don’t take my word for it. Use this calculator from the reputable Kaiser Foundation https://www.kff.org/interactive/subsidy-calculator/ to research your own potential costs.
2) Won’t I pay penalties for accessing my 401K early?
You may have heard that there is a 10% penalty to withdraw early from 401Ks before 59 ½. And there is . . . for suckers.
But there are multiple loopholes you can exploit to access your money penalty free. The most simple method utilizes the loophole that allows you to withdraw money invested or converted into a Roth after just 5 years, even before the age of 59 ½..
Read more about how you can retire early penalty free here.
3) Do I need investment expertise?
Investing is only complicated if you let it be. Simple is best and accessible to everyone,.
As FIRE godfather JL Collins famously promoted in his book A Simple Path to Wealth, you just need one low cost, total stock market index fund while you are building your nest egg and you add one total market bond index fund fund when you retire.
Nothing more complicated is necessary. In total market funds, you will be fully diversified and will own a small piece of every public traded US company with a single click – no expertise needed. Its truly that simple.
If you want to research further, Collins book is highly recommended or you can follow a similar approach this website lays out here.
4) Do you need to make more than 6 figures?
Early retirement is no more available to the rich than the average. Its not about what you make nearly as much as its about how much of your salary your lifestyle costs.
Simply put, if you spend all your pay, you’ll work until you die, regardless of salary. On the other end, you can retire in 17 years if you save 50% of your income. This is true of any salary, even an average one. A detailed breakdown of how fast one can retire on an average salary is explored in depth here.
5) What if there is a recession?
Yep, market crashes inevitably happen, yet portfolios recover for both early retirees and traditional retirees. Neither is more susceptible or more positioned to recover.
Loads of research has been done studying the stock market performance going back to the late 1800s. In short, the greatest financial minds have determined that as long as you withdraw no more than ~4% of our portfolio when you retire (adjusted yearly then for inflation), your portfolio would have survived any period of history, even the Great Depression.
In fact the majority of the time, retirees end up with far more than they retired with by following the “4% rule.” Research confirms that this is just as true of retirements that last 60 years as it is for more traditional 20-30 year retirements.
You can read more about safe withdrawal strategies here.
6) Can you still FIRE in a high cost-city?
Help, what if I live in San Francisco, New York, Denver, or Seattle – isn’t the cost of living too high to retire early?
This is a common question that can have some very complicated considerations (real estate cost, taxes, wages, etc.). Yet the answer is simple: of course you can still retire early.
The truth is – desirable places to live near mountains, lakes, beaches, etc. will cost more due to the laws of supply and demand. But that will also attract more businesses, bring higher wages, and pump up real estate values. The opposite is true of less desirable cities/states. Houses are cheaper, but the wagers are lower and the property taxes may even be higher.
Regardless of the location, the ability to retire early still comes down to spending less than you earn and investing the difference.
There are tons of ways to do this. You can game the credit card reward system. You can try to commute to bring your wages up and housing costs down. You can fleece fetishizers out of their money by lotioning up your feet on Only Fans. Opportunities abound. Go crazy.
But don’t assume your zipcode is responsible for your financial independence (or lack thereof); you are.
7) Can you FIRE with children?
There are crazy internet rumors that it takes more than $1M to raise a single child, and many people therefore assume it’s simply not possible to FIRE if you are a parent.
Hogwash. The actual statistics suggest it’s more like $240K to raise a child – a considerable figure, nonetheless. But while it may mean a few more work years, $240K is not a sum that eliminates early retirement possibilities.
Also keep in mind that $240K is just the average, and those who want to save aggressively and retire early are not average and will likely spend far less than that to raise a child.
Here is an example that illustrates my point. According to Forbes the average family of 4’s annual budget in 2022 was $101K. My family of 4, on the other hand, had an annual budget of just $42K in 2022, and that includes high property taxes of $10K and a vacation that included 4 plane tickets. We lived on less than half the average American budget, and my children were not deprived of a middle-class lifestyle.
Everything can be expensive in America, including raising kids, if you let it be. But you can also live a decent life at a reasonable price. Which side of the line you fall in is not up to anyone else but you.
8) But what about paying for college?
College is expensive at full sticker price, especially private college. By some measures, it’s one of Capitalism’s most shameful creations and one of America’s worst examples of monopolized inflation.
Its listed prices (and aid packages) are also a complete sham you don’t have to pay. With no earned income penalized on the FAFSA, most early retirees are in an especially unique position to put their kids through college far below the predatory sticker prices.
How you ask? Just like taxes and ACA health coverage, the US college education system punishes earned income and privileges investment income.
I explore this in more detail in my series on college aid funding, but in short, an early retired family is likely to qualify for maximum “aid” due to a lack of regular work income. Without scholarships, there will still likely be some expenses a FIRE parent may contribute, but not FIRE-busting expenses.
Is it immoral to the game system? Not in my view, as I revealed in my expose on the college aid scam (here).
9 ) What about income taxes?
Believe it or not, income taxes are such a small factor, that most early retirees don’t spend much time worrying about them and neither should you.
In our working years, most of us are accustomed to high taxes automatically coming out of our checks (7.65% for Social Security/Medicare in addition to federal income of 10 – 35% depending on income).
But that ends if you retire early and no longer earn a traditional income. And depending on how you fund your retirement (capital gains, dividends, Roth contribution/conversion withdrawals, etc.), your income tax rate can be as low as 0. Yes, you heard that right: z-e-r-o.
As a matter of fact, if you fund early retirement years entirely with capital gains from a brokerage, your tax burden (married filing jointly) is 0% for income all the way up to a whopping $94,050 (2024 limits).
Even if you take some small side hustle income outside of a brokerage, or convert IRAs to Roths (for early access), or withdraw with the SEPP method, you will find that income taxes are unlikely to exceed the low single digits to fund an average American annual budget of ~$75K.
You can dive deeper into this topic over at my friends at Can I Retire Yet to compare your situation to several scenarios.
10) Should Social security factor into early retirement plans?
You absolutely should, and factoring your future benefits in will undoubtedly reduce the amount you need to comfortably retire, as well as reduce some of your risk to depleting retirement funds in a down market.
You should think of your social security like any other asset (401K, pension, IRA, rental income, high yield savings accounts, home equity, etc.). As complicated as each are, suffice it to say that each of these items factor into your net worth and can provide funding today or in the future.
Determining future social security payments based on your actual work history is pretty easy to determine. You can even do a little back of napkin math to determine the net present value of your social security benefits, and use that to determine its place in your FI numbers.
For example, lets say you expect living expenses of $80K a year and therefore need $2M to retire early (FI math is annual expenses x 25), but only have $1M today. It looks like you are only halfway there.
But you may be able to determine that the net present value lump sum value of your future social security payouts are equal to about $0.5M today. That means you are much closer to retirement than your 401K alone suggests.
Run the numbers and see for yourself, but bottom line: yes, you can and should factor your (and your spouse’s) expected social security benefits into your retirement plans, early or otherwise.
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