Don’t be Reckless If You Want to LEANFIRE

When you’re young, you’re very reckless. Then you get conservative. Then you get reckless again.
–Clint Eastwood

A few months ago, Marketwatch posted an article outlining the stories of people who had “FIREd” and were not successful.

For those of you who do not know, FIRE is financial independence, retire early.

While most of them were, to me, as a CFP(R), head scratchers, one of them really stood out.

The person profiled was 27 years old, and had a total of $190,000 saved up and decided to “retire.”

Having $190,000 saved up at age 27 is FANTASTIC! I was NOWHERE close to that when I was 27.

However, making great progress is nowhere near the same as being ready to retire.

As I outlined in SAFEMAX for FIRE, assuming she was to retire for 50 years, then her safe withdrawal rate should have been 3.2%. Put another way, she needed to have 31.25 times annual expenses saved up.

I won’t even go into how most of her assets were locked up until retirement age, meaning that she’d have to pay 10% penalties on withdrawal.

But, let’s assume for a moment that all $190,000 was accessible, penalty free.

Her annual expenses could only start out in retirement at $6,080 to guarantee that she wouldn’t run out of money before 50 years.

Unless you plan on living in a TRULY low cost of living location like, say, Chad, this is an impossible number to hit.

Even Jacob Fisker, the founder of the early retirement extreme movement, couldn’t get his spending that low.

I totally understand wanting to retire early and feeling like the finish line will never arrive.

However, you shouldn’t let that desire override being thoughtful and not, inadvertently (or ostrich-head-in-sandily) digging you a future hole that’s hard to get out of.

But, if you want to shave down your lifestyle to retire earlier, I’m supportive, as long as you do it more thoughtfully than some of the people in the Marketwatch article.

What is LEANFIRE?

Sam Dogen does a much better job of explaining LEANFIRE than I can, so I’ll give you the Cliff’s Notes version.

LEANFIRE means cutting down your discretionary expenses to a point that you have enough money saved up to be able to retire.

It’s basically saying “I have $X saved up in my nest egg” and solving for your annual spending using the safe withdrawal rate.

Conceptually, it’s simple. Rather than saying, “I spend $Y annually” and then multiplying to get to a safe withdrawal rate as a target, you’re going the other way around.

However, as we saw in “Do You REALLY Know How You Would React if the Stock Market Dropped by 20%,” human beings suffer from what is known as the hot-cold empathy gap. In other words, you think that you can make do with a much more restricted lifestyle and be good for the rest of your life.

Instead, what typically happens is that, when you make a reckless decision to pull the plug on employment, you quickly discover, as the person who tried to “retire” on $190,000 did, that the lifestyle isn’t sustainable.

How You Should Plan to LEANFIRE

1. Live your life now like you’re going to when you’ve retired.
2. Include the amount that you would need to pay for a financial shock due to a health event.
3. Life that lifestyle for two years before pulling the trigger.

I understand the complications in determining the tradeoffs between sacrificing lifestyle and working longer. That’s why we FIREd at 46 and 45, not 36 and 35. We were FI at the earlier ages, meaning that if we were unable to generate income, we would have not wound up diving in dumpsters for food and living under a bridge.

There’s a big gap between being able to do something and choosing to do something.

Thus, if you truly want to LEANFIRE and get out of the rat race as soon as humanly possible, you need to start living your life as if you were already retired (bar the not going to work part). Truly cut out all of the expenses that you’re going to cut out in retirement. If you think that you’re going to live in a tiny house and plant your own garden, start watching Victory Garden (did I just age myself?) and go out and rent a tiny house to live in.

So, if you’re trying to solve for the annual spending based on how much you’ve saved up, then truly start living that way to find out if you can do it. However, don’t forget to take a big potential future expense into account.

As we saw in “Have You Saved Enough to Survive Health Shocks in Retirement, one negative health shock could cost up to $350,000. The Marketwatch article outlined one such person who experienced just that. Don’t think that tornadoes only hit someone else’s neighborhood. As we saw in “Whoa, Whoa, Whoa…Aren’t You Overreacting to the COVID-19 Pandemic,” human beings are terrible at estimating both the probability and impact of “unlikely” events. Sure as you don’t plan for a negative health event happening to you because you’re currently healthy, you’re going to trip and fall into a pit of snakes on your next hike. Therefore, you need to ADD the amount to cover for a long-term negative health impact on your finances to that target nest egg before pulling the trigger. So, if your LEANFIRE spending is $30,000 per year, and you’re planning on retiring for 50 years, then you need to add $350,000 to your $937,500 target.

You may think that after a month of living your LEANFIRE life that you can hack that for the rest of your life. I’m sure after the first month of COVID-19 quarantine, some people were thinking “oh, this isn’t so bad,” but after 3 months, they were ready to make themselves bald by pulling out each and every hair on their heads.

Research from Michigan State’s Richard Lucas, along with assistance from Andrew Clark, Yannis Georgellis, and Ed Diener, shows that it takes people who have married, divorced, and widowed about 2 years to return back to their baseline state of happiness.

In other words, it will potentially take you two years to adapt to your new LEANFIRE lifestyle.

Would you want to pull the trigger, live like that for a few months, and then realize how brutally miserable you were, except now you’re out of a job? Neither would I.

This leads me to…

The Dangers of Recklessly Pulling the LEANFIRE Trigger

There are several disadvantages to pulling the trigger too early and not being truly prepared and thoughtful about making the LEANFIRE leap.

• You don’t like it, and now you have an employment gap. If you’re out of work for an extended period of time, you risk becoming unemployable. Research from Uppsala University’s Stefan Erikkson and Linnaeus University’s Dan-Olof Rooth shows that depending on the skill position of the job you’re applying for, employers consider an employment gap of anywhere between three months and a year to be too long for the applicant to be viable.
• You have an unexpected health shock. While you might be healthy now, there’s nothing to say that your genetics won’t deal you some rare condition that is chronic and costly. Your plans to live somewhere cheap in retirement may be thrown off because of the lack of sophisticated healthcare necessary to treat whatever befalls you. Your geographic arbitrage plans may go right out the window.
• You’ve put your nest egg in the wrong asset location. The person I discussed in the beginning of the article had $130,000 in a 401k. She was age 27. She would have to pay a 10% penalty on money withdrawn from her 401k until she was age 59 1/2. While a Roth IRA and without planning for how your assets will be distributed until you can reach age 59 1/2.

Early retirement is not for the faint of heart. While some people are unhappy with their work lives, pulling the “safety net” (ask the people who lost their jobs due to the COVID-19 pandemic how “safe” their jobs were) and living off of your assets takes courage.

But, courage is not recklessness. Plan ahead before you LEANFIRE so that your plan doesn’t BACKFIRE.

Are you thinking about LEANFIRE? How have you ensured that you’re ready to do it? Let’s talk about it in the comments below!