Over recent years, so-called FIRE plans, or “financial independence retire early” strategies have caught on fire. Unsurprisingly, many people simply don’t like working traditional nine-to-five desk jobs and would rather spend their time doing anything else. But just how prudent are FIRE plans in this economy and society?
To be fair, advocates of FIRE plans don’t take early retirement lightly. As such, many articles and postings on the topic are replete with warnings. Primarily, the biggest concern they address is not having enough money for retirement. Further, no one knows how long they will live.
But to address these problems, many if not most advocates focus their solution on money: making enough of it, putting resources into supposedly reliable funds like annuities, or moving to a cheaper location, even internationally.
Granted, these are great tips. All FIRE plans require gobs of money to work. However, it is not just about having money, but rather, cash flow. Money is passive while cash flow implies activity. Here are the risk factors indicating why cash flow is critical:
Monetary Risk to FIRE Plans
One of the biggest threats to savers, particularly the baby boomer generation, is inflation. Doing exactly what they’ve been told, millions have socked away money for their golden years. And what did the federal government do in response? They squandered it.
How, you may ask? Via aggressively dovish monetary policies. Due to inflationary strategies, the dollar has progressively lost value every year for multiple decades. Thus, saving money in an automatically depreciating platform doesn’t make much sense.
To combat this, you need cash flow, such as revenue generation from rental investments. By going this route, you’re receiving wealth, not units of its perception.
Investment Risks to Early Retirement Strategies
To get around the dilemma of declining dollar value, many advocates of FIRE plans will stress wise investments. Of course, this should go without saying. Even if you saved enough money and even without dollar devaluation, you need to grow your funds somehow to account for the unknown.
However, levering too much money toward investments is risky. What if the economy suddenly nose dives? That would lead to a market crisis, which would hurt your principle. Further, you don’t know when a recovery would come into play, thus potentially dashing your longer-term strategy.
In early retirement, you don’t want to have too much allocation toward any one sector. Diversification is key.
Political Risks
Although a massive breakdown in society is highly unlikely for the U.S., it’s still possible. As the political divide becomes even more contentious, this is a dark cloud for early retirees.
Even if you feel secure in retirement, I’d hold onto and nurture valuable skill sets. Whether they are technical in nature or qualitative skills, distinct talents will be in high demand in a world that has consistently embraced the mediocre.
Stay valuable, and you’ll have the confidence to survive any economic environment.