What Are the Problems with Financial Independence – Retire Early?
As many people will have spotted, there are a lot of holes in the FIRE theory.
Firstly, FIRE relies on the numbers being consistent and consistently in your favour. But this is not always the case by any means.
FIRE relies on inflation, the cost of living, interest rates and so on being consistent. Although this was the case for many years it has not been the case of late.
FIRE relies on investment returns being consistent. The stock market has historically produced good returns but can be quite volatile. Property investments have always tended to rise in value long term.
FIRE doesn’t take into account the fact that government policies can change. Taxes and tax allowances for savings and pensions can and do change.
It doesn’t take account of the fact that if you retire contributions to a personal pension will stop, as will National Insurance contributions to your state pension.
FIRE doesn’t take into account differences in the ages of its participants very well, nor different (and unknown) lifespans. For example someone starting in their 30s has longer to save their savings pot, but may be on a lower income and is likely to be drawing from it longer too. Someone starting in their 50s may have a high income and will be withdrawing from it for less time, but has less time to accumulate it.
A big criticism of FIRE is that it is a ‘jam tomorrow’ strategy. You could spend years scrimping and saving but never actually receive the benefits.
It’s probably fair to say that Financial Independence – Retire Early only has a chance of working in practice if you have a high income and spend very little, and if you start on your FIRE journey in middle age. In short, however, the numbers are unlikely to add up for most people.