Questions to Ask for Retirement: A Taxonomy of FIRE Strategy
I've often read other bloggers' posts about FIRE and yearned to understand the reasoning behind their strategic decisions. Of course, FIRE is simple as at the core it consists of two goals: cut your expenses, and grow your income. To explore these nuances to strategy, I've come up with a few questions that help classify different FIRE strategies.
Do you invest your money, or save it and keep it liquid?
The Financially Independent/Retired Early (FIRE) movement is overwhelmingly in favour of investing your earnings, as opposed to leaving it in a savings account or as cash. This is because inflation erodes the value of liquid assets such as cash, leaving you with less buying power in the future. Yet the question of investing is not so clear cut: in certain situations, you'll prefer to have the flexibility of a wealth of cash.
"Cash is king," so the saying goes. "Readiness meets opportunity," goes another. Both sayings suit black swan investing, or holding onto cash and waiting for some unforeseeable event to give you an opportunity to profit. This is an active, engaged method of investing that runs contrary to the passive "buy and hold" mentality prevalent in FIRE. It's a great example of why you might prefer to hold cash over investments.
Another example is for extreme savers. If you have a high income and minimal expenses, your time to FIRE is extremely short--possibly as short as three years. You can easily save more cash with a couple extra years, and that extra cash will make up for the losses from inflation. In such a case you might be more comfortable with the comparatively non-volatile nature of cash than with the risk of investments.
Do you leverage investments, or are you debt-averse?
Everyone has their tolerance level for debt, and it's important to understand where your comfort level lies. Would you take out a mortgage for a home to rent out? At what leverage ratio?
With leverage you can amass net worth incredibly quickly, but oftentimes it comes at the risk of making your cash flow brittle. That net worth can then vanish when things go wrong. Missed mortgage payments are all it takes to lose your hard-fought wealth, which is why you should own your primary residence free and clear.
However in the business world leverage is the vital fluid of a company's growth. If you plan to form your own business, you will need to consider its financing. If you take on debt, you should also be tracking your leverage ratio just as meticulously as you should be tracking your cash flow.
Do you want a frugal lifestyle or lavish one?
Most FIRE advice is geared towards frugal living, with good reason. Conspicuous consumption is a widespread disease within our society, and cutting down on it where you can is a worthy goal.
That said, everyone must discover for themselves how far they are willing to go in the name of frugality. This is a highly individualistic question, and one that you should be brutally honest with yourself about. Taken to the extreme, if you cannot subsist off of rice and beans you should budget more for groceries than a handful of dollars a month.
To distinguish the types of spending for FIRE'd individuals, it's common to refer to frugal and lavish lifestyles as Lean FIRE and Fat FIRE respectively.
Do you rush to FI, or take it easy?
Financial Independence is not a race, and so you don't always need to sprint to it as quickly as possible. What if instead you meandered more slowly to enjoy the journey?
This is the principle behind SlowFI, where you make the trade-off between years of working and the amount you save. For instance, saving about 25% of your income places you on the path to freedom in 3 decades – a reasonable timeline if you start at a young age.
Do you want diversified income or all-in?
For many of us, we have a primary job and then perhaps a side-income or two. If you wish to grow your income you can either double-down on an existing income stream, or you can start a new side line.
As an example, you could redouble your efforts in your career to achieve raises and promotions. You could alternatively buy an investment property and start renting it out, or delve into any of countless other passive income ventures.
There are trade-offs to both approaches. Diversity of income comes with resilience built into it, as losing a single stream does not immediately crash your top line of income. But too many streams of income means that you cannot do justice to all of them at once, if you need to grow them.
Where will your benefits come from?
This question is most relevant in the United States, where health insurance is usually tied to employment. Will you pay for your own insurance and benefits? An alternative to paying your way is called Barista FIRE. Barista FIRE is where you work a token job such as a Starbucks Barista in order to gain access to benefits in your retirement.
Where will you live?
Geoarbitrage is the simple idea of living in a low cost area whilst maintaining a high income. However, there are some nuances to it. For instance you may start working in a high cost of living area, build a professional network, and then transition to a low cost area whilst maintaining those connections to keep your income up.
You may wish to consider whether you are supporting gentrification by using geoarbitrage. I recommend reading Our Next Life's post on doing no harm:
But it’s important to confront what geoarbitrage really is: using our socioeconomic and geographic privilege to take advantage of others’ worse conditions without changing those conditions for them.
Will you own a house or rent?
The overwhelming majority of the FIRE community owns at least one house, which they live in. There are good reasons for this, including having a low monthly cashflow once the mortgage is paid off.
However, houses are expensive, anchor you to a place, require infrequent bouts of hard work, and are subject to catastrophic problems. As A Purple Life puts it in the below blog post, rent is the most you'll pay and a mortgage is the floor of what you'll pay:
Mr. Flexcents
Renting can afford you incredibly cheap living space and flexibility, and it promotes a minimalist lifestyle. However, renting also makes you susceptible to inflation.
Will you spend all your money before death?
For many, one of the goals of accumulating wealth is to leave a legacy behind for their children and family. Others may instead aim to create perpetual foundations of charity or philanthropy. In both these cases, these are only feasible by accumulating enough wealth to sustain indefinite growth.
This gives rise to ideas such as the 4% safe withdrawal rate. If you have enough assets that you only eat into a portion of its growth, you will never run out before you die.
Alternatively if you wish merely to cover your own expenses until the day you die, you can burn down your accumulated savings. The ideal would be to die just before you spend your last dollar, so as to consider none of it 'wasted.' Each year your portfolio would shrink, but that's fine as long as you don't run out before your demise.
The difference between spending all your money and gaining enough to self-sustain can be significant – compare several hundred thousand dollars to a million. Not to mention the amount of time that goes into building a large nest egg. It's up to you whether that extra effort is worth it.
Other Considerations:
Once we get past the highest level questions, we start getting into more individual questions. For instance, "Do you want to minimise taxes?" or "Do you wish to exploit welfare programmes?" These questions in particular begin to encroach not just on financial planning, but on your moral position.
Another personal question might be "Do you want to speculate/gamble/bet on stocks?" If yes, then you have the potential for both great losses and gains in your lifetime. You should be prepared for the worst in your planning, and able to hold onto the gains if some should come your way.
Finally, some people have the opportunity to gain pensions – such as military service members or teachers. You should factor into your strategy the steps necessary to secure a pension, and whether it is worth your while.
Final Words
There are hundreds of questions to ask yourself along the path to financial independence, but I hope these few will be enough to launch you smoothly onto your own trail. Remember to never stop asking questions and considering the implications, and it will serve you well.
