FIRE challenge shouldn't be taken lightly, advisors caution

Striving to retire early may sound good, but there are drawbacks and tradeoffs to consider

FIRE challenge shouldn't be taken lightly, advisors caution

To devotees of the FIRE movement, it sounds like the perfect goal: Financial Independence, Retire Early. The idea has gained significant online traction, with hundreds of anonymous people online sharing their dreams of leaving behind their 9-to-5 jobs much earlier than the traditional age of 65.

But while the thought of losing the ball and chain early has massive appeal, financial advisors warn that it will involve giving up various benefits of the typical life progression. One example is active income, which tends to rise well into middle age; executives tend to see their peak earnings in their 50s or 60s, reported MarketWatch.

“Individuals who retire early are choosing to stop their earned income, which is the greatest defense against life expenses,” Hank Mulvihill, director and senior wealth adviser at Smith Anglin in Dallas told the news outlet.

If one’s investments and savings can generate enough income to replace their current income and grow to approximate salary bumps and bonuses, early retirement could work. But Mulvihill added that those mulling the move should also consider the costs of giving up insurance coverage, employer-matched contributions to retirement accounts, and any other forms of compensation they are benefiting from.

Plotting an early retirement also puts people on a steeper-than-normal path of asset accumulation. “You need to accumulate assets in order to generate large amounts of passive income,” wrote Josh Brown, financial adviser and chief executive officer of Ritholtz Wealth Management, in a blog post. “You need to work like a dog over many years and not spend in order to accumulate those assets.”

Aside from adopting that grinding work style, FIRE hopefuls must be frugal; meals out, movies, and vacations will likely remain in their retirement dreams. “They often have to live on a shoestring budget and forgo things that make life enjoyable,” Anthony Badillo, lead planner at virtual financial advisory firm Gen Y Planning, told MarketWatch. Adding to the idea, personal finance author Vicki Robin said that self-reliance with tasks around the house like cooking and repairs can go a long way.

Early retirees in Canada may also face restrictions in accessing their RRSPs. Those with locked-in RRSPs are unable to withdraw from their RRSP before age 55 unless they face financial hardship or a shortened life expectancy; RRSP withdrawals are subject to withholding tax. Converting an RRSP account to an RRIF is an option, but only if one is prepared to make withdrawals every year that the RRIF is open.

Unknown risk factors like market downturns, unexpected home expenses, and greater-than-expected healthcare costs can also have a significant impact, especially when one retires in their 30s or 40s. “Life happens,” said Roger Ma, a financial planner at lifelaidout in New York. “A lot of unexpected things can happen to you that may totally derail your early retirement plan.”