What inflation means for the FIRE movement
Becoming financially independent and retiring early is only getting harder
If you’re a member of the FIRE community — those striving to achieve financial independence, so they can retire early — you’ve probably been watching your investments a little more carefully than usual. We’re currently experiencing the highest inflation rates in 40 years, paired with a stock market that is rattling between growth and correction — which means that if you were planning on retiring in 2022, your target portfolio numbers may no longer apply.
“The magic portfolio number is largely fiction,” explains Felicia Gopaul, CFP® and former CFP Board Ambassador who currently runs Financial Control Mastery. “Once you’ve hit your magic number, the market shifts and the number is no longer correct.”
That said, there are other aspects to early retirement besides collecting a specific amount of money towards your retirement savings — and many of these aspects still apply even during periods of inflation. Let’s take a look at what the FIRE movement is, whether FIRE is right for everyone and whether inflation could get in the way of your plans to establish financial independence.
In this article:
Is financial independence right for everyone?
The FIRE movement is, at its core, a movement towards financial independence — the freedom to live life on your own terms and to choose the type of employment that is best for you and your family.
Some people choose to emphasize the “retire early” aspect of the FIRE lifestyle, which means that they’ll be more focused on specific numbers — budgets, portfolios, dividends, cash flow. Other people choose to emphasize the “financial independence” side, focusing on building the kind of life that can withstand fluctuations in both employment status and investment returns.
Is FIRE right for everyone? It’s fair to say that many people will not be able to retire early, given the amount of money early retirees would need to accumulate towards their retirement account to live on their investments for 30 or 40 years. However, we can all benefit from asking ourselves how to move in the direction of financial independence — first by building up an emergency fund and paying off our debts, and second by creating the kind of financial stability that allows us to live and work mindfully. A person who has money in the bank and skills in their toolbox has more choices than a person who is living paycheck to paycheck — so if you want to know whether the FIRE movement is right for you, start by asking yourself what it would take to get just one paycheck ahead.
What does inflation mean for the FIRE movement?
“The 4% rule is a popular rule of thumb in the FIRE movement,” explains Andrew Latham, Certified Personal Finance Counselor and Content Director at SuperMoney. “This rule of thumb is based on the assumption that you will not run out of money if you withdraw 4% or less of your portfolio in retirement.”
Latham warns that this 4% rule may not apply in an inflationary environment. “Based on current inflation rates alone, that may not be an assumption you want to hinge your retirement plan on.” He suggests recalculating your portfolio with a lower rate, such as 3%. “If your target income is $80K a year, you could retire early with a $2M nest egg by using the 4% rule. However, if you use the 3% rule, you’ll need to save $2.64M before you can retire.”
Some people in the FIRE movement may try to combat inflation by rebalancing their investment portfolio in favor of investments that could yield potentially higher returns. These investments are generally riskier, but you can mitigate the risk by increasing the time horizon associated with your fire movement retirement plans — that is, by telling yourself that you’ll continue to pursue traditional employment if your investments don’t yield the results you were hoping for.
Other people interested in financial independence may decide to reframe their financial goal. Instead of retiring from work completely, they’ll switch to what FIRE advocate Tanja Hester calls a work-optional lifestyle. When you live a work-optional life, you have enough money saved that you can do the kind of paying work you want to do — instead of taking the first job that becomes available. Financial independence gets redefined as freedom from traditional employment, and gives you the opportunity to continue working for yourself regardless of how the market performs.
Will inflation push back your FIRE retirement date?
“The FIRE movement community is largely a community of savers,” says Gopaul. “If they are thinking about retiring this year, they can.”
If you’ve already got enough money saved to retire early, you may not need to postpone your target retirement date. However, you should make sure that your retirement savings and investments are still robust enough to meet your needs towards financial freedom — including any increased living expenses that might result from an inflationary environment.
“What I’d suggest is keeping a watchful eye on your spending, inflation, and your portfolio,” Gopaul advises. By paying attention to the income generated by your investment portfolio, as well as any other passive investments such as real estate, you’ll be able to determine whether you’re still bringing in enough money to cover any inflation-related changes in your spending.
If you’re spending more than your FIRE portfolio earns, you’ll need to figure out a way to cover the gap — either by postponing your FIRE date, finding an additional source of passive income or picking up a side hustle.
You might also like
Life insurance is a financial safety net for your partner, your kids, your life…
Read more
How are people within the FIRE movement dealing with inflation?
The best way to find out what inflation means for the FIRE movement is to ask someone who’s already established financial independence.
We reached out to Michelle Freeman, who has been living off her investments since 2018. Freeman, who blogs about her finances at FIRE and Wide, shared the following advice:
“As someone who’s already retired early, how am I dealing with inflation rising sharply? First, by ensuring I still have a positive real return on my overall investment portfolio — that is, ensuring that I’m taking enough balanced risks to beat inflation. Second, I’m using the flexibility I built into my budget plans before quitting my career four years ago. This lets me ride out these bumpier years without sleepless nights — something I’d argue is well worth including in your own financial plans!”
Gopaul offers similar advice from a financial planner’s perspective: “When we’re working with someone in the FIRE community, we often set up guardrails for their financial planning. If their portfolio falls below the bottom guardrail, then the client has to make an adjustment to their spending or choose to work longer. As long as they stay within the guardrails we set, there is often no need to defer their retirement.”
Essentially, people in the FIRE movement are dealing with inflation the same way as the rest of us — by comparing their projected income to their projected living expenses, adding actual numbers as they become available and making adjustments accordingly. If your expenses are higher than your income, you’ll need to either spend less or have an extra income. That’s a financial reality whether or not you’re trying to establish financial independence.
As 2022 continues, we’ll quickly learn whether this current period of inflation is likely to resolve or whether we should expect it to stick around for the long-term. Regardless of whether you’ve already retired, are planning to retire this year or are simply wondering what the FIRE movement is all about, you can trust that good financial planning still apply — and by working to keep your spending within your means as much as possible, you’ll be in a better position to thrive financially no matter what happens.
Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Read more
Our disclosures
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus.html
Read our disclosures
You might also like
Get our most-read stories, twice a month
Very happy with the whole process from start to finish on my application. Only area that could be improved is that my wife also applied and was rejected and we did not get a reason. She is a 30 year old female without any existing conditions so I was surprised.
The whole process was seamless and easy. My application for term life insurance was all done online. The rates are fair, and the people at Haven Life seem to genuinely care about their customers.
Best life insurance company.
The process of getting life insurance with you is a very smooth process. I really liked the way you communicated through the process and were on top of the things. I really appreciate it. Thank You for my peace of mind and my family’s peace of mind.
Super easy! I was putting off purchasing life insurance as all I wanted was a term policy and was dreading the thought of having to meet or speak to a broker and deal with the dreaded upsell tactics. While researching options, I stumbled across Haven Life and began looking into it. Thrilled that I did. I could not have imagined an easier, more streamlined process from beginning to end. Very easy process and excellent, easy-to-understand documentation on the site.
