FIRE or Slow FI? Locate your sweet spot

Do not spend lavishly today without worrying about the future; at the same time, do not sprint towards an early retirement

April 10, 2022 11:50 pm | Updated 11:50 pm IST

Cutting current consumption to achieve FIRE is sacrificing to enjoy the present for having a better future.

Cutting current consumption to achieve FIRE is sacrificing to enjoy the present for having a better future. | Photo Credit: Getty Images/iStock

Many young and middle-aged professionals in the U.S. are working towards achieving FIRE (Financial Independence, Retirement Early). In this article, we shall discuss what it takes to achieve FIRE and an alternative called Slow FI (Financial Independence).

What FIRE?

If an individual wants to achieve FIRE, he or she should either save a large proportion of the average income, or earn a large income, and should not have a lavish lifestyle. Note that it is the middle-class professionals who are increasingly aiming to achieve FIRE. These individuals must therefore save a large proportion of their post-monthly income to realise their objective.

You can read success stories on the Internet about individuals who achieved FIRE by their early 30s or 40s and how they had minimalist lifestyles during their short working years. The question is: are you willing to cut your current lifestyle to save more? Lowering current consumption to achieve FIRE is sacrificing the opportunity to enjoy the present for a possibility of having a better future. And who is to say whether your investment decisions will pay off to accumulate the money that you require to achieve FIRE.

The point is that you expose yourself to a high level of regret when you are striving to achieve FIRE. Why? Cutting current consumption causes pain. The compensation for this pain is happiness in the future, which may not materialise.

And, if you are unable to achieve FIRE, then you could regret your frugal lifestyle. Understandably so, many versions of FIRE have emerged. Besides Lean FIRE (the aggressive version), you have Coast FIRE, where you save aggressively in the initial years and then let your large savings accumulate the required amount at retirement. Meanwhile, you coast towards retirement — earn enough to match your current lifestyle. Reading about how some individuals retired early is sure to motivate you. But can it change your attitude to spend less and save more? And even if you do pile up the money you require to retire early, what about emotional readiness?

Have you planned on how you want to spend your retired life? If not, you may be exposing yourself to healthcare risk.

Why? Empirical evidence shows that retirees who do not plan how to productively occupy themselves during retirement are more likely to suffer from dementia and other health issues.

Given the issues with Lean FIRE, a parallel movement that is growing is Slow FI — slow financial independence.

The idea is to not sprint towards financial independence but to strike an optimal balance between enjoying the present and achieving financial independence later than you would if you were on Lean FIRE. Of course, deciding on the optimal balance between present and future happiness is not so easy.

Does this mean you can continue to spend as usual, saving 20-25% of your post-tax monthly income?

Not really. You should increase your savings each year. The best way to do this without cutting your current lifestyle is to save aggressively from your annual salary hike; you should save, say, 40-50% of the salary hike instead of the standard 20-25%. Everyone wants to retire early, but few succeed. And fewer enjoy early retirement because most fail to become emotionally ready for a long retired life. You should aim for early financial independence, not early retirement, without significantly sacrificing your present lifestyle and happiness.

With financial independence, you can choose phased retirement to keep yourself gainfully occupied and yet enjoy greater leisure time. You can then gradually transition into full retirement.

The upshot? Do not be present biased — spending lavishly today without worrying about the future. At the same time, do not sprint towards early retirement, as in the case of Lean FIRE. You must try to find your sweet spot. True, you only live once. But be smart with your spending decisions!

(The writer offers financial training for individuals to manage their personal investments)

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