People fear what is different or what they do not understand.
This weekend, my Twitter feed seemed to explode with news of some interview Suze Orman did about the FIRE movement and how she hates, hates, hates, hates, hates it. Normally, I don’t listen to podcast about finance, because I just don’t need anything confirming what I already know. So this should have been interesting to listen to, hearing what someone who uses the traditional planning would say. I will say prior to listening my first thoughts were she must have a new book and tv special coming and sure enough. In the past she has spoken about hot topics in retirement and savings, so I feel this is no different, a sort of shock value to create some kind of buzz.
I will also say that I am surprised with the attention FIRE has started to receive in the last couple years and in particular months as major media outlets are constantly featuring those of us who have done what many think is impossible. It was something I was a part of before I even knew it had a name (although I still don’t really like the name, I prefer just FI).
The interview was purely that, just a one way opinion from one of the big names in personal finance. I think it would be interesting to see an actual debate about the topic, so what follows would be my rebuttal. Personally, I feel as though her thoughts jumped back and forth, so I will try my best sort the topics for consistency. If you want to listen to the podcast, you can search Afford Anything Suze Orman and you will find it.
So lets get to it:
Right away Suze Orman comes out firing and expresses that she hates the FIRE (financial independence retire early) movement, repeating hates way too many times, simply because things can go wrong in life and you will not have enough money to cover catastrophes.
Suze jumps immediately into explaining that she spent $2.5 Million caring for her mother in 7 years (or $30,000 per month) and then jumps into AI replacing human workers in years to come leading to rising unemployment. Because of rising unemployment, taxes will need to go up and social security will collapse because people are not paying into it.
She then goes on to brag about her experience and has many fancy things, like an island, flies in private jets, has millions and millions of dollars, and works when she wants and will not be able to outspend her money.
First off, I’d like to give a slight explanation of FIRE. It involves the use of some of the traditional retirement savings methods, such as living below your means, investing and maxing out tax preferred investments, continuing to invest in non-tax preferred accounts, paying off your debts like car loans, credit cards, student loans, and in a lot of cases your mortgage (although this is more of a personal choice in the community). But what we are doing is instead of taking 30-40 years to amass wealth, we do it in an abbreviated time frame, realizing the math behind money, in that if you start early, given time, compounding, and the growth of your investments, you can actually make enough money to live off and even make more than what you need, thereby not even having to dip into principle in a lot of cases.
Many of us prefer a frugal, efficient life, where we seek to optimize our life to reduce waste. Because there is a direct correlation in the more you spend, the more money you need. Many of us have also come to the realization that wreckless spending does not equate to increased happiness.
With proper planning that includes tracking your net worth, passive income, spending, you can achieve a point in life where the income from your investments can sustain your life. Part of this planning takes into account the realization of risk. There is risk in everything we do. Getting out of bed is a risk. Putting money in a bank account versus the stock market (and vice versa) is a risk. There will always be risk, but you can’t let the fear of the unknown keep you from pursuing something. You take into account as many variables as you can and plan accordingly.
For example, my net worth update includes 2 estimates. One showing the highest projection for the year, but also a negative outcome. For 2018, my optimistic estimate was $1.2 million, the pessimistic estimate was $850k (I started the year at $1.055 million).
With regards to caring for parents, I am in that situation. Luckily I don’t provide financial assistance, more so physical assistance that older people cannot do for them selves. I would like to get more info on that $30,000 per month care for your mother. I used to have clients in a long term care facility paying $3500 monthly for care. So while there is a need for long term care, I have worked out a plan with my parents to care for them in order to avoid placing them in any long term care facilities. Also, it’s not an obligation of a child to care for their parents. I come from a broken home in that much of my family does not speak to each other. My pursuit of financial independence has given me the flexibility to move cross country to help my parents. If I didn’t have that ability, my sister would not provide it, but they would have been able to get assistance from a neighbor. So there are options to providing care for parents, it’s just something that should be discussed and planned for in advance.
Falling victim to the machines taking over, personally does not worry me. If I am retired, I don’t need a job. I would even argue that the benefit companies receive from replacing people with machines will lead to increased efficiency, greatly lower cost, which should translate to increased profits, which would trickle down to equity investors (which many FIRE people happen to be) in for the of increased share price and/or dividends.
With respect to the collapse of Social Security because few people pay into…Suze, I have actually taken that into my plans. I expect nothing from Social Security when I reach that age. Any little bit I collect, would just be extra play money, but I’m certainly not banking on a check from Uncle Sam.
Suze later in the interview talks about living on less, spending less, and seeing your money grow, and how she came from nothing.
This is actually what the FIRE community preaches. Stop trying to keep up with your neighbors, spend less than you make, invest as much as you can at an early age, and you can come from nothing to building a comfortable life where your time is yours.
She then goes on to say what is the definition of FIRE? When can you take the income from a retirement account.
She then goes into compounding and explains putting $100 away a month and starting 10 years later will cost you $700,000 in the long run. She questions how do you take advantage of your compounding years. She tends to brag about her years of experience quite a bit in this segment.
Well, I’ve already explained this in the first paragraph, but I will add that we aren’t a bunch of hippies not wanting to work, or think that having a couple hundred thousand is enough to stop working. A lot of us are very mathematically inclined, have given proper planning and execution into pulling the trigger. I’d even say many of us could do a better job than financial advisors do at their job (I used to be one).
I am personally annoyed by the “when can you take money out of your retirement account” statement, as most of my traffic and email is from the 72(t)/SEPP (substantially periodic payments) distributions to access your retirement money before 59.5 years of age and not pay the penalty. There have been other great writing in the community about the Roth Conversion Ladder.
Our community is not the group of people putting $100 a month away into a Roth. We max out our 401(k), roth/traditional IRA, HSA, and invest in brokerage accounts. Why? Because we know putting away $100 a month will not get you to FIRE. We often talk about savings rates in the 50-80% range, not the traditional 10-20% that the professionals talk about. That is a big part of reaching financial independence at an early age.
In the next segment Suze estimates $350k per year to live. And then goes on to use an example of you have $1 million at 4% interest, you only have $40k, so you need $10,000,000 minimum in order to retire.
The host goes on to use a $2 million portfolio generating $80k to live off (I feel like the host, Paula, was trying to get a more realistic number to use for living). Suze does not think that’s enough to live off of because of inflation and FIRE is the biggest mistake anyone can do.
(The interview was real hard to just listen to, but especially at this part). I would like to know more about where that $350,000 figure is coming from. The vast majority of households do not have that income combined to live off. It’s just a ridiculous number. Even in my years as an advisor, I would rarely come across a couple or individual with that kind of income. In 2018, I am projecting about $12,000 in expenditures, an increase from 2018’s $10,000, most of that is discretionary spending related to dating. Can I spend more, most definitely, but it doesn’t increase my happiness. I have come across more couples living well on under $80,000 a year than she realizes. I think this is where her reality is very different from yours and mine, we don’t literally live on an island.
Suze goes onto talk about living expenses at 60+ years of age are much higher: roof repairs, cars, kids expenses, college education, caring for your parents. We have not thought of these things happening and that market crashes can wipe us out. She talks about dividend paying stocks and dividends being cut, or eliminated completely. We will get burned playing with FIRE. (Here is the book plug-I knew it!!!).
Part of planning for FIRE is realizing that emergency expenses arise and that inflation eats away at the value of your money. So in the planning process, we invest and have additional funds for emergencies. Also, ignoring inflation would be a big mistake. A big conservative approach to my planning was using a long term rate of inflation of 4%. When I started in the industry that is what we used and somewhere along the line it changed to 2%. I however want to plan for higher inflation, so I have stayed with 4%.
Part of my planning involved a doomsday scenario, where I HAVE to work (not simply have the option), and basically I have arrived at a 75% drop in the markets or 2 back to back years of 50% drops. Even at this point I can get by, but it would be tight. Can this scenario happen…anything is possible. I could also continue making ridiculous amount on my investments that I simply can’t spend down.
In regards to dividends being cut or eliminated, there is a reason for diversification in your investments. I currently sit at 56 total holding in my portfolio. 50 of those holding pay dividends. By diversifying my investments across several companies, I am able to reduce my risk of seeing my passive dividend income decrease. For example, 2 companies have decreased their dividend in 2018. Had all my money been in those 2 companies, I would have seen a severe drop in dividend income. By spreading my dividend holdings across 50 companies, I am able to reduce the risk of seeing a decrease in my dividend income. For 2018, 34 companies have increase their dividend and I still expect a few more announcements. Also several of my holdings have dividend increase histories of 20+ years. For these dividend aristocrats, there is a very high probability of an increase in future years. If all of my companies were to cut or eliminate their dividends, I don’t have anything to worry about…that means we are all fucked and don’t have to worry about money.
Going back to inflation and tying in dividends, a part of my plan is to use only dividends to live off. My investment style focuses on dividend companies that increase their dividend. What you will find from the articles on my site, the increases of these dividends also provides a hedge against inflation as my passive dividend income increases at a rate greater than inflation. This further reduces the risk of my touching my principal.
So far I’m not feeling burned by FIRE.
Suze goes on to question what will we do with our free time? She then goes onto us missing out of our best compounding years and should be saving as much as we can now. She then says do not insult the beauty of compound interest.
The host goes onto using a 3% withdrawal rate and Suze says that might work as long as nothing goes wrong. She goes onto saying you need to work as long as you can in a job you like. She explains the ultra rich continue to work because they love what they do.
I originally retired at 36 back in 2016. I travelled and exercised a lot. I admit I eventually got bored and have gone back to work. However, the work in not satisfying. I would love to have a job that I really enjoyed, but the reality is that the majority of people work in a job they don’t like. This is kind of the point of FIRE, being able to leave work and focus on your passions. It’s also why I am leaving work in 2019 again.
For the 3% withdrawal rate, lots of us post our expenses and withdrawing at the 4% rate actually provides excess funds to set aside for a rainy day or invest. FIRE is not about planning for perfection, it actually has lots of flexibility and acknowledges situations are not perfect.
$2million is nothing. Suze did retirement planning for a 401(k) plan. She learned that people earning $50-60k a year had more than enough money to retire vs the executives. She goes onto say when you make a lot of money, you spend more. The lower earners spend less and avoid debt. She says to live below means but within your needs, fund your 401(k) up to the match, fund your Roth, pay off the house, credit cards, and keep your car for 12 years. Only buy needs vs wants, get as much pleasure saving vs spending and you don’t need as much. By retiring early you will draw down your portfolio early and have more years for something to go wrong.
Suze goes on to say if you retire early, you should have a passion you continue to persue. If you retire early, you don’t have a passion. She has an island, sold 5 homes, has a boat. She was able to go back to work when she wants (Plug for a show you need to watch).
She seems to think we travel the world when we retire early. The more money you make the more money you spend.
She talks about starting a movement call MAX, to max out your retirement accounts and start as early as possible.
She actually gives an example of investing aggressively and not saving anymore and the money continues to grow.
I’ll stop the at this point, because she talks about her book a lot now. What’s interesting is she answers a question about when do you have enough money and the answer is when you don’t have to worry about money. What also interesting is she talks about low cost investing, buy and hold investments for very long terms, keeping cost low. At least there is some common ground. Suze then declares a Slap Down to the fire movement!
This is an interesting part. While I agree $2 million isn’t a lot of money, with simple and smart investing, it can generate enough cash flow to live off and sustain most households. I do it on a portfolio of over $1 million.
I’m confused, because talking about people who make$50-60k per year and living a sensible life style, investing in their retirement account, paying off debt, and controlling your wants vs needs, sound very much like the FIRE movement. A lot of what she describes in this section is FIRE.
I think Suze believes people in the FIRE movement are nothing but doctors, engineers, or executives.
She make an attempt at starting a MAX movement. Sorry Suze, that already started. If you really understood FIRE, you would realize part of FIRE is maxing out your tax preferred accounts.
It’s also ironic, when she uses the example of starting early, aggressively saving and investing, you can make more money than you need and not actually have to save anymore. Kinda sounds like FIRE to me!
It’s also funny that she discusses low cost investing, holding on very long term for your stocks, and says you have enough money when you don’t have to think about money.
Sorry Suze, sounds like you’re trying to take credit for the FIRE movement. If you think you’ve just done a Suze SlapDown to the FIRE movement. I say just bring it!
Host Take Aways from Paula: I’m glad Paula put this segment in. In it she says Suze does not understand the FIRE movement and seems to think income and asset growth stop in FIRE, which couldn’t be further from the truth. We don’t necessarily stop work, but maybe continue hobbies that earn income. FIRE doesn’t mean you draw down your assets, or stop saving. FIRE is actually about people first, we have the ability to stop work, but that doesn’t mean earnings stop. FIRE is about having options on the table. I do wish Paula would have said she was an advocate of FIRE when Suze asked her if she wanted to be one of the retire early. That would have lead to an interesting segment.
People have an agenda. In this case, it’s for Suze to sell her books and promote her show. I think a debate would be interesting as there are some shared themes in promoting a problem in this country of saving and investing. It would also be fun to educate the guru on what they think is impossible and bring her back down to reality of what her readers and viewers financial situation is like. Personally, I didn’t think the interview helps her image and it makes her appear out of touch with reality. Why would someone get advice from someone who has a very different reality of what is financially needed to even hit a regular retirement. Maybe one day one of us would be invited on her show for a showdown.
My parents advice to me has been to get out and experience more things. Enjoy the fact that I am young and have money to do what I want. They regret having saved all their lives, and now that they are at a point in life they can do what they would like, their age limits their ability. Do not be afraid of being your better self.
People fear what is different or they do not understand. Sometimes there is a process, product, or thought process that comes along and shakes up an industry. The FIRE movement is the biggest concept in years to shake up the thought of the traditional retirement process. The fact that we have a big name go off against us is verification that we are on to something.
What clarification would you like these professionals to realize about the FIRE movement? Comment below.
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