The Blind Spots of FIRE

June 21, 2023

In this highlight, we discuss blind spots that you should watch out for when pursuing FIRE.

For more information, check out our full show called, “How to Achieve FIRE By Income (Are You on Track?).”


But the first thing you have to do before you even start going through the mathematics and the numbers is you have to kind of get the mentality right. You have to think through, “Is FIRE right for me? Is it something that I want to achieve?” And what are some of the blind spots that maybe I’m not thinking about? Because I think a lot of folks have this very romantic view of what retirement is, and maybe it’s not grounded in reality. So we’ll talk about some of those things to be aware of.

Yeah, so let’s jump in, and I feel weird I’m the one introducing this first one because it ought to be Bo since we know he loves to throw the weights around a little bit. But the first thing is, we always say, “Don’t skip leg day.” Now, this is one you’ve probably heard us talk about. We want you to have a strong financial foundation to be considering something like FIRE. Financial independence retiring early is not something where you can just dabble. You can’t just save a little bit and count on your money to work for you. You’ve actually got to be pot-committed and go hard into the disciplined life of saving, being frugal for the future so you can live life in a different way than the majority of Americans.

When you make the decision to leave the workforce, it is grave, it’s big, it is significant, especially when you’re doing that at young ages. So we think that one of the things that you ought to do is make sure that you plan, plan, plan, plan, plan, stress test, stress test, stress test. So that you’re running through different iterations, different variables. You know, one of the things we do for our clients when they are going into retirement is we run Monte Carlo simulations, adjusting different variables. “Okay, what if I want to have this standard of living? What if my expenses are higher than I anticipate? What if I work an extra year? What if I decide to change the state that I live in? How does that impact the plan?” If you’ve not done this work on the front end and you’ve not actually put in the time to think through this, I would argue you shouldn’t even be thinking about retirement until you’ve at least checked these boxes.

So make sure you’re doing the stress test. You’re really fine-tuning your financial plan. Do the heavy lifting because you do not want to skip leg day with such a huge financial decision. And then the second thing that you want to do is you want to make sure that you understand the risks that are present. You have to educate yourself on what makes a successful retirement period and what makes an unsuccessful one. One of the biggest things, if you read any sort of blog or literature or commentary on retirement, is this thing called sequence of return risk.

Yeah, this is one we spend a lot of time talking about in our content meetings because we want to figure out how do we create some great illustrations showing people that you can have two people who start off with the exact same amount of resources, but just the timing is all that changes. You even have these same rates of return for like a 25+ year period, but all we did was mix up where does a bear market fall versus where does a bull market fall. And guys, it gives you a night and day result, and we can show you.

Let’s look at this case study we put together, kind of showing how this can manifest. So let’s say that you start your retirement and you want to start withdrawing 4 percent per year starting in the year 2000, all the way until you get to the year 2023. And so, we said, “All right, I’m gonna withdraw four percent of whatever my portfolio value is, starting with a million dollars at the year 2000.” What you can see is that in the first year, if you think back to the dot-com bubble bursting, you were able to withdraw forty thousand dollars. Well, then the market fell. It actually dropped in 2001, 2002, and 2003, so your withdrawal was actually less than what you were living on and less than what you had anticipated being able to live on in retirement. Yeah, the reason we chose that 2000 is exactly what Beau shared. That was a bad period, and that’s what we want to talk about—the sequence of return risk. If you chose to retire right as things were feeling great, like, “Man, I am so wealthy, I’m so rich,” but then boom, you get hit in the face with bad year after bad year after bad year, yet you still have living expenses coming in, you’ve already left the workforce, you don’t have income coming in. This is a big deal. And here’s something that I think we’ve put no limit on what the four percent rule meant on this.

So, you actually have periods here where it got down to nineteen thousand dollars a year because we didn’t put a minimum. We just said, “Hey, just take forty.” And since they had to pull off the principal, their initial contribution early, they got to the point where they were basically living off of fifty percent of what they planned. I don’t even know if that’s possible. But in a lot of ways, because that means maybe instead, you know, like we have Farmer’s dog, my wife, and you know, insist on buying this overpriced dog food for our dog, maybe at that point, you’re eating the pharmacy today for your pet. And that’s why I want to tell you, sequence of return risk is something you should be very mindful of because on this one, I don’t even know if this is realistic to think that a person who goes into retirement at 40 goes down to 19. Is that even something that I think is a viable option? And imagine how the mindset works if you retire thinking, “I’m going to live off of forty thousand dollars a year,” and then every single year all the way until you get to almost 2015. So, fifteen years into your retirement, you had to live on less than you had anticipated. And in reality, most folks don’t do that. Most folks, they say, “Okay, I’m going to set my standard of living here.” I said, “Okay, what happens if instead of just withdrawing four percent of the portfolio value every year, we said we’re going to actually set a base limit of forty thousand dollars? Now, if four percent is greater than forty thousand, then we’re going to give ourselves a pay raise. But if I just lock it in at forty thousand dollars, look what happens.” Okay, the portfolio still sustains, right? I make it out to 2023, and I still have almost a million-dollar portfolio.

This is why the four percent rule kind of holds true. But look at this. Every year, all you got was that forty thousand. And until you really get to year 2022, it’s the first year you’re able to increase lifestyle. So, as we see inflation, as we see your purchasing power change, you weren’t actually able to expand retirement. If anything, you had to kind of continue to cut costs. The sequence of the returns matter. These two are what happened in reality.

But, Brian, you came up with this great idea. You said, “Okay, what happens if instead of starting retirement at the very beginning, instead of in the first three years of retirement, that we have a downturn, we have the dot-com bubble burst? What if it was starting at the beginning of a bull market when things got what would those bad times at the end? How does that change the picture?” Yeah, we kept the exact same 20-plus-year period, a 20-year period, but what was it, 23 years? We kept the same 23 years, but instead of hitting that bear market from 2000 all the way through the end of 2002, we actually just said, “Keep move 2003 to the first year, and then move those first three years of the bear market to the end.” So you get the exact same returns, we just changed the sequence, hence sequence of return risk. And this is night and day, guys. Look at this. The same person, just if they retired three years later. Now you have a situation where their average income is not… They remember in the first one that had no limits, $38,000 a year was the average. Yep, second one, where we put a limit, it was right over $40,000, but it gutted close to a third of the value, meaning their investment, instead of it being worth $1.5 million, is worth a little over $900,000. This one, they lived like kings. Meaning, instead of $40,000, they actually had average withdrawals of $72,000 a year. Plus, their ending portfolio value is close to $1.6 million. It is legit. So make sure, and this is something I always tell people when we’re talking about sequence of return risk. Sometimes, like we’re in the middle of a volatile period, last year, 2022, was not a good investment year. We’ve had volatility this year. A lot of people are probably thinking, “Man, it is probably horrible to be thinking about retirement.” But there’s a chance, and this is what this is always that silver lining moment that I share with people is if you retire right as we hit the up market, meaning if you’re doing the not skipping leg day and actually, you know, checking out from a stress test and other things, and you actually showed satisfactory results through volatility right now, you might have a wind at your back moment coming forward. That is a lemons turning into lemonade moment for your retirement. I love it. So one of the blind spots can be the sequencing of your returns, when you actually choose to retire. And in that same vein, Mary, to that idea is you need to plan for a long life expectancy. I would not focus so much on the FOMO idea or the YOLO idea or this “I only have today” because odds are you’re going to live to a ripe old age. And the longer that we live, the greater that our life expectancies, the more difficult it will be for our portfolios to sustain us over the long term. So the better our planning needs to be going into that. Yeah, I was… You know, I had the… I was talking to my mother yesterday and… You know, and I think it’s kind of interesting. I lost my father in my 20s. But talking to Mom yesterday, I was like, “Man, it is amazing because you don’t think about your parents getting into the upper 70s.” But I think if you’d asked my mother after my father passed away, you know, “What do you think?” She’d have been like, “I don’t know how long they’ll go.” Yeah, but the statistics show most of you who are watching this content, you’re gonna have a ripe old life, and that’s great. That’s actually a blessing. But what I don’t understand is when I look at my comments, when I look on YouTube, and I see all the people saying, “Man, I’m not, I don’t, I don’t know that I’m gonna live a long time.” So when you talk about car culture and you talk about this “I’m gonna live for today,” I’m like, “Fine, you are setting yourself up for, you’re living for today, but your future self has to be prepared to kind of pay the consequences or live with the consequences of that lackluster retirement because that’s the majority of Americans, and you are falling right into that trap of you’re thinking YOLO and FOMO. I’m telling you, focus on food. That’s where you need to be because you will likely live to a very ripe old age.

You need to have the resources to carry you all through that, and the data and the analytics substantiate this, the research studies support this. You know, the Trinity Study is something we hear a lot about, where they looked at what is a sustainable long-term withdrawal rate over a 30-year retirement. And when they did this, they looked at different allocations of portfolios from very, very conservative, 100% bonds, to very, very aggressive, 100% stocks. And they found that except for the very most conservative portfolios, in those moderately aggressive to moderately conservative portfolios, if you had a four percent withdrawal rate over most 30-year periods from 1871 all the way through 2022, you would have had greater than a 75 percent probability of success for making it to the end of your time without running out of money. So four percent was indeed sustainable. But then when they went back to go look, okay, what if we did this study instead of looking at a 30-year window, a 30-year retirement window? What happens if we stretch it out to 50 years? Well, then what you notice is now even more of the conservative portfolios, they don’t quite get you to that 75 percent. So you either have to remain risk-on, which we don’t recommend as you move into retirement, or at least not that risk-on, or you have to decrease your withdrawal rate. Four percent if you’re going to have a long extended retirement may not be the withdrawal rate that you’re going to shoot for.

So I think a lot of FIRE people are banking on four, four and a half, five percent withdrawal rates, are maybe not setting themselves up for long-term success. Well, I think this makes sense. I mean, if you’re only going to put in, if you look at your entire life and you think that you’re, and you’re in that situation where you’re prioritizing that you’re only going to work a little over two decades, but then you plan on living off of this money for four to five decades, yeah, you’re going to be more conservative with your assumptions. Because what you don’t want to do is get in the situation where you go through the years of building up your expertise, build up your earning potential and what you’re making, and then you walk through the threshold and say, “Guess what? I’m giving up this income, going to be fully retired.” It’s hard to come back from that. I would encourage you to be conservative with these assumptions so you don’t get yourself in a heck of a pickle if you try this out, it doesn’t work and then you have to go back and try to start the process again. For more information, check out our free resources here.



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