Episode 073 - Rethinking the concept of FIRE
Don't get me wrong - I'm ok with the concept of Financial Independence. But it is a means to an end, and if you think the end is ''retirement'', I think you are doing it all wrong. So in this episode I want to deep dive the concept of why we work, what makes us happy and why separating financial security from life goals has to be the methodology that we start with, rather than the one we end with.
Click on the player above to listen to the episode or download it. You can subscribe to the RSS Feed here.
First, I’m going to define some acronyms:
FIRE - Financial Independence Retire Early
- What is it?
Let’s define the difference between FI and FIRE, specifically
Everything happens for a reason. What I want to do is to dive into the history behind these concepts and uncover their gains and risks.
So now where are the risks & faults of FIRE?
- You can be financially independent by having more money than you can spend
- Self Employment, Entrepeneuralism, etc. used to be the only way
- Since 2010, following the market crash of 2008, a bull market emerged
- Stocks went from all time lows to all time highs over the next 12 years
- Bull markets traditionally have about a 6-8 year cycle, but this one went on for dou-ble that
- Interesting parallel - 1996-2001 - The “Dot Com Boom”
- Euphoria in markets made people enormously wealthy until the markets crashed
- The result was that between about 2002-2007, no one went to college to study com-puter science
- The offshore market would do programming work for $5 an hour
- No one could compete with this
- As a result, we had a lack of trained software, STEM and other fields
- After the dust settled, and people started to realize that tech was the future, they couldn’t hire enough staff, so the law of supply/demand kicked in
- Wages went to euphoric levels
- Silicon valley real estate went crazy after about 2010
- Caps in immigrant workers meant domestic workers could get $100K+ fresh out of college
- So add to this massive wage inflation in those sectors, a workforce that didn’t want to work for the rest of their lives
- By combining the massive rises in the stock market, with massive income, and since many were fresh out of college and used to living as college students do, it was natural that just continuing that frugal life right out of college and investing money into the mar-kets would gain milliions
- Guys like Carl (Mr. 1500) and Pete (Mr. Money Moustache) became rock stars, as they showed how they could work for a few years, and then never have to work for the rest of their lives
- The point of leaving employment (the RE part of FIRE) meant they could sell a vi-sion of freedom to people that would allow them to escape the rat race that the economy of “withs and withouts” had to deal with
- But there are problems with this
- Man was never born to go and work and have a career
- That happened as a result of the 20th century, and particularly the rise of the trade union movement
- When industrialized factories were under-paying a workforce, organized labor emerged to combat this with large scale walk-outs, protests, and eventually negotiating over labor rates. This led to the rise of the middle class where wealth moved from the ub-er-rich back to the work force
- Since about the 1980s, the trade union movement lost its mojo, in part to offshore manufacturing, and then to robotics
- Labor can’t negotiate for higher rates, so we are seeing what we are seeing today - the decline of the middle class
- Those that have the skills to empower the uber-rich’s quest to own all the ro-bots (ie. Jeff Bezos, etc.) are paid handomsely until they are no longer required
- Ultimately the individual agrees to be trained in a skill that can be sold to those with money, typically needing tertiary education
- But in order to understand why people do this, we must factor in the key rea-sons people work in the first place:
- Security & Money - People need to be able to pay their bills and often this is connected to paying not only their own bills, but their emerging family (spouse, kids, even parents if needed)
- This is a big one. Study the teachings of Carl Jung or the in-terpretation of these things by current luminaries such as Jordan Peterson for more information
- We all need to be needed. This is core to our psychology and often what we do, even if it is uncomfortable, etc. can be done under the umbrella of “service” thereby meeting this psychological need
- It is why those that serve in the military, often in the most in-humane environments, come back still having the desire to be “of service”
- Employers know that there is more impact in giving an em-ployee a new Job Title or some commendation of their work, than a pay raise.
- We all need to find our sanity & confidence in identifying our-selves based on what we do, therefore when you meet someone new innevi-tably the line, “So what do you do?” comes up
- Identity based on job has been common for centuries
- Social mantra & ideology
- Since we are all humans, and we all share the security & ego requirements, we make assumptions that all of us have to achieve these things the same way
- Our brains are wired to compartmentalize things
- The 7+/- 2 principle - Phone numbers
- So we need simple concepts to move on to solving more diffi-cult challenges
- Go to school
- Get a job
- We’ve embraced this because it was defined that way by trade union negotiations with employers
- By paying people more, but forcing them to invest the money, we created the concept of retirement funds (401Ks, IRAs, Superan-nuation), etc. when the employer wouldn’t provide a pension after the worker leaves employment.
- As the trade union movement has waned, so to has the provi-sion of pensions, and now they are often only found in government employment programs
- What is clear is that those that choose to have a job because they are relying on a counter party for income are carrying the legacy of hundreds of years of trade union support, but now at a time when the trade union isn’t there to help them
- What this means is that employers can now define pay rates, and as a result, the divide between the 1% and the 99% as they call it, is obvious - and it’s not go-ing away anytime soon
- FIRE was a small crack in the system that allowed those that (though a com-bination of history, luck and govt/social policy) to earn way more than their costs, they could save, gamble on the stock market and live off the winnings
- I use the word “gamble” here purposely. There is no guarantee that the stock market will pay out. There is history of this, but no guarantee for the future. In the same way that there was no guarantee for those in a union to get a middle class lifestyle. What often is the case in one period of time, changes for the future
FSLE - Financial Sustainability Leave Employment
- What is true is “The Rich don’t have jobs”
- So your methods of meeting your financial independence/security needs could be solved using the same techniques that the rich use
- OWN ASSETS
- It used to be that in order to be rich, you had to create some massive com-pany, go public, etc. That is no longer the case
- Those that have assets that generate them income can do it by automating the concept of labor, just as the rich want to automate labor and even replace labor with robots
- Look at the rewards that those in the Bitcoin community have made by bet-ting on alternative monetary instruments
- It is highly unusual, somewhat “luck” based
- But the mega rich have emerged holding Bitcoin rather than cash
- Alternatively and easier for most, is the concept of owning assets that are more physiological
- Rental Real estate is the best one
- Other forms of systemic assets that generate income, based on the concept of systems & robots can work too
- The thing is that it is about supply & demand. You must offer something that is in short supply, and know that over time the ratios between supply & demand will even out as others discover opportunity
- At some point, you generate enough dividend, rolling income, from your as-sets that you meet your burn rate and you no longer have to work
- Your obligation is to “attend” to the assets, so what you choose must have minimal labor effort to attend to them.
- With all of this in place, you can leave employment
- You are relying on the assets that you control and you attend to, to provide you with income for the rest of your life
What is common between FSLE and FIRE?
- First is the desire to not work for someone else
- Second is the teaching of frugal living
- Third is the building of assets to support your future
- Both require a level of patience in order to save - often years of time
- Deferred gratification
Now what is different?
- FSLE teaches “no counterparty risk”
- No deployment of assets to endpoints that you don’t control (or have at least 1 degree of separation from control)
- Since purchasing of assets can be done using OPM, it can be done in parallel with a lower level wage - you don’t have to be a $100K+ income earner here
- It doesn’t require an “all or nothing” approach - you don’t need to have $2 million in liquid assets to choose to give up your job
- FIRE will focus on the net worth of the individual in order to “pull the trigger” and quit your job
- FSLE is more incremental - you can wind down employment over time, while wind-ing up asset smart income
- FSLE is more suited to someone who is less risk adversed than FIRE, although I would argue that FIRE has 100x more risks than FSLE
- FSLE focuses on “inflation proofing” the strategy - it isn’t about spreadsheets & numbers as much as is it about owning assets and receiving dividends
- FIRE relies on the value of the $USD to work. Increasing inflation isn’t mitigated as liquid capital invested in stocks, etc. must rise in value to be greater than the Chapwood Index first, then you can draw down, otherwise you will destroy the asset itself. FSLE nev-er draws down on an asset - it just received divdends from it
- FSLE is more like a farmer. Once you own the farm, you don’t sell or devalue it. You simply live off the dividends that the farm produces (ie. the harvest).
- FSLE requires you to more of an “operator” in that you are closely engaged with the asset. That requires some commitment to the asset, and some understanding of it, so you don’t defer it to a counterparty. FIRE doesn’t. You can buy general index funds on the stock market and know nothing about the companies in that fund. You just receive the money. That’s a great plus, but also a great risk of counterparty failure.
But here’s the biggest difference, and one that retirement doesn’t provide an answer for
- Remember the reason for working in the first place
- Ultimately above all of this, the concept of work, it is the two key things:
- If you leave employment, which supports both of these psychological human needs, you may have solved SECURITY, but you may not have solved PURPOSE
- If you have already found purpose, spent a life doing it, you often find those in that situation refuse to retire out of choice - not because of the money
- But if you didn’t find purpose, because you didn’t go out looking for it, then retiring to begin the process to find it requires your 150% commitment
- Without purpose, your life has no meaning. This is the #1 thing we’ve pushed aside, opting to focus entirely on the security & money side of things
- It is particularly strong and true in the USA, where fear is a major motivator and psychological trigger. Consider the most successful Hollywood movies to see why. Also the USA is one of the few countries in the world to have a national celebration of fear (Hallow-een).
- As a result, this over-focus on fear tends to become a weapon that the factory & corporate owners can use against their own workforce, and until you push fear aside, you have a problem on your hands when coming to the point of making a decision to leave the work
- However for those that can surpass fear, they then come face to face that if some-one isn’t telling them to do something, and they have to tell themselves, they have to de-velop self-discipline
- But before that, they have to know WHAT makes them happy - what fulfills them - what supports their PURPOSE & EGO
- If we don’t address that first, then everything else is an empty motion and you may as well keep working for someone
RETIREMENT should never be the goal
- The problem here is that RETIREMENT is an end-point of a journey
- The only end-point we have is when our biology gives up on us
- If that isn’t in your future, then you shouldn’t attempt to end-run
- If you don’t support both SECURITY & EGO, you will die
- SECURITY means you’ll probably die from external influence - sickness, cold, starvation, etc.
- EGO means you’ll probably die from internal influence - feeling lost, hope-less, depressed, lacking purpose
- Statistics prove this to be the case
- Yet those statistics are never discussed because the financial services industry is structured around the concept of employment based on trade union definitions
- Rich bosses don’t want you to leave early, as it disturbs their income flow
- So they don’t tell you the truth - even though you probably know it in your gut