There is a new movement occurring that promotes an early retirement. It is called FIRE or Financial Independence/Retire Early. According to this article, the premise of the movement is simply to do one thing to be successful:
Well, I have a surprise for you. It turns out that when it boils right down to it, your time to reach retirement depends on only one factor: Your savings rate, as a percentage of your take-home pay
It is that easy. All you have to do is save your way to financial independence. Well, Pop Culture Finance is misleading once again. In a perfect world where the math never changes, yes this is good advice. For the real world, there are going to be some surprised people who subscribe to this advice. Bear in mind, the last 9 years of the stock market is not always going to be the normal environment. I will keep it simple. Here is what is misleading about this advice:
1. It requires more than saving just to retire
Yes, savings is an important part of it. However, it is only part of the equation. It takes 5 components:
Planning - You have to determine the amount to save and the amount you have to earn to achieve your specific retirement goals.
Saving - Yes, you have to save a percentage of income
Investing - Yes, you have to get into this complicated process
Managing Risk - The market won't always be in the fairy tell world as it has been in the last 9 years
Monitoring - Make sure your plan is working by monitoring the components along the way
You can't just save your way to a successful retirement. It takes much more.
2. Invest in low cost index funds
When you invest in index funds, you are taking equal market risk. This is what Pop Culture Finance does't tell you. You can save money on expenses as long as you are willing to take the risk of going exactly with the market that the "low cost" fund represents. It is like paying minimally for an airline ticket on a budget airline. You didn't spend that much on the ticket. However, the airline doesn't quite follow all of the safety requirements in order to cut costs. So while you are enjoying your budget price in the back of the mind you are worrying about crashing and never making it to your destination.
3. What are you going to do when you go through a bear market and loose 50% of your money?
The retire early crowd are looking for a modest return of 5% over time. However, what are you going to do when the dreaded bear market hits? Bear markets are a part of investing and if you are going to ride the roller coaster of return are damaging to those returns. This is especially the case if you are still taking market risk in retirement and taking income out.
Bottom line: It is human nature to look for the easy way out. Pop Culture Finance is full of easy strategies. They aren't telling the whole story. The reality is that it requires more than an easy strategy to be successful. Like anything you want to be successful at, it takes a multi-step approach and most important, critical thinking. If you listen to Pop Culture Finance, you can just turn your brain off and it all works.
Bob Brooks is host of the Prudent Money Radio Show. If you have a question for him go to www.askbobbrooks.com. If you want to inquire about his financial advisement services, email him at firstname.lastname@example.org or call 972-386-0384 and ask for Judy.