"We're flawed because we want so much more. We're ruined because we get these things and wish for what we had."

— Don Draper

I’ve been watching Mad Men—again. This is not my first, second or third time through. I’m a bit addicted. For those unfamiliar with the plot there are two underlying and related themes. It is a story about broken people with a profound sense of loneliness that is tempered by the relationships they build with their colleagues. And it is the story of Don Draper who is constantly running away and searching for something more, yet always drifting back to where he came from. These futile attempts at a new beginning and his ability to re-engage in his life with few consequences are facilitated by his talent and his wealth. While financially independent, he thrives under the pressure of the next challenge too much to bow out and retire.

Naturally, this makes me think of the FIRE movement. For the uninitiated this stands for financial independence, retire early. Describing it as a movement seems grandiose but may not be too far from the truth. The concept is fairly straight forward. It is also based on dubious math. Achieving financial independence means building a portfolio that is 25 times the amount of your annual expenditures. The key here is to retire early which means diverging from the traditional path. Saving 10.5% in your Super is not going to get you there. FIRE adherents save more. In some case much more as savings rates of 30% to 50% are the norm. In extreme circumstances savings rates reach 70% or more. The advantage of an extreme savings rate is that it also trains you to live on less. That makes it easier to amass 25 times your annual expenditures.

Financial independence is a concept that resonates with so many people. And for good reason. Financial independence provides the opportunity to walk away from abusive partners and toxic work environments. It provides choices and options in a world that seems to take them away as you age and your responsibilities increase. The appeal is genuine and pure and so alluring that it requires a leap of faith. The leap of faith is the dubious math. Amassing 25 times your annual expenses is based on a rule that is central to financial planning—the 4% rule.

I’ve been reflexively critical of the FIRE movement because it involves a misinterpretation of the 4% rule. A financial planner named Bill Bengen came up with the 4% rule to help answer one of the most critical questions in retirement planning. How much can you take out of your portfolio annually without running out of money before you die. The complexity of this question is based on the inconvenient fact that the future is unpredictable. The returns you achieve during retirement are unknowable, and more importantly, the date of your death is unknowable. Bill Bengen set out to solve this problem by analysing historical data and looking at what withdrawal rate would work if you happened to have the bad luck to retire in the worst market environment in history. He knew the worst scenario as a retiree was to finish your career as markets embark on a multi-year period of negative returns. This is very damaging because you are also selling down your assets to fund withdrawals. But even under these adverse conditions a 4% withdrawal rate held up. The 4% withdrawal rate was born.

Any rule of thumb comes with caveats. In the case of the 4% rule those caveats are rather inconvenient for the FIRE movement. To model out a retirement based on different historic return scenarios you need an end date. In a retirement scenario this end date means death. Any portfolio that is experiencing volatility while having money withdrawn will at some point run out of money. Bill Bengen was trying to find a safe withdrawal rate for a portfolio in retirement. His view of retirement was traditional and assumed it would occur when someone was in their mid to late 60s. He wanted his model to cover the lifespan of the majority of the population so he assumed a 30 year retirement. A 30 year retirement is perfectly reasonable if you retire at 65. It is less reasonable if you retire at 35. The FIRE movement is basing a withdrawal rate on a rule designed to support a three decade retirement—and making the jump that it applies regardless of when you retire.

Vanguard did a study that explored the 4% rule in context of an early retirement and extended the time a portfolio needed to support its owner from 30 years to 50 years. The success rate plummeted from 86% with a 30 year retirement to 36% with a 50 year time period. That means in 64% of the scenarios the FIRE adherent would run out of money before death. Explaining a 40 year gap in your resume while applying for a job in your mid-70s is going to be challenging. Then again people keep getting to be President in their 70s. Perhaps there is always hope.

Upon reflection I’ve come to the realisation that my naturally cynicism has perhaps been unjustly applied to the FIRE movement. It is a group of people that are actively advancing an idea. An idea grounded in the collective realisation that society at large has gotten something profoundly wrong. That the possessions we amass are a burden rather than a reward. That the lifestyle creep inherent in career advancement brings dependence rather than freedom. But it is also a community. And community is so critical to our wellbeing and something so many people are yearning for today. It is a community that is dedicated to achieving a goal—that magic and dubious number of 25 times your annual expenditures. You hear a lot from people who are trying to get to that number. You don’t hear too much from people who have made it. The exception is the ‘professional’ FIRE retirees who have crafted a second career talking about how they quit their first. And maybe that is a point. Our goals drive us. But they don’t answer what comes next. What comes next when there isn’t a next rung on the ladder. What comes next when you’ve consciously exited the ladder. I think many people in the FIRE movement start their journey with a dream of retiring at 35. I think most of them keep their careers with the added bonus of a nest egg large enough to give themselves what we all want—options. Perhaps Don Draper explained the power of financial independence best when he said “I don’t believe in fate. You make your own opportunities”.

Write me at mark.lamonica1@morningstar.com and let me know what financial independence means to you.