A man walks down Broad Street near the New York Stock Exchange (NYSE) in New York, U.S.(Photographer: Michael Nagle/Bloomberg)

The ‘Radical Saving’ Trend Is Based On Fantasy

(Bloomberg Opinion) -- For as much as people have complained about the astonishingly low savings rate in the U.S., nobody has done much about it. But now there is a new movement called “FIRE,” which stands for “Financial Independence, Retire Early” that encourages people to do just that. It has turned out to be surprisingly controversial.

The FIRE folks say you should engage in “radical saving” during the early part of your career—about 50 percent of your paycheck—until about age 35 or 40, at which point that is pretty much the end of your career because you can then retire. The FIRE folks have done the math and figured out that if you save that 50 percent and invest it in the stock market, using generous actuarial assumptions, that pile of money will grow even as you sell assets over time to finance consumption. The goal is for you to bounce the last check you write.

This brings up a whole bunch of interesting philosophical questions:

  1. What is the point of saving? Most people save now because they want to consume later. But the FIRE folks don’t want people to consume. For the FIRE folks, the point of saving is simply not to have to work. To give you the freedom to do whatever you desire over the last 50 years of your life. Trouble is, the freedom to do anything you want isn’t much fun when you’re hemmed in by a microscopic budget.
  2. What is wrong with consumption? Not consuming is an end in itself. Personally, I like to consume. I like nice clothes, nice jewelry and going out to nice dinners. I, too, am a radical saver, but the point of my saving isn’t so I don’t have to work, it’s so I can consume more later. Savings is just a big pile of opportunities, and someday I might come across a house or a car or something I really want and the money will be there.
  3. What is wrong with working? Why do the FIRE people dislike working so much that they want to quit at age 35? Working gives people purpose. This is my primary difficulty with universal basic income schemes: most people do not function well with a bunch of unstructured free time. I have had unpleasant jobs, and even working an unpleasant job is preferable to not working at all. I am one of these people who thinks there is dignity in working, that every job is important no matter how small.

If you poke at the FIRE people with these criticisms, such as your standard of living will drop during retirement, they will typically respond that it is possible to have a high standard of living under these constraints, but it just isn’t true. I know how to operate Microsoft Excel just as well as they do and the numbers don't add up. Life is full of trade-offs. If you don’t want to work a full career, you will generally have to consume less. If consumption is somehow tied to happiness, then you will not have much happiness. Of course, the core of the FIRE movement (and the tiny house movement) is that consumption is not tied to happiness, but that doesn’t exactly jibe with the historical record.

The biggest issue with the FIRE movement is that it’s the ultimate bull market phenomenon. FIRE seems to work because the stock market has gone straight up. A bear market will change that. Even if stocks do return 8 percent to 12 percent over time, it’s not going to be any fun living on a shoestring budget and watching your nest egg decline in value by 30 percent to 50 percent. That will be the point in time in which most FIRE adherents get online and start looking at job ads. Of course, after a decade or more of being on the sidelines, they aren’t going to be very employable.

Personal finance guru Suze Orman was criticized as being elitist and out-of-touch for suggesting that you might need $5 million to $10 million to retire at 35. But she’s not wrong under her framework, which is that in retirement, you want to live well, not poorly. If you don’t have the ability to fly first class once in a while, you have probably done something wrong.

There are positive aspects to the FIRE movement. It has got people thinking about saving and long-term investing in a productive, positive way. That definitely is not a bad thing, but saving and investing should be for the purpose of future consumption or for charitable contributions, not so you don’t have to set your alarm clock.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of "Street Freak" and "All the Evil of This World." He may have a stake in the areas he writes about.

©2018 Bloomberg L.P.