For Estate Planning, Try FIRE

For Estate Planning, Try FIRE – Let’s take a look at the Financial Independence, Retire Early (FIRE) movement. FIRE sets out a strategy for achieving that goal based on careful planning, determination, financial discipline and smart investing. Millennials have enthusiastically adopted these principles and inspiration, which were derived from a book published in 1992 by Vicki Robin and Joe Dominguez titled “Your Money or Your Life.” The authors tried to create a blueprint for getting off the treadmill and leading life on one’s own terms as young as possible.

Delayed gratification

The first part of the secret sauce is to save a large portion of your take-home earnings, ideally 50% or more. Step two is to invest it in passive vehicles, such as index funds, to cover your living expenses for the remainder of your days. No one would suggest it is easy to sock away such a substantial amount. Unless you are blessed with an exceptionally high salary, it requires sticking to a rigid, frugal budget and minutely tracking expenses. Could you be content with a minimalist, no-frills lifestyle? Some people can.

The financial calculations are quite straightforward. The crux is to work out your FIRE “number,” which is 25 times your annual outlays as of the date you hope to retire. You will need to make projections. For example, if you anticipate being able to live decently on, say, $80,000 a year, you need to build an investable, income-yielding nest egg of $2 million. If you think you can manage on $60,000, the capital shrinks to $1.5 million, and so forth. These numbers are based on withdrawing 4% per year from your capital, which is the inverse of the 25 times multiplier.

Various hacks can help boost this formula.

You want to invest in tax-advantaged accounts, like individual retirement accounts and 401(k)s, whenever you can. It would also be prudent to pay off your mortgage as soon as possible. By the same token, you want to limit any debt payments, so be extra cautious with credit cards and other loans. You may also need to consider bridge accounts to cover any years before your retirement accounts or Social Security kick in, perhaps in your 40s or 50s.

There are variations on the standard regular FIRE, which is constructed to replicate and cover your projected cost of living. You could live lean during retirement, cutting costs to the bone, or live fat, if you prefer never to skimp. That would demand a higher FIRE number. Barista FIRE, another popular route, means supplementing retirement income with side hustles or part-time or freelance jobs. You can still retire early but must boost your income to fund your lifestyle. Why “barista”? Because Starbucks originally provided health insurance to its part-time workforce, and now many others, including Amazon, UPS, Chipotle and Staples, have followed suit.

Life, liberty and the pursuit of happiness

FIRE is about freedom and flexibility. And that freedom has a different meaning for everyone. For you, it might be the opportunity to pursue a meaningful occupation, something you love that is not simply punching a clock. Or perhaps you have always enjoyed your work life and have no desire to turn your back on it entirely. You may still like the social connections and intellectual stimulation. Rather than plodding under pressure, your ideal equilibrium might be to just scale back or work part time. Or you might rather lie on a beach. Finally, note that FIRE is not meant to be an escape route from a job you detest. Try to get another job!

Know your limitations

FIRE depends on certain “fuels,” like compounding and robust market returns (so, the earlier you start, the better). Inflation can upend plans. Frugal fatigue syndrome can easily set in with the trade-off in sacrifices. It is also more challenging for those with families to support and mortgages to repay. Quitting the workforce means you will also miss peak earning years.

As you clarify your values and passions, you will learn to consume less while living better.

This is just a basic introduction to a serious and complex topic. Before doing anything, talk to a qualified financial adviser about whether a FIRE approach might work for your goals and lifestyle.

Copyright, 2023

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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