A personal finance guru has sparked a backlash by claiming people need at least $5 million to retire and pouring cold water on the “FIRE” movement.
FIRE, which stands for “Financial Independence, Retire Early”, is an increasingly popular concept among millennials who dream of retiring before the age of 40 by maximising their savings and living frugally.
It was started by US man Peter Adeney, a former software developer who claims to have retired at 30 and now lives off returns from around $600,000 invested in index funds, all while educating others via his blog Mr Money Moustache.
“I hate it,” said TV host and best-selling author Suze Orman, who has an estimated net worth of over $US30 million and lives on her own private island, in a recent interview with the Afford Anything podcast. “I hate it, I hate it, I hate it.”
The 67-year-old slammed FIRE devotees as “naive” and said they were kidding themselves, arguing instead they should work for “as long as you possibly can in an area you love so you don’t feel it’s work”.
“I personally think it is the biggest mistake financially speaking you will ever, ever make in your lifetime,” she said. “I think it’s just ridiculous. You will get burned if you play with FIRE.”
Asked by host Paula Pant whether a typical FIRE goal of building a portfolio worth $2 million generating 4 per cent, or $80,000 a year in passive income, was a “safe amount” to retire on, Ms Orman scoffed.
The former CNBC and Oprah Winfrey Network regular said $2 million was “nothing, it’s pennies in today’s world”. “I was a waitress until I was 30 making $400 a month,” she said.
“When you’re older is when you want $40 (million), $50 (million), $100 million. Two million dollars when you’re in your 30s, you may think that is a lot and you can live on $80,000, and you can have a good time for two, three, four, five years and hopefully nothing will go wrong, but I promise you, if you think $80,000 a year as you get older is going to make it for you before tax, I have a bridge to sell you.”
She warned “things happen” in life — illness, accidents — not to mention the cost of looking after children or elderly parents, or even the possibility of financial collapse. “You’re hit by a car, you fall down on the ice, you get sick, you get cancer,” she said.
“If you only have a few hundred thousand dollars, or $1 million, $2 million … if a catastrophe happens, if something goes wrong, what are you going to do? You are going to burn up alive because you won’t have the money to do it.”
Ms Orman cited her experience looking after her own ageing mother, where she spent more than $2.5 million on her in seven years. She said people should make allowance for up to $300,000-$400,000 per year.
“So you need at least $5 million, $6 million,” she said. “Really, you might need $10 million. You don’t know how long you’re going to live and because you’ve done it when you’re so young, if you start spending $350,000 a year, in not that many years, all your money is gone.”
She added young people who voluntarily left the workforce were wasting their most valuable years to earn compounding wealth. “When you are younger your money that you invest makes money and that money makes money,” she said.
“When you stop working early and you’re not able to contribute (to your retirement account), how do you take advantage of your compounding years? So rather than having millions and millions of dollars when you’re older, maybe you have a million, maybe half a million.”
Even for smart investors, she warned long-term yields were not guaranteed, with many “really great companies” in the past having stopped paying dividends or going bankrupt altogether.
Government bonds are also not a sure thing.
Then there was the threat of higher tax rates. FIRE people were “not thinking about artificial intelligence”, which Ms Osman argued was “coming in big time”. “Do not be surprised if by the year 2030 there’s a 25 per cent unemployment rate,” she said.
“When people are no longer working because machines have replaced all of us, there is nobody paying into the tax structure. When nobody is paying into taxes, tax brackets will have no choice but to go up.”
Ms Orman said she had seen people come to regret retiring at 50 or even 55. “Then they call me back at 70 and they go, ‘Why did you let me do that?’ I say, ‘I tried to talk you out of it, don’t you remember?’” she said.
“As you get older, I am telling you when you’re 80, 90, 95, if you need to go into a nursing home it’ll be $20-25,000 a month. It’s great when you’re young — I was young, I’m not young anymore, but I am sure smart and I am seriously rich.”
Her comments weren’t received too well by Reddit’s FIRE community, which has grown to nearly half a million members. “She says that $80,000 is not enough to live on,” one user wrote. “That’s around top 10-15 per cent of income in the US. So, according to her, 80-plus per cent of Americans don’t earn enough to survive.”
Another added: “She says you could need $350,000 a year, if you aren’t a 1 per center you are destined to go broke. She is completely out of touch with reality, at that point whether you FIRE or not is completely irrelevant, almost everyone is going to go broke regardless.”
Sydney engineer Pat Seyrak, who documents his FIRE journey on his blog Life Long Shuffle, said Ms Orman’s comments showed a “disconnect with the reality of ordinary people”. Since starting in January 2017, Mr Seyrak has saved more than $380,000 towards his goal of $1.24 million.
“Suze is familiar enough with the financial literature and studies to know that a retirement portfolio can survive indefinitely while sustaining yearly 3-4 per cent withdrawals with a very high degree of safety,” he said in an email.
“By those numbers $5 million can sustain $150,000-$200,000 worth of yearly withdrawals, yet the vast majority of people live happy and full lives with nowhere near that level of income at any point. I personally do not need a yearly income of $200,000 to live a happy and full life and I think most ordinary people will agree with me.”
Mr Seyrak said Ms Orman floated a number of “Black Swan events” and “throws around some quite unrealistic numbers about what is needed to insure against these”. “She is coming from a position of having a very expensive lifestyle, so it may be difficult for her to see it from the point of view of someone with a lower income and less expensive lifestyle,” he said.
Despite her “abrasive” tone towards the FIRE community, Mr Seyrak said he appreciated Ms Orman’s core message about building resilience into a retirement plan. “We can take it as a positive critique that we should make sure we have a little bit of extra ‘fat’ in our savings to deal with unexpected situations,” he said.
“But it is ill-informed to try and insure against every exceedingly rare Black Swan event while working yourself to the bone accumulating the money to do so until you keel over. Instead, using the data available to me, I choose to build in a reasonable amount of safety to cover the majority of situations that may occur in my life and enjoy my time as best I can while I am here.”