When it comes to retirement planning, financial advisers have a lot of experience building portfolios for people ready to leave the work force in their 50s, 60s, or even their 70s. But what happens when a client walks through the door with a plan to retire in their 30s or 40s?
It’s rare, but not unheard of among younger people today seeking to be part of the “financial independence, retire early” (F.I.R.E.) movement. F.I.R.E. seekers aim to save aggressively and spend very little with a goal to leave the workforce decades earlier than their parents’ generation.
The movement has gained momentum during the past decade through online communities and social media as more young people share their F.I.R.E. goals and success stories – ranging from never having to work again to seeing paid work as optional.
F.I.R.E. is a polarizing concept that sparks fierce debate among those who praise the hard work and frugality that comes with retiring young and those who believe these people are sacrificing too much to exit their working life early – only to wind up bored without a job to go to every day.
Regardless of where advisers stand on the F.I.R.E. movement, any client who’s saving more than they’re spending should be lauded, says Chuck Grace, a lecturer at the University of Western Ontario’s Richard Ivey School of Business who teaches courses on personal investing, and a consultant to the wealth-management industry as managing partner and president at Bigger Picture Solutions Inc..
“You have a client walking in and saying, ‘My plan is to save a lot of money.’ How can that be a bad thing? One of the cornerstones to building wealth is that people who are wealthy save more than people who don’t. You can’t invest until you have savings,” Mr. Grace says.
The wrong response, he says, is when advisers challenge investors and tell them they’re too young to retire or that their goal is naive.
“Most professionals are going to look at anyone who walks into their office and say, ‘What are your goals and objectives – and how can I help you?’ Whether it’s to save or to do something else. Professionals will always approach it that way.”
A few years ago, Mr. Grace had a 21-year-old student at Ivey who presented his plan to retire in his late 20s as part of a school assignment. Mr. Grace was skeptical at first. He even asked the student to redo the assignment to make it more realistic.
Four years after the student’s graduation, he came back to Mr. Grace to say he had met his retirement goal through a combination of extreme savings and real estate investing and was ready to stop working at the age of 27. Today, that student’s experience is used as a case study in Mr. Grace’s classroom, where students critique and debate this F.I.R.E.-inspired financial plan.
“It’s very unusual,” Mr. Grace says of people who retire young successfully – or to have “fired,” as the movement describes it. (To be “firing” is when you’re cutting expenses to reach that goal.) “To make that choice you have to be incredibly disciplined.”
Retiring young can also be risky, especially for those on a fixed financial plan, says Jason Heath, an advice- and fee-only certified financial planner at Objective Financial Partners Inc. in Toronto.
He’s concerned F.I.R.E. followers may not be factoring in surprise expenses such as health-care bills if a family member becomes seriously ill, or the possibility of parents needing financial support. These are the same risks that someone retiring in their 50s and 60s faces, only heightened by the longer retirement time frame.
“There’s already all of this uncertainty, let alone the uncertainty of [potentially] having a 60-year retirement,” Mr. Heath says.
Another risk for someone focused on savings and cost-cutting is they might forgo wealth-protection measures – such as purchasing life, disability or critical illness insurance – while working to meet their retirement goals.
“A death, disability or critical illness could derail a F.I.R.E. plan – or anyone’s financial plan,” Mr. Heath says.
Warren MacKenzie, head of financial planning at Optimize Inc. in Toronto, believes advisers should challenge F.I.R.E. adherents on why they want to retire early. Their responses to an adviser’s difficult questions could prompt them to rethink their plans.
“Sometimes, you really get people thinking about their goals,” says Mr. MacKenzie, who has had a few clients who retired early and then complained about being bored and feeling unfulfilled.
“I would ask [people looking to retire early], ‘What are you going to do when you retire?’ If they say, ‘I’m going to play golf,’ I would point out that I know people who got bored silly doing things like playing golf every day. It becomes like work,” he says. “I would talk to them to ensure they’re clear on their goals."
As an adviser, Mr. MacKenzie also believes it’s his job to point out that sacrificing personal enjoyment when you have a young family in order to retire early could be a mistake.
“By all means, save and be financially secure, but the idea of sacrificing your best years by working overtime and not enjoying things like travel and time with your family so you can retire at age 40? Then what will you do?” he says.
“I think it’s wrong to sacrifice your life for financial independence at age 40 or 50. It’s not how much money you have that makes you happy. ... If you’re sacrificing everything just thinking about the future, how are you living in the moment? How are you enjoying life?”