The Financial Revolution: Why are People Retiring Early
Type “Financial Independence, Retire Early” into your favorite search bar and an innumerable number of pages on the FIRE phenomenon (including this one) will give you a glimpse into the window of the new financial movement. You’ll find stories about people’s journeys, extreme cases of people living on $10,000/year, marketing strategies towards FIRE, and plenty of get-rich-quick schemes. What you will not find is a story on why are people retiring early.
What has changed? What landmark event in our society kicked off this movement? Why are predominantly millennials (as they are the only ones young enough to truly ‘retire early’ at this point) trying so hard for this?
That’s where we pick up the story. I attribute it to 3 things.
Millennials: Stressed Out By Money
Millennials, overwhelmingly, are stressed out. According to Harvard Business Review, millennials are in a ‘relatively negative state of mind’ and note that ‘the average age for the onset of depression has dropped from late forties or early fifties, where it was 30 years ago, to mid twenties.’
A separate Harvard Business Review indicates that the general reason for this stress is work. Through survey analysis, the Harvard researchers found the most important long-term goal cited by millennials is “finding a new job with better benefits, more pay, better hours, and more work-life balance, as well as work that was more intrinsically rewarding. This … was much more typical of the Millennial age group than older or younger groups.” Common responses for short-term goals, on the other hand, were to ‘stop worrying.’
Short term goals: stop worrying. Long term goals: more money. Put together, millennials want to stop worrying about money.
As further proof of this, in their research note on millennial attitudes towards money, Wells Fargo cites some extremely disheartening statistics for millennials:
- 98% cite feeling financially secure as important to their lives
- 69% want to get over their anxiety about money
- 32% are satisfied with their financial lives
This generation came of age during an economic crisis the severity of which most living had no memory and watched the global recovery teeter on the edge of ruin for the past decade.
On the way to that metaphorical economic prostate check, they get stuck paying for gaudy university improvements (like LSU’s lazy river) and are now saddled by a crushing debt load which numbers into the trillions. Small wonder they’re anxious and pissed off. Hockey stick graphs are always bad, and it’s never good when your generation is largely defined by one:
In summary, millennials are a debt-saddled, stressed out generation that are constantly focused on finding better paying, more fulfilling work, and are not happy with their current finances. Their financial anxiety is omnipresent in their minds.
Perhaps the path to fulfillment lays through work?
The Death of Worker Satisfaction
For fifty years, the path to a secure, fulfilling career was four years of higher education. The social contract declared “pay your college tuition, signal to us you are competent and can learn, show up, and we will take care of you as you get old and make sure you get a piece of the pie.” So students went, expending their formative years and dollars for monotonous classes that had little reason to exist in the curriculum other than to subsidize departments of dubious merit. All under the guise that they were soon to participate in the great expansion of the American economy and earn a fair piece of the proceeds.
Well, about 20 years ago the corporation unilaterally changed the terms of the deal. The corporate real profit margin went up 2.5x from 2000, but the median real income increased by a big heaping load of jack squat:
At the same time, corporations took a look at the future liabilities in the retirement side of their ledger, freaked out and acted. Pensions were out, and someone decided ‘defined contribution’ could be sold as one hell of a deal. 401k was in rather than the for-life annuities that once used to be commonplace. According to the Bureau of Labor Statistics, employees eligible for a corporate pension plummeted. Just 8 percent of corporate employers now offer a pension. But in an unforeseen side effect, this began to undermine employee tenure and increase employee turnover. Workers were becoming less loyal.
Shortly thereafter, the Great Recession unleashed its full fury and layoffs transpired in droves. The double whammy sent the message loud and clear to a generation: you are expendable, you are not important, and you can easily be replaced by a robot. As a result, job satisfaction among survey respondents to The Conference Board’s annual survey of the topic are well below levels experienced in the workplace 20 to 30 years ago.
It’s hardly a shock that the combination of depression, debt loads, financial angst, and job dissatisfaction renders a stew of introspection whose answer seems only all too clear to millennials: break the cycle, live for yourself, and GET THE HELL OUT.
The Bull Market
The last factor driving the FIRE movement is double edged: the bull market in asset valuations.
On the positive side, FIRE is itself only plausible since the US market is at present +422% from the low on March 9, 2009. It’s difficult not to get excited and envision bailing on the system altogether when your portfolio is constantly pumping out 20% annual growth. Even the most meager of savings compounds into a material amount of wealth in the face of such powerful, unrelenting (and unusual) stock returns:
I fear, however, that recency bias pervades the mentality of the FIRE community. While declaring financial freedom and engaging in the pursuit of fulfilling relationships and enjoyable activities is itself laudable and noble, it cannot be underpinned solely by the assumption of a permanent bull market. A recession at some point is inevitable, and the legions of FIRE members may not be adequately capitalized to endure such a downturn. In 2000-03, choosing poorly would have resulted in over 2.3 million of lifetime portfolio value.
I shudder to think about all of the new investors who have seen their accounts grow at ridiculous 20% compounded annual growth rates (CAGR for your neophytes) and who have not experienced the absolute sheer terror that a recession unleashes, like a tsunami of panic against some unsuspecting small Indonesian resort town.
It’s so much more than just some sterile negative numbers on a spreadsheet. Anyone can calmly throw in a series of -20%, -15%, -15% into their lifetime plan and see the result as we sit at 3.9% unemployment and a healthy hiring market. That’s not what triggers the panic in recessions. And it’s not what causes people with otherwise stout constitutions to bail on the ‘stay the course’ philosophy.
The panic in recessions comes when the Dow Jones is down 8% in a day (this would be nearly 2,200 points today) and building security shows up at your team’s desk with HR and a bunch of boxes and ¾ of your team is escorted from the building. Panic comes when you have a mortgage due, your neighbors and friends lost their jobs 4 months ago and haven’t had as much as an interview, and the unemployment rate is nearing 10%. Panic happens when everyone you know is shutting down businesses, selling homes, unemployed, or desperately clinging to the menial job that they hate but now cling to like a piece of driftwood in the eye of a hurricane.
Panic comes when you realize that despite whatever you may or may not feel about your employer… you still need a safe port in the storm. And until you can provide your own safe port via savings, you are vulnerable.
If you’ve only recently begun accumulating material levels of assets, I virtually guarantee your tolerance for risk is nowhere near as high as you believe it to be. Try to do something with this while times are good.
Stressed out, indebted, fed up, but not stupid. It should hardly come as a shock that so many have discovered Einstein’s most powerful force in the universe (that of compound interest) to take charge of their own financial destinies. Disenfranchised by the unilaterally revised terms of the worker/employer social contract, the FIRE movement is to be commended for its implicit rejection of the ‘normal’ 40 year career.
My own journey towards financial independence was the result of a personal loss forcing me to re-evaluate what I wanted out of life. It gladdens me to see so many prioritize their own mental health, personal relationships, and meaningful experiences over the rather banal trivialities of career accomplishment.
Just try to exercise a little caution along the way.
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