Author Topic: Do you ever worry the fundamentals FIRE is based on won't hold anymore in 20 yr?  (Read 1489 times)

moustacheverte

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FIRE from what I understand is based on fundamentals like unlimited growth and people buying more and more and more as they live their lives.

But the virus seems to be making a lot more people stop and think about the rat race, about perpetual growth, about work and spending in general. For instance, I'm reading that the air travel industry has been turned upside down with business travel projected to be down 50 or 66% for ever from that point on since we've actually seen that teleconferencing brings just as much value as flying everyone in for that marginally useful meeting.

Same thing for exponential growth which more and more people realize is unsustainable using finite resources and planet. We can't keep growing and living like we have for the last 80 years without most likely destroying our world.

So, do you ever worry that the way our economy runs will drastically change in the next 20/30/40 years and that the tenets allowing FIRE won't work anymore? What then? I'd hate to have spent my twenties and thirties to save over half my income to have been wasted because when I'm 50 or 60 I'll have to go back to work...

What's your take on this?

Malcat

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The principals behind FIRE are the principals behind any retirement: save enough so that you don't have to work anymore.

For FIRE to fail on principal, retirement itself needs to fail on principal, and that means total upheaval of the economic systems of the world.

Now, two things;

First: FIRE failing on principal is not the same as the 4% rule failing on principal. Many prognosticators in this space are sounding alarms about the 4% rule being insufficient in the future. So many a conservative FIRE folk are aiming for substantially lower withdrawal rates to combat the risk of having to go back to work. Some are aiming for rates as low as <2%.

You can argue for and against that as necessary, but it still relies on the fundamentals of FIRE, just under less optimal conditions.

Second: Oh for sure! All sorts of shit could happen that could topple capitalism as we know it. IMO climate change is a beast and as the pandemic showed us, we're pretty powerless if nature tries to fuck with us. You aren't wrong, the entire system *could* collapse. However, that means shit all for your financial planning because you *can't* financially plan for that.

More realistically you could get cancer, have a deadly or crippling stroke, get hit by a bus, get Covid, get shot, etc. Factors that could totally eff your plan are everywhere. That's a normal part of life. That why being able to enjoy your life in the present is so unbelievably important.

So, what does this all mean for your FIRE plans and that dreadful prospect of "wasting" your 20s and 30s saving half your income only to have to go back to work?

Well, here's the sticking point: in my opinion, if your plan involves a situation where you need to be an unsatisfying life for two decades in order to make it work, then it's a shit plan and you should look into alternatives.

You cannot financially save your way to total security in your future life. No matter what the simulator tells you, there's no 100% success rate in life. It just doesn't work that way.

So any plan that from the outset involves a significant probability of being regretted because you wasted precious years of your life is a highly risky bet.

FIRE is all about taking control of your own life and crafting your own happiness. It is absolutely NOT about dragging yourself miserably through years and years of work, while denying yourself the luxuries you really want for the sake of happiness in the future. That's what some people do, but that's not what MMM did.

That's a really great recipe for ending up a messed up 40 year old who never learned how to be happy. And if you don't end up happy, then what the hell was the point?

I don't know what you should do, but whatever plan you choose, I would look carefully at what it is you think you need to be happy. And if you can't be happy during the earning phase of your financial plan, seriously consider reformulating the plan.

SwordGuy

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But the virus seems to be making a lot more people stop and think about the rat race, about perpetual growth, about work and spending in general.

That pretty much happens in every bad situation society goes thru.   Then times get a bit better, Madison Ave. advertises something "New!  Shiny!   Must Have!" and folks fight to get back into the rat race to afford it.


2Birds1Stone

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I worry about a lot of things in life, that I actually have control over.

Having embodied more of an ERE philosophy on the whole FI thing, there is extra resilience and consilience in my approach. Meaning a <3% WR, the ability to leverage non financial capital, earn some side income, and the list goes on to create a robust lifestyle that doesn't really rely on $$ as nearly as much as more mainstream FIRE plans.

 

SwordGuy

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We have rental houses and people will still need a place to live.

We have farmland and people will still need to eat.

We have social security and politicians will still want to get elected.

We have stocks and bonds and people will still want things made and to buy them.

Now, what I do worry about is whether the intransigence and greed of the right wing will drive people to gut capitalism.  "Let them eat cake!" is more generous than some on the right wing would go nowadays.

There's not only plenty of wealth to be made if all working people actually made a decent living; there's enough evidence that that a larger, healthier, better educated and more prosperous middle class would make the wealthy more wealthy.   But the right wing doesn't see it that way.    They want to squeeze workers more and more and the end result of that will be wealth confiscation followed by guillotines for the once-wealthy.    That's far more likely than some imagine.

And it won't be stopped by propaganda or more police brutality.   It will only be stopped if almost Americans get access to the fruits of the American dream.

terran

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If you read the original version of one of the first FIRE books (although they didn't call it that then), Your Money or Your Life, which looks like it was released in 1993, the whole investment section is basically "buy government bonds and live off that sweet interest." Obviously this wouldn't work now, so you'd have to change your strategy. We might have to change our strategy too, but I wouldn't worry too much about it. There will always be a way for rich people (that's us) to make money off our money. Or there won't and we'll either be living in a utopian or dystopian world where money doesn't matter for one reason or another and we'll have to figure that out.

John Galt incarnate!

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FIRE from what I understand is based on fundamentals like unlimited growth and people buying more and more and more as they live their lives.

But the virus seems to be making a lot more people stop and think about the rat race, about perpetual growth, about work and spending in general. For instance, I'm reading that the air travel industry has been turned upside down with business travel projected to be down 50 or 66% for ever from that point on since we've actually seen that teleconferencing brings just as much value as flying everyone in for that marginally useful meeting.

Same thing for exponential growth which more and more people realize is unsustainable using finite resources and planet. We can't keep growing and living like we have for the last 80 years without most likely destroying our world.

So, do you ever worry that the way our economy runs will drastically change in the next 20/30/40 years and that the tenets allowing FIRE won't work anymore? What then? I'd hate to have spent my twenties and thirties to save over half my income to have been wasted because when I'm 50 or 60 I'll have to go back to work...

What's your take on this?

"Money makes the world go round" is a timeless verity.

Thus, there will always be opportunities to acquire plenty of it.
« Last Edit: August 09, 2020, 02:55:30 PM by John Galt incarnate! »

Buffaloski Boris

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My take?  Somewhat similar to Malcat's above.  If you're toiling away in misery to accomplish some FI number, you're doing it wrong.  The FI blogosphere is rife with young STEM people who hate their jobs and are working nose to the grindstone so they can someday go retire to live the hedonistic life. I think it's just another form of selfishness and idiocy.  They're assuming that they're going to still have their health and the relationships necessary to enjoy it when they reach this Promised Land of RE. Which are awful big assumptions.  I'm all for frugal living, but I think frugality is it's own reward.  It challenges you, it focuses you on higher goals, it conserves God's creation, and yes it helps you to retire early and live a more fulfilled life if you're savvy enough to seize it.   

So let's say that we end up in a period where our investment returns kind of suck, or where the economy changes.  Would you rather be in a position of being partly FI and have some freedom, or be  broke like most folks?  It's an easy choice.  Life can suck at times.  It sucks a lot more when you're broke.

One last thing. A rabbit hole that I think FIRE people get themselves sucked into, and that I think makes them miserable in the end, is this view that because I'm wealthy and because I've figured out the not-at-all difficult math of compounding interest that this translates into some sort of special wisdom or power or concern about the world in general. Mastery and application of 8th grade math isn't all that special. It doesn't mean that you'll be all that successful when turning your "superpowers" to politics or religion.       

PDXTabs

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So let's say that we end up in a period where our investment returns kind of suck, or where the economy changes.  Would you rather be in a position of being partly FI and have some freedom, or be  broke like most folks?  It's an easy choice.  Life can suck at times.  It sucks a lot more when you're broke.

Yup. I think that there is a real chance that with climate change we will see worse returns over the next 30+ years than were historically possible. That's just a reason for me to save more.

bigblock440

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The fundamentals being spending less than you earn?  No I don't worry that it won't be relevant 20 years from now.  Will the market returns match history?  Who knows, but historic returns aren't the fundamentals, they just shorten the timeline. 

FireLane

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Do I worry? Heck yes.

I worry that climate change will cause massive upheavals in the years ahead. I worry that cities will drown, ecosystems will collapse, tens of millions of people will become homeless refugees, and countries will go to war over their dwindling share of the planet's resources. I worry that all this disruption will result in zero or negative economic growth for decades to come and cause the future to be poorer than the past.

I worry that skyrocketing inequality has led to an excess of rich people parking their money in stocks, bidding up asset prices beyond the point of reason and causing returns to be very low for the indefinite future, such that the 4% rule or even the 3% rule will fail.

I worry that health care in the U.S. will never be reformed, insurance costs will spiral out of control and a minor illness will become a life-ruining expense. I worry that conservative politicians are deliberately trying to wreck all plans for reform because they want people to be chained to their employers.

But if you're the worrying sort, there have always been things to worry about. There was never a point in history where the future was rosy and it was smooth sailing ahead as far as the eye could see. There have always been bank runs, bubbles, depressions, famines, floods, epidemics, wars and the threat of wars that would give an investor reason to hesitate.

There's no portfolio or investment strategy that guarantees safety from all possible dangers. Choosing to work for the rest of your life isn't safe, it's just a different kind of risk: the risk that one of these catastrophes will happen anyway and then you'll have spent your last good years in a cubicle, rather than being free to have adventures and live the best life you can. Sooner or later, you have to take a leap of faith.

But whatever it is that's coming, we FIRE folk are better positioned for it than just about everyone else. If you're doing it right, you'll have a hefty portfolio (such that you'll have years of advance notice if your investment strategy starts to fail), plus flexibility to live where you choose, practice at living frugally, and hopefully some transferrable skills. The vast, vast majority of people are nowhere near as well prepared as we'll be.

ctuser1

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What is the point of "worry"ing about it?

There is always some "risk" that an existing approach may not always work in all situations. Most of these risks are unknown unknowns (or black swans or whatever other term-de-jour you like), which means you can do nothing about them!

If you can quantify a "risk", then hedging is possible. However, the cost of hedging will determine if hedging is feasible or not.

I find it incredibly helpful to collapse down all long term decisions in terms of "next 6 month goal". The trick to doing it is to think "What do I need to do for the next 6 months to give me the most flexibility for the long term, and delivers the maximum happiness/satisfaction for my kids, me and everyone else around me in the near term?".

Long term flexibility and short term happiness don't always agree. Then you need trade-offs.

I don't find the subjective emotions (like "worrying") to be helpful or useful for any planning exercise!! I have seen it in many people (including DW and others in my extended family I dearly love), but still find it utterly perplexing.

LWYRUP

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I like the philosophical answers above but I'll give a nuts and bolts one.

I think we could have a period of depressed returns that could test the 4% rule.  I am personally aiming for 3.5% at this point (if there's a big correction and CAPE falls closer to 20 I may bump that back up).

I do think that the healthcare issues in the US will get sorted out in the long term and so people will be able to retire early or just start small businesses and know that they have access to reasonable and reasonably-priced healthcare.  So we may see an improvement on that front. 

If the past is our guide, there will be continued improvements in human material well-being (though it will likely be two steps forward one step back, like always so a lot of things will be better and a couple of things will be worse) and so if anything we should see increased numbers of early retirees (or just more broadly more people who step away from the corporate world but can still sustain a reasonable standard of living).  If anything, climate change suggests that we should push MORE people to retire early, so that they can do things like walk to the local park and grow their own vegetables, not drive along the highway for an hour to send a lot of e-mails about TPS reports and then fly off to Bora Bora for ten days.  So, real travel may be more difficult and reserved for the spendy elite but the mass of humanity may work fewer hours and enjoy their life more and visit places via virtual reality, etc.  So, as far as the 4% rule goes, maybe FIRE lifestyles will look more like geoarbitrage (coders in rural towns working freelance part time) and less like "save up 2 million at globocorp and VTSAX to victory."

I'm in the VTSAX to victory camp myself but there are many walks in life.  We'll sort it out somehow.

lifeanon269

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So let's say that we end up in a period where our investment returns kind of suck, or where the economy changes.  Would you rather be in a position of being partly FI and have some freedom, or be  broke like most folks?  It's an easy choice.  Life can suck at times.  It sucks a lot more when you're broke.

This right here.

The thing to remember when living a mustachian FIRE lifestyle is that if your post-retirement finances are failing, in order to turn them around so that your outlook is brighter again, it only requires you to earn a very low wage job for a few hours of work to get back to green again. That means that you can continue to succeed with just about ANY job you can find. Earning as little as an extra $5000/yr can completely change your retirement outlook in tough times when living a frugal life which means that just about any work/income you find will yield success for you.

Whereas, if things turn bad with the economy, for most people who live a debt filled life and are without jobs, they'll need to find another high paying job in order to pay all their bills. It tough economy times it can be very difficult for people to find those high paying jobs and therefore these people will be much more likely to go bankrupt.

This is the root of the foundation of a frugal lifestyle and a savings mindset that I don't think, regardless of how the economy performs, will ever not hold true.

stoaX

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What is the point of "worry"ing about it?

There is always some "risk" that an existing approach may not always work in all situations. Most of these risks are unknown unknowns (or black swans or whatever other term-de-jour you like), which means you can do nothing about them!

If you can quantify a "risk", then hedging is possible. However, the cost of hedging will determine if hedging is feasible or not.

I find it incredibly helpful to collapse down all long term decisions in terms of "next 6 month goal". The trick to doing it is to think "What do I need to do for the next 6 months to give me the most flexibility for the long term, and delivers the maximum happiness/satisfaction for my kids, me and everyone else around me in the near term?".

Long term flexibility and short term happiness don't always agree. Then you need trade-offs.

I don't find the subjective emotions (like "worrying") to be helpful or useful for any planning exercise!! I have seen it in many people (including DW and others in my extended family I dearly love), but still find it utterly perplexing.

I like your "next 6 months" way of thinking. I'm going to try and incorporate that into my planning.

BicycleB

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I find it incredibly helpful to collapse down all long term decisions in terms of "next 6 month goal". The trick to doing it is to think "What do I need to do for the next 6 months to give me the most flexibility for the long term, and delivers the maximum happiness/satisfaction for my kids, me and everyone else around me in the near term?".



So let's say that we end up in a period where our investment returns kind of suck, or where the economy changes.  Would you rather be in a position of being partly FI and have some freedom, or be  broke like most folks?  It's an easy choice.  Life can suck at times.  It sucks a lot more when you're broke. 

I love the wisdom this thread is bringing out!

OP, I don't worry that people dropping out of the rat race for moral reasons will endanger anyone's FIRE investments. I just don't think that will be a broad enough trend to affect much. Waves of that have happened before with little effect on the global picture. At most, we'd build a gentler society where financial returns would be lower but the emotional goals of FIRE (freedom, security, meaning, ecological sustainability) would be more easily met.

Re perpetual growth - I disagree that FIRE is fundamentally based on that. It's just not. It's based on the idea that there's a return available on investments, and living with wise thrift could allow someone to live happily on that return. Both of these are perfectly possible without perpetual growth.

To me it also appears that there is so much room for higher value per unit of material by shifting gradually to a more recycle-instead-of-throw-away economy that during our lifetimes, we will not confront any fundamental limits. We only will confront limits of the system's current version, which presumably will be replaced with a more efficient version step by step. I agree climate change will have impact, but suspect that our ingenuity will have a stronger effect than that. Plenty of room for growth of measured and functional GDP to the year 2100 and beyond.

I have periodically supposed that returns on investment could be lower in future, suggesting that a lower withdrawal rate might be worth planning for if safety is a much higher priority than any drawbacks of doing extra pre-FIRE. My reasoning though is different. I can imagine that lower population growth could lead to a reduction in returns. Another factor I can see producing such a result is simply that as society becomes more advanced and stable, returns fall because overall risk is lower. I consider that we may already be experiencing this - that today's low interest rates reflect the increasing ability of government and society to manage its systems. A different explanation for the same pattern would be that as society ages and technology advances, the amount of available capital increases, reducing returns per unit of opportunity through simple supply and demand; higher supply of capital produces lower returns. Lower returns wouldn't change the fundamentals in my view though, just the details of individual calculations.
« Last Edit: August 10, 2020, 03:19:10 PM by BicycleB »

ctuser1

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Thx for the kind words stoaX and and BicycleB.

On the nuts-and-bolts question(s) raised in this thread:

Long term returns are driven by many factors. Two of the most important ones are:
1. Productivity Growth
2. Financialization of the economy.

#1 -> Quantum computers figure out low-cost and low-energy ways to produce ammonia (some bacteria do it) -> second eco-friendly green revolution in Africa.
#2 -> Walmart (listed, SP500 component) driving mom and pops (unlisted, private) out of business. Big Tech + COVID accelerating the trend.

Caveat(s): These are not mutually exclusive, just different flavors of "similar" things. Plus the above discounts other drivers, e.g. the population growth component of the economic growth.

Long term, #2 will someday hit a wall. There is only so much financialization you can do.
#1, however, can continue for a very long time as measured in "economic utility".

So, to argue that the exponential driver is somehow going to go bust is not rooted in reality, IMO.
Further, I'd argue that #2 has a looong way to run still. Not many moms and pops in Africa, India and other parts of the world are integrated into the world financial system.

Yes, there are losers in such a process. It sucks to be a small business owner in this march of behemoths!! But, if you can't defeat them - join 'em. Buy VOO (or VT/VTI) and partake in their exponential climb!!

Nobody knows the future. I certainly don't. I did not write the above to predict a specific version of future. It is just to show that an optimistic outcome in long term is as equally plausible (and I personally think more probable) than a gloom and doom one.

So, my personal "next 6 month plan" is to continue socking away in VOO/FXAIX. If the world changes in 6 months, I will take a stock again.

I also don't claim that this "6 month thinking" is a magic bullet. DW complains that this approach of mine gives her a headache because she needs a more firm direction that doesn't change every 6 months. She thinks my way of thinking leaves things too much on shaky ground. Last time around, I pointed out that I am simply doing Dynamic Programming like she studied for her MS (https://en.wikipedia.org/wiki/Dynamic_programming), and she stomped out saying I am being "condescending" to her. Go figure!! So it must be a personality thing whether this will work for you or not.

ChpBstrd

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The assumptions of FIRE already don't hold in most countries of the world:

1) If there is no middle-class, there is no opportunity to earn sufficient money or save sufficient money. Corruption or crime are your best bets to get rich and escape to someplace better.
2) If corruption is high enough, anything you managed to save is subject to being taken away by someone with more political power.
3) If you lack access to a well-regulated investment market, you cannot invest.
4) If your currency is unstable, it is impossible to preserve wealth. Ask the Argentines.
5) If public health and sanitation are bad enough, you probably won't live to retirement age.
6) If your economy is unstable, you will constantly have to dip into retirement savings to afford necessities like food, housing, and medicine.
7) If there is a conflict, your house, land, and possessions may be confiscated or destroyed.
8) If your parents' generation was not able or willing to invest significant resources into your education, it's unlikely you'll ever earn a professional salary or join the middle class.
9) If your culture looks down upon wealth, you will likely give away your savings to family, charity, or religious groups, or not be motivated to earn it in the first place.
10) If your social category faces discrimination, you may have great difficulty even becoming middle class.

Feeling lucky to be born in a wealthy country? Well, actually several of these assumptions are at risk in the U.S. where the purchasing power of the middle class has been declining for decades, public health is politicized, education is being defunded, and the USD is at risk of devaluation due to the size of the national debt. For the past 20 years the US has been careening toward the policies and culture of what we charitably call "emerging economies".