FIRE: What advisors need to know

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SAN DIEGO — Some young Americans are gunning for early retirement. That can mean guiding these clients — often in their 20s and 30s — as they shift their focus toward intense saving.

On its own, the FIRE movement — or Financially Independent, Retire Early — doesn't seem like such a bad idea, according to financial advisor Roger Ma, a CFP and founder of financial planning firm lifelaidout. Clients are usually working toward retirement after all. "I was on the path myself for a couple of years and then my wife knocked some sense to me. She said I was an idiot," Ma said.

Debatable idiocy notwithstanding, FIRE often requires undergoing extreme lifestyle changes, Ma told attendees at the FPA's annual retreat. "Someone on the FIRE path is looking to save 50% of their net take home pay," Ma said. "Often times they're plowing it into low-cost, mutual funds."

That can manifest in living a very sparse life — or in the anecdotal case of one individual, even living in a U-Haul at his office parking lot, Ma said.

The frugality is justified considering how much time these aspiring early retirees will have to save for.

While conventional wisdom sets the retirement age at 65, Ma said. the actual average is closer to 62, according to data from J.P. Morgan.

"If these people are retiring before age 40 — that translates to a potentially 70-plus year retirement — how can they safely use research based on a 30-year investment?" Ma asked.

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Advisors may find FIRE plans concerning because many of them wind up being extremely fragile, Ma said. While many people use the 4% withdrawal benchmark to determine how their savings will hold up, that projection may not apply to FIRE.

"A lot of stuff happens over a 70-to-80 year period," he said.

Additionally, planning for the future can begin to look different as you age. "Some of your interests and goals in your 20s may not be the same ones you want to have in your 30s or 40s," Ma added.

For many folks, the "retirement" aspect of the acronym can be a little muddled. In fact, Ma thinks that for many FIRE-seekers, it's "less about retiring and more about a mindset shift."

That transformation means going to work because you want to — rather than out of necessity. "Early retirement is maybe once you hit that number you're like 'yeah, I'm going to work because I like to go. I don't really have to, I have the money, but I like it.'"

Many who seek FIRE do wind up working after they've "retired," Ma said. "The formula is you make income, save income, invest wisely and eventually make FIRE," he said. "You can either continue working or stop working. A lot of people on the path continue working."

As drivers of the gig economy, millennials in particular are well-versed in the art of the side hustle, Ma said. This is important for FIRE seekers who are looking to retain a sense of meaning once they are ready to fully retire.

Ma says advisors should really press their clients seeking FIRE for their reasons why. "People who clamp onto this movement might be trying to escape their current job," he said. "They may be seeking meaning or purpose or a set formula to follow."

Advisors can provide alternatives to these clients beyond FIRE simply by engaging in a little old fashioned holistic financial planning, Ma said. "Often times you can make small changes in your life that can significantly improve the quality of your life, before having to make drastic changes when things aren’t going right in your career,” he said.” I think subtle changes make a huge difference."

Ultimately, advisors should ask clients this important question: "What are you going to do when you reach FIRE that you can't do right now?" Ma said.

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