Suze Orman is clearly no fan of the FIRE movement (which stands for "Financial Independence/ Retire Early"). What Does Suze Orman Say About FIRE? What is the FIRE movement? It's basically people who aim to quickly put themselves into a financial position where they can either quit working or work on their own terms. How does Suze Orman feel about FIRE? In a recent Marketwatch article, she opines that retiring early is one of the "biggest financial mistakes" a person can make, and that the cost for a young person to retire safely would run into the $5m range. Her reasoning? Things happen, making retirement far more expensive than most people think. Her basic opinion on FIRE is as elegant as it is unequivocal:
"I hate it. I hate it. I hate it. I hate it."
The problem with Ms. Orman's argument is she's only looking at one side of the equation - the financial cost of retirement. For the sake of logical consistency, she ought to be looking at BOTH sides of the work/ retirement equation. What about the financial costs of working and earning money?
Although now that you mention it, it's easy to understand why she doesn't talk about the financial expense of earning money. Humans have a certain instinct, if you will. Just ask anyone the following question (start by asking yourself): is it financially smarter to (1) earn less and spend less, or (2) earn more and spend more? Logically, we all know that choice (1) could easily outperform choice (2), but instinctively, it seems that we are magnetically drawn to choice (2). Everything about our society and our basic brain wiring tells us that all things being equal, we should always go for more.
The obvious problem with this instinct, however, is that all things are NOT equal. For most people, higher earnings translate into higher marginal and discretionary spending. As you become accustomed to earning more and spending more, what you perceive as your financial "needs" appears to spread like a miasma rising from a pestilent financial quagmire. Consequently, the amount that you think you'll need to retire proliferates - possibly at a rate that exceeds your annual pay raises. This is the basic cause for a vicious cycle that probably sounds all too familiar. You could be earning more and more each year, but ironically, you're feeling more and more stuck... or possibly even that you are drifting backwards. It feels baffling as you tell yourself "hey, I'm earning more, so why am I worse off now than I was before?" Don't worry if you have felt this way before, because you are far from alone. And if you ask me, I'd say that this hamster-wheel-esque sensation is so widespread that it largely explains the growing popularity of FIRE.
So maybe our kneejerk instinct to go with choice number (2) is yet another human blindspot that afflicts the thinking of even financial experts such as Suze Orman. If so, then all the more reason to evaluate FIRE with logical consistency, balancing the financial costs of retirement jot for jot against the financial costs of working.
Let's skip generalities and philosophy and just go straight to a real world example. I retired and moved with my family from Washington DC to Lisbon, Portugal, a little over three years ago. At the time, my gut instinct told me what Suze Orman is now telling me - that I'd be financially worse off without a salary. Earning more and spending more felt far safer and more responsible than cutting costs and making due with a reduced income from investments.
Here's the relevant background. In terms of income, I used to earn a salary of $250,000 a year working part-time as an attorney in Washington, DC. I also earned about $154,000 in taxable qualified dividends. After we moved to Lisbon, we continued to earn our $154,000 in taxable dividend income, but we were also able to generate income by renting out our DC house. By doing so, we transformed a major living expense into a passive income source, and dramatically cut our federal tax bill by using depreciation deductions on the property.
In terms of expenses, we also made a personal choice to downsize our spending habits when we moved to Lisbon. Our current apartment in Lisbon is about half the size of our old house, and our credit card bills in Lisbon are a fraction of our normal bills in Washington, DC. Part of the reason why our monthly bills are lower is because things cost less in Lisbon than they do in Washington, DC, but there is also a healthy dose of personal choice to buy fewer things. Moving to Portugal enabled us to cut our largest expenses; health insurance, private school, income taxes and housing costs. On the other hand, we did tack on some added expenses by living abroad. We have to renew our residency status in Portugal, and file a local tax return each year. These two tasks are complex enough that we need to hire an attorney and an accountant to help us stay compliant with local law.
I tallied our income and expenses living and working in DC (earning high and spending low) versus our income and expenses living and not working in Lisbon (earning less and spending less). The financial results are basically the opposite of what my gut instinct was telling me they'd be.
What you can see is that it cost me $324,880 a year to live and work in DC with income of $404,0000 a year, leaving me with annual savings of $79,120. It costs $62,720 a year for me to live and NOT work in Lisbon, with taxable earnings of $165,325. That leaves me with an annual savings rate of $102,605 in my taxable accounts. In a very real sense, it cost $23,485 a year to earn high and spend high, compared to earning less and spending less.
Let's be completely honest, though. In theory, I could have kept my job, stayed and DC and maybe cut $23,485 of discretionary spending to make it all balance out. In reality, that just wasn't going to happen. I'm not proud to admit it, but I somehow felt more entitled to blow money a bit more carelessly while I was working. You know, and being more pressed for time made it easier for me to want to pay up top dollar for conveniences.
This is what it looked like on paper at the beginning, but fast forward three years. How have things played out in practice? To begin with, my portfolio income has grown each year, but my living expenses haven't really changed much. While I was working in DC, it always seemed like as soon as my income grew, my living expenses would grow by at least that amount. After I retired, I've been finding it easier to hold costs steady - probably because health insurance and education expenses in Portugal barely budge each year, but grow at a geometric rate in the DC area. As a result, my savings have been rising at an increasing rate each year, and that I'm making more financial progress today than I was making during my time spent in the hamster wheel of high earnings/ high spending.
Maybe $23,485 of extra savings doesn't sound like much to some people, but consider this. Thanks to rising income and relatively fixed costs over the last three years, we now save about an extra $65,000 more than we were able to save in DC. And then there is the steady tailwind of compounding at our backs pushing that savings rate ahead with gathering speed. If retiring early made sense three years ago, it makes over twice as much sense today.
What about you? Would you be financially better off or worse off if you quit your job and moved to a lower cost jurisdiction? Before you hop onto Suze Orman's FIRE-hating bandwagon, maybe my real-world experience could be a useful way for you to frame your cost/ benefit analysis. Feel free to use my sample spreadsheet as a starting point. Is it better to earn high/ spend high, or earn less/ spend less.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not financial advice, and I am not a financial advisor. This article is for entertainment purposes only.