The 'FIRE' Millennials - Setting Up For Disappointment

by: Option Millionaires

Over the past several years, the FIRE principle has been gaining popularity among millienials and other young professionals.

FIRE stands for "Financial Independence, Retire Early" and incorporates a philosophy of living frugally and investing a large portion of income.

FIRE adopters may find themselves disappointed versus adopters ten years ago, as forward-looking returns are much lower than in the past.

FIRE may still be possible, but some adjustments and smart portfolio strategy will be necessary.

Over the past decade, an increasing number of millennials have been adopting the FIRE principle. The FIRE acronym stands for “Financial Independence, Retire Early,” and to achieve FIRE, some have chosen to adopt an alternative lifestyle. These individuals buck old ideas such as the “70/20/10 rule” in which 70% percent of income goes to living expenses, 20% percent into paying off debt or a traditional savings account, and 10% into investments. FIRE followers invest over 50% of their income while living an extremely frugal lifestyle, seeking to take advantage of high rates of returns in risky investments, like common stocks, early in life.

This principle worked fabulously since the Great Recession ended nearly ten years ago, with the S&P 500 returning an average of 12.50% per year (before dividends) since 2009. Taken another way, an individual making $60,000 per year and investing half of it each year in the S&P 500 would have amassed $585,445 (again, before dividends, but I’m not including taxes, so let’s assume they wash each other out) over the last decade. Wow, suddenly saving a few million for retirement over a couple decades sounds easy, right? No.

The FIRE cohort entering the accumulation phase of their lives in or shortly after 2009 had luck on their side. More specifically, they had a strong stock market. Those adopting the FIRE mentality today (thinking younger millennials and maybe a handful of folks in Generation Z) will likely find themselves disappointed, if only because their timing was off. See below for details.

Forward-looking returns are lower than in 2009

The period between 2009 and 2012 may have been the best period to purchase risky stocks in modern history. As mentioned above, the average annual return for purchasing domestic stocks since 2009 has been around 12.50% per year. Since then, valuations and dividends (two significant determinants of future expected returns) have been stretched. See below for the implications of this in the most up to date long-run capital market expectations from Research Affiliates below.

A 3% return from US equities stands in stark contrast to what the FIRE cohort has enjoyed since 2009. Other major institutions forecast similar below-average expected returns. BlackRock expects 7% annual returns for U.S. stocks going forward, Franklin Templeton expects a 5.7% average annual return, and Sellwood Consulting expects close to a 4.5% average annual return. With this data in our back pocket, let’s run some simulations to show how difficult FIRE will be for new adopters.


The 2009 case

Let’s start with a baseline to show how lucky early FIRE adopters were. We’ll assume average annual returns of 12.50% and run a Monte Carlo simulation, or a series of several thousand individual simulations, to see how much money an investor has after 20 years if they contributed $50,000 a year into their stock portfolio. For simplicity, we’ll assume 100% of the contributions are invested in the S&P 500.

And the results point to an early retirement! The 10th percentile, which can be considered a fairly dismal result, still nets close $3,000,000 in today’s dollars (real terms) after 20 years. Let’s see what happens using today’s expected return values.

A pessimistic case

Let’s run the same simulation using Research Affiliate’s 3% average return figure for the S&P 500 and see if an early retirement is still viable.

Ouch. To attain one of the worst case scenarios using a 12.50% return, we need to hit the 90th percentile or run into some extraordinarily good luck to net $3,000,000 in real dollars. Suddenly, retiring before 45 or 50 seems less easy.

The mid-point case

Let’s plug in Blackrock’s 7% expected return figure. This number seems optimistic, given that it is very close to the market’s historical return and the current market is in a late-cycle stage.

While better than when assuming a 3% return, the results are still not stellar. One would need to be lucky enough to stay away from the bottom 50% of results to have three million real dollars after 20 years.

A Different Method: Assume a Bear Market First

Another way we can look at these simulations is to assume that returns will fall close to their historical norm, but we will make an adjustment to account for a bear market over the near term. The bear market adjustment is based upon the premise that the economy is in a late cycle environment and that the current bull market is the longest in modern history. A bear market is likely overdue. To take this risk into account, let’s run our scenario with historical return numbers, but assume that a nasty bear market takes place immediately when we start investing. We’ll plug in the two worst years in our simulation first and then see how this impacts our retirement analysis.

This case appears much less dangerous to financial independence and an early retirement, most likely because these worst returns occurred when the account size was still relatively small. Further, with the worst returns out of the way, future returns will be higher (when the account size is larger).

Nevertheless, these illustrations shed some light on the real risk that the millennials seeking to adopt a FIRE lifestyle could have a more difficult time reaching their goals than individuals ten years ago.


With the prospect of lower expected equity returns, FIRE could be difficult, but some modest adjustments could improve your chances of being debt-free and wealthy at a young age.

  1. Contribute more to your investment account: Of course, this comes with the tradeoff of having to further reduce your living expenses, potentially to a point where it could negatively affect quality of life.
  2. Market Timing?: A difficult proposition, but one could theoretically employ a risk-managed strategy, such as a trend-following strategy with equities, until after the next recession concludes. Or, one could adopt a strategy to invest conservatively over the near term, with a large fixed income position, and then build up a significant equity position after a large market drawdown. Of course, market timing is difficult in practice and takes significant emotional control, so be careful adopting such a strategy.
  3. Diversify: This is probably the most realistic and optimal solution. Capital market expectations for domestic stocks are unimpressive at best. International equities, however, have higher expected returns due to better valuations and cash flows (dividends) according to Research Affiliates, BlackRock, and Sellwood. Therefore, diversifying into some international equities could help move the needle toward a higher long-run rate of return, which could, in turn, lead to a higher probability of FIRE.

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.