Hey young people, I’ve got great news for you. Recent research based on the life-cycle model says young people shouldn’t save for retirement. Instead of saving, you should live it up while you’re young. When you make more income in your mid-30s, then you can save for retirement. This will help you maintain a consistent standard of living throughout your lifetime. If you save and invest when you’re young, you’re depriving yourself. Researchers call this the “welfare cost”. This theory assumes you don’t retire until you’re 65+. This also assumes your income will increase until retirement, for a sure thing in this day and age.
Basically, this theory is the opposite of FIRE. I advocate saving as early as you can and as much as you can. Once you achieve financial independence, you can retire from your career and pursue your interests. Or you can keep working if you enjoy your job. Financial independence gives you more choices. You have the power to work on your own terms once money is out of the equation.
Of course, there are downsides to FIRE. The “welfare” cost is just one of them. I made a good income in my 20s and 30s. I could have lived in a bigger house, purchased fancy vehicles, and gone out all the time. Instead, we lived modestly and strived to save 50% of our income. Fortunately, I was happy with my moderate lifestyle and never really cared about how other people lived. Living modestly wasn’t a big sacrifice to me.
Here are a few other downsides to FIRE.
- Unconventional: FIRE is unconventional. Most people can’t understand why you would want to retire early. Americans highly value work and income. You won’t fit in with conventional people.
- Spouse/partner: Since most people don’t like FIRE, there is a good chance your spouse/partner won’t like it either. FIRE needs to be a team effort. It’s practically impossible if one partner isn’t on board with the plan.
- Risk: There is a risk that your savings might not last. I retired when I was 38 years old. That means my retirement could last 40+ years. Who knows what can happen during that long retirement? Fortunately, I retired at the right time and our investments grew tremendously over the last 10 years. I also had some income from blogging so that helped.
There are more downsides, but let’s get back to the NO-FIRE retirement theory. I’ll write more about the downsides to FIRE another day.
Problems with NO-FIRE
Living it up while you’re young sounds good in theory, but there are many problems with it. The assumptions might not hold. We live in a tenuous time. The job market is awesome right now, but a huge recession is just around the corner. Life has been very unstable over these last few years. Who knows what the next 30 years will bring?
Here are some problems with the NO-FIRE theory.
- Bad spending/saving habit: This theory creates a terrible spending and saving habit. If you spend all your income when you’re young, I don’t see how you can suddenly start saving when you’re 35. This kind of spending habit is hard to break. Whenever you get a raise, you buy more stuff. Why save when you can improve your quality of life? Saving for retirement can wait another few years, right? Unfortunately, before you know it, you’ll be in your 50s. Then you’ll think it’s too late to save. In fact, this is why most U.S. households don’t have much retirement savings. They have bad spending habits and they can’t change.
- No compounding: If you don’t save when you’re young, you’ll miss out on the 8th wonder of the world – compounding. The money you saved and invested when you’re 22 will grow so much more than the equivalent invested when you’re 35. The easiest way to become a millionaire is to max out your 401k. It’s a sure thing. The author said compounding doesn’t work today because the interest rate is near 0%. However, things have already changed since they did this study. The interest rate is higher now. Anyway, you should invest your retirement savings in the stock market and real estate. Young people can take more risks because they have plenty of time to recover. Don’t just stick it in a saving account.
- Investing isn’t easy: Saving is just one part of the equation. You need to learn to invest too. If you started investing when you were 22, you’d be an expert by 35. It takes time to learn how the stock market works. We all make mistakes when we started investing. It’s better to get that over with when you’re young.
- Miss out on free money: If you don’t invest in your 401k, you’ll miss out on company matching. That’s free money. Why pass it up?
- Income might be unstable: The biggest problem with NO-FIRE is it assumes you will be able to increase your income until you retire at 65. Yeah… I thought I could do that when I was 22. I was a good engineer and frequently got good raises. However, I got burned out and quit my engineering career. This isn’t rare. Most workers get burned out at some point in their careers. Some people can get back to it, but many can’t. The economy is always changing and you never know when your job will be obsolete. Many workers enjoy working from home today, but this arrangement is only paving the way for more outsourcing. Eventually, companies will hire cheaper remote workers from around the world. It’d be nice to increase your income until you retire, but it won’t be easy.
- Forced retirement: Lastly, you might not be able to work until 65. Many workers dropped out of the workforce over the last few years due to the pandemic. A lot of people have long COVID and can’t work in the same capacity as before. There are many health issues that can derail your career. You might have to retire before 65 even if you don’t want to.
Front-load spending is gambling
The research encourages young people to spend it all when they’re young and save later. I think it’s a big gamble. You don’t know what the future will hold. Everything has to go right for this to work out well. As we all know, life isn’t perfect. Things will go wrong and it’s better to be prepared.
On the other hand, FIRE encourages you to save and invest as early as you can. You’ll have to live more modestly than going all out, but you’ll build wealth much faster. FIRE is more difficult at first, but it will give you more choices when you’re older.
What do you think? Do you think it’s better to save when you’re young or just spend it all? I guess it depends on your personality. I’d rather do the difficult thing first, and save the easy stuff for later.
If you want to keep track of your finances, sign up with Personal Capital to manage your portfolio. They have many great tools for investors including the 401k Fee Analyzer and the best retirement calculators on the internet. I log in almost every day to check on my accounts.
Image credit: Miguel Teirlinck
Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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