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.
FIRE recap
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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I believe whoever wrote that article is definitely a capitalist. There’s no reason to expect someone to be reading that financial article unless they are planning to be a saver. Majority of the people will spend the whole paycheck but still won’t be happy.
Young people should enjoy life but also understand that saving is important as well.
anyone that knows the time value of compounding will save early. dopes won’t. the idea of a constant life style is beyond stupid. while i don’t believe in fire either it at least makes more sense than other fads. make a budget… live with in it. the sooner you put money aside… the sooner you retire. and don’t give me the crap about inflation either. blowing your money while younger is a stupid rationalization.
Yeah burn out is real. And I recall reading Fritz Gilbert’s book from the retirement manifesto.com that 60 percent of people retire earlier than they had planned.
You read my book! Even more impressive, you retained what you read! As an author, I could ask for nothing more.
I like having options. What saving does is give a person options. I started investing my my 20’s but didn’t discover fire till I was 36. In my late 20’s I quit work and traveled around while using up quite a bit of savings.
Do I regret spending this money in my 20’s when I could have used it to buy a home or invest? Heck no. Those years traveling were some of the best in my life. I was still able to buy a home and target FI at 42. There’s a balance to it and everyone has their own path to forge. But saving early gave me the option to travel.
Wow, that’s some interesting stuff! For me, FIRE was a much-needed decision and I don’t regret kicking up my savings rate big time to make it happen. Early retirement is something I’m so grateful for.
That said, that’s just what worked for me. It’s going to be different for everyone, but I still think that even if you’re striving to strike the right balance, saving a little is still important. As you mentioned, at least for the habit to form, the compounding to take place, and to get any matches you can for plans like a 401(k).
The key is almost always going to be finding the right balance for yourself but I’ve already got the “save first and then have fun with the rest” mentality instilled in my daughter… I don’t care what that research says! 🙂
Right. You need to save a little so you know how to save more later. Saving nothing at all is a bad start.
I think money managing, saving and investing should be a mandatory subject taught in schools. I think people in their 20s can take bigger risks and still have time to overcome their mistakes so they should be encouraged to save and invest early on. I certainly took a lot of risks in my 20s some paid off, discovered FIRE at 33 and have become more careful now in my late 30s as I get close to becoming FI. I will definitely not take the same risks now as I am getting older, have a few health concerns and can no longer work long hours.
It’s much better to make mistakes in your 20s than in your 30s. Young people have enough time to recover.
I think there are personal finance classes in school now, but I’m not sure when they are taught. It might be in high school for us. We’ll see when our son goes.
Amen!
I decided to go FIRE 1st of January this year (timing not ideal) and I have not looked back once. Even though my stock portfolio declined ~30% since then (living in Sweden with the Ukraine war being kind of close and the massive inflation and interest increase lately; it still works out). I have been saving/investing for a long time and I cannot say I have been depraved at any time, by any means. Try to instill in my kids that we are extremely fortunate to be living in a part of the world where we have a roof over our heads, heating, food on the table and don’t have to worry about speaking our minds without being put in jail for it.
If deprivation means not being able to buy a brand new house/car every 3 years; I guess we are deprived, but that is not how I see it.
Cheers
Well said indeed!!
Congratulations! Timing is a bit tough, but keep at it. The stock market will come back at some point.
Enjoy the time with your kids. They grow up so fast. You’re right about deprivation too. New fancy stuff don’t improve your quality of life that much.
As a fellow swede the inflation we should be most worried about is lifestyle inflation. Not current price on gas or coffee.
In my mind that is worse, just spendning more when you earn more without investing is dangerous.
Talk about wasted opportunity. If spending did something for your happiness long term, but it doesn´t.
Self pushing for FIRE by index and dividend investing for about eight years, pretty close until 2022 hit. Now just trying to buy as much as I can risk, and hoping the world will chill out soon.
It’s a balance on both sides, with valid arguments for each. I agree saving and investing early on is crucial, because young people in their 20s have what no else can buy, time.
That being said, sometimes through social media and certain YouTubers who romanticize investing, young people might feel guilty if they spend. Enjoyment, travel, and investing in oneself in the early years is a big part of growing up.
That article also spoke some serious truth though, that so many people die with tons of money because they saved too much, good for their heirs but not everyone else.
Having too much money when you’re retired is a good problem to have.
You can donate it all like Warren Buffett if you want to help improve the world. 🙂
I wouldn’t say it’s a good problem if it comes at the expense of a life lived depriving yourself when you have good health, energy, healthy parents, friends etc. Sure, it gives you options though.
I’d be curious to learn if the FIRE community tends to donate or bequeath to charity rather than give to their family more than the general public.
i spent a lot in my 20’s and could have had an equally good time spending less. the real problem when i look back was taking on some debts to have a good time. you can still get there with a later start but saving and investing early is so much easier.
we should have a lot more money right now due to that fact.
I had a good time in my 20s as well. I don’t think buying more stuff would have made life much better. When you’re young, you don’t really need much to have a good time.
“If you save and invest when you’re young, you’re depriving yourself. Researchers call this the “welfare cost”.”
This is hilarious. These researchers definition of “deprive” is so far off it’s not even worth commenting on. Go to a third world country and learn something closer to what deprivation really is. Driving a sensible car and foregoing a $50k luxury vehicle is not “depriving” yourself.
Saving money early got me to financial independence in my mid-40’s and I wasn’t deprived of anything. I live in America and have all the luxuries of life that other 1st world people enjoy – and I saved money the whole time and now I’m free. Even folks on the lower side of the income spectrum in America live 1000x more luxurious than nobleman just 150 years ago. Hey young kids – save early and invest, it works!! And oh yeah look at all you already have, it’s pretty nice innit?
Right. I think the definition of welfare cost is too broad. It’s better to live within your means and save some money. I wonder if the researchers save for retirement or not.
We saved early and didn’t feel deprived either. Well, maybe just a bit, but we still had a happy life on a moderate budget. Thanks for your comment!
Everything in moderation. Save up to the match in a 401k or in your Roth no matter your age, save outside of tax deferred accounts for an emergency fund, save for a home, car, etc., and save to spend to have fun.
I don’t think it has to be all or nothing.
Young people really should try to save a bit. It’ll teach them how the stock market works.
If they like FIRE, they can ramp up later. Not saving at all is a terrible idea, IMO.
This is an area of controversy among economics researchers.
Because of the progressivity of Social Security and the shorter lifespans of people who don’t earn much throughout their lives, it may make sense for some people not to save for retirement at all.
People prefer increasing consumption profiles over flat ones, so it makes sense for higher earning younger people to defer their spending when they’re young and take advantage of compounding from saving for retirement and, equally importantly, tax benefits from tax advantaged savings so they can spend more later. Of course, if they’re earning a LOT later then they will hit diminishing marginal benefit from additional spending so it might make sense to save less when there’s less money to be had.
We just started an IRA for our oldest, but we matched hir summer job money, so that will be free money for hir (presumably the $2K zie earned this summer will be spending money for extras next year in college).
Thank you for your input! I think it’s probably okay for people with low income. Social Security will help when they retire.
I prefer the increasing consumption profile too. I didn’t mind being frugal when I was young. Now that I’m older, I can spend a bit more for a comfortable lifestyle. When we’re older, we probably will spend a bit more. Saving and investing early paid off for us.
Great job with the IRA. We’ll do something similar when our son is old enough to work.
I didn’t start saving for retirement until my 28th birthday (that very month was when I became eligible for my new employer’s 401k plan). Before that I worked in the bicycle industry, which was a TON of fun: steep discounts on product to support my hobby, a super low cost-of-living area, amazing colleagues and friends… and laughably tiny paychecks.
If you went to college, remember how much fun that was on a shoestring budget? Just like boredom teaches young kids to entertain themselves, your twenties should be a continuation of learning how to enjoy life without throwing huge sums of money into the effort. And if you’ve landed a job that pays better than mine did, that’s fantastic — just make sure retirement contributions are auto-deducted before you have a chance to miss those dollars.
Exactly! Young people can enjoy life without spending a ton of money. I started saving as soon as I made a real paycheck. I still had a great time hanging out with friends.
The part about the gambling at the end was interesting. I was thinking that FIRE is a gamble, because if you live a short life, you don’t get to enjoy the easy times. I think that’s why the study went with being steady throughout life.
I started reading the study link and it seemed a little weird. It suggested young workers buy a house, but that long commitment could backfire where putting money in a retirement account mostly can’t. It also doesn’t take into account the cost of kids and that living costs go up. A lot of people in their mid-careers find themselves in a “sandwich” situation – taking care of kids and elderly parents. I find it harder to invest money in my mid-40s than I did in my mid-20s.
I agree with it being harder to invest as you get older. The cost of living increases so much as you age. The sandwich thing really sucks. This month, I’m going down to CA to help Mrs. RB40’s dad. He had a fall and we need to help him transition back to living at home. Then, I’m heading to Thailand in November. All these travel expenses add up. It’s a lot more difficult to save now than when I was young and had no obligations.
As is typical, there are some valid points at both ends of the argument, and the answer for many will be somewhere in between. I guess that’s where I mostly sat but, when I look back, I do think I perhaps could have done a little more when I was younger. That said, it’s fun trying to play catch up now!
I think everyone should try to save when they’re young. It’s a good habit to have. You also need to learn to invest. Waiting until 35 to invest is too late. I bet new investors are panicking now because of the market volatility. Experienced investors know to stay calm and keep investing.
As for me, I don’t think anyone making a liveable wage should spend it all, regardless of age. People who do the bare minimum in saving for retirement are like Wally in the Dilbert cartoon. They will end up doing the bare minimum for their whole lives, at best just paying off their debts, and in retirement living in poverty while envying the dead and craving the comfort of a grave.
If they want to avoid this not-so-pleasant scenario from happening, these words of wisdom apply:
“I will do today what others won’t so I will have tomorrow what others don’t.”
— John Addison
I am 73 and I live alone. In books I have written, I have stressed that money can’t buy happiness. In fact, I list 37 elements of happiness that money can’t buy. Nevertheless, as I got older, I realized that there are many reasons for having money, particularly later in life. This makes life much easier and joyful. So I took the steps to create this retirement money while others who earnied two to three times as much money as me blew it on crap — and it was crap! Someone once said, “In a world of tens, be an eleven.” That’s what I did financially. In fact, I was a twelve.
Nowadays I like to go out at least twice a day, In the afternoons, I go for coffee to a coffee bar. Practically every evening, I go to a pub or restaurant where I miminally have a coffee, a glass of wine, and a salad at a cost of $40 to $45. On weekends, I have a full dinner at a cost of $60 to $75 and often treat my friends for a total cost of $150. Every year I spend somewhere between $20,000 and $30,000 on travel.
Even though I worked less than my adult life, and when I worked I worked only 4 or 5 hours a day, I don’t have the same money concerns other people have. I created this great position by realizing that I must not rely on the government or a corporation pension to fund my retirement years.
Again, these are the three principles that I live by:
1. Earn money wisely. (Don’t work hard; work smart. Only 4 or 5 hours a day is required if you have critical thinking skills, creative thinking skills, and common sense.)
2. Save money wisely. (Save at least 50 percent of your after-tax income.)
3. Invest money wisely. (Take calculated risks and invest in Dividend Stocks in companies that provide needs and not wants.)
I love those three principles. I assume save wisely also includes spend wisely. You need to enjoy life too. It looks like you’re doing great. We also enjoy going out and spending money, but we live moderately for now because we’re still trying to save. At some point, we won’t have to worry about money at all.