In the previous episode, we talked about the ‘FIRE’ movement and what it actually takes to achieve your goal of Financial Independence, Retire Early.

Usually, fire extinguishers do a lot of good. It’s nice to have one in your kitchen in case of emergency.

Yet, when FIRE stands for Financial Independence Retire Early, you don’t want anything to extinguish your likelihood of FIRE-ing.

So, we put together a list of FIRE extinguishers to watch out for… regardless of when you want to retire and how close (or far) you are from achieving your unique goals.

You could take this list to any financial adviser (including Brandon and Amanda). Ask them how they are helping you avoid these factors that could destroy your path.

We’re going to cover some of the most common FIRE extinguishers that could potentially wreak havoc on your financial strategy.  These might stop you from fully enjoying the fruits of your own labour and retiring early… whether “early” for you is 45 or 65.

Here Are the Retire Early Show Highlights:

  • Two of the biggest ‘FIRE’ benefits Grandma would have loved ([4:10])
  • How stock market volatility actually affects how much money you have ([10:00])
  • Is the Internal Revenue Service stealing your money? ([13:00])
  • Inflation: How to prepare, capitalize and protect your savings ([14:30])
  • One type of ‘FIRE’ extinguisher almost everyone forgets to factor in ([16:50])
  • Early retirement and paying for Kids’ College: Are they compatible? ([19:50])


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Read Full Transcript

A hearty welcome to Grandma’s Wealth Wisdom with your hospitable hosts, Brandon and Amanda Neely. This is the only podcast for strategies to grow your wealth simply and sustainably like grandma used to. Without further ado here are your hosts.

Brandon: Hey, I'm Brandon and welcome to Grandma's Wealth Wisdom where we help you build wealth grandma would be proud of.

Amanda: And I'm Amanda, today we're going to be continuing a three part series about the FIRE movement. In case you missed the last episode, FIRE stands for Financial Independence, Retire Early, FIRE.

Brandon: If you missed the last episode or aren't following this whole FIRE movement, we're not just talking about fires in your furnace or any of that kind of stuff, we're talking about this idea financial independence to retire early, but I still, if you don't know what that is, I still want you to listen to this episode, because we're going to be sharing the top FIRE extinguishers that could possibly wreak some havoc on anyone's financial strategy, whether you're in lots of debt or about to retire early, if you want to do that, if you're not following this FIRE movement, if you are these extinguishers can affect us.

Amanda: I do have a poll for the audience, if is a wreak havoc or wreck havoc, because Brandon said wreak, but I would say wreck. If you have an opinion about that, please let us know.

Brandon: Probably wreak, I don't know.

Amanda: I think it's wreak havoc.

Brandon: I'm from the South, I don't know. I say words that don't make sense.

Amanda: But I also do that too, so let us know, what do you say, wreak havoc or wreck havoc, and regardless of what you say, these FIRE extinguishers could apply to you.

Brandon: They could wreck your havoc, wreck havoc.

Amanda: Exactly, it's wreck havoc, I knew it was. I think I got it. Okay, so a little bit more background about FIRE that we did not share in the previous episode, there are kind of two FIRE camps. Not to be confused with campfires if you want to help those affected by the campfire in northern California right now, the place to go is to the Red Cross, please send your support there and help those that are being affected by that fire and other disasters that happen.

Brandon: Or enjoy a campfire, but probably not in December. Anyway, fire camps later, it's a fun thing to do. I love campfires.

Amanda: Right. So within the FIRE movement, there are kind of two camps. First, there are kind of the Silicon Valley types who were working 100 plus hours per week, and they're at the end of their ropes, close to burnout, or maybe even already burnt out. So they decide they're going to save as much money as they can, then they can quit their jobs and move to a tiny house in Colorado for example. Then they can spend more of their time doing what they love and they can get their personal health in order too, because they've reduced their expenses, they have this huge nest of money saved up, and they can just live their lives.

Brandon: They can finally go to the gym.

Amanda: And do what they love, get some sleep, not have to drink Red Bull all the time or whatever it is. Then there are those who, like are in the second camp that build up passive income through things like rental properties until the income from the rentals is equal to, or more than their expenses. So then they don't have to work anymore at like a day job kind of thing, because they're bringing in such income from the rentals that it covers all of their personal expenses. And then there's kind of a people who are a combination of these two camps, maybe they have a pile of money that they live off a little bit of that and they're doing some rental properties, or they create a business that has more passive income, and they also have a big nest egg. You can have a combination of those two. That's kind of the two ways that people think about getting to financial independence.

Brandon: They're the FIRE camps, there you go. So before we go get into the list of FIRE extinguishers, I want to share two of the really great benefits of the FIRE that grandma would love too. So there's, again there's two things. One is that minimalism. People who are pursuing or have already fired, live with less typically. They don't clutter their lives with meaningless materials, and this not only impacts their wallets, but also helps steward the resources that we have on the planet.

Amanda: This idea of minimalism is one of the things that really attracts me about the FIRE movement. I'm definitely more of a minimalist, I actually forced to Brandon to go through a minimalist class with me, and we got rid of some stuff, although I'm still working on him.

Brandon: I still like things.

Amanda: Chachkies. If you look in our closet, you'll see he has way more clothes than I do.

Brandon: And little toys, or whatever else. I get all kinds of crazy stuff.

Amanda: Yeah, all around his desk are a bunch of toys. But grandma, she loves this idea of FIRE and this minimalism about fire, because they're living a lot like her, simply and sustainably, and that's good not just for them, but also for the planet, and that really makes grandma proud.

Brandon: So I'll work on some of that minimalism. The next one is time. FIRE isn't just about financial wealth. FIRE is mostly about taking back control of your time and the goal is to never exchange your time for money. Instead, you can spend your time doing what you love and have more time to spend with family and friends, and doing, I don't know, going to a campfire, there you go.

Amanda: Right. The thing about this that really appeals I think to Brandon and me both is that we're entrepreneurs. We've been entrepreneurs for a decade or like self-identified and trying to be entrepreneurs, that kind of thing. But regardless of that, like in entrepreneurial speak, we talk all the time about getting your business to where you're not trading your time for money. And at that point you can grow in scale and do all kinds of things, but if you're exchanging your time for money, then you don't really have a business, maybe you're more of a solo entrepreneur, a freelancer or that kind of thing. So that goes really well with what we're talking about. Like the FIRE movement, maybe for some of them it's getting out of a job, that's where you're exchanging your time for money, and that if you have that big nest egg, you don't to do that anymore. And of course, grandma loves this idea too because she's all about spending more time with family and doing what you really love, especially if what you love involves gardening, canning, sewing, cooking from scratch, some of those lost arts from past generations.

Brandon: We're doing some of that lost art with having the baby now and cooking a lot more, which you know, I guess before we would just more fast food.

Amanda: And also like making baby food from scratch is a way more cost effective, and it's way healthier for the baby. So FIRE movements have babies I bet, a lot like, the people within the FIRE movement that have babies are probably doing kind of similar to how we are with how we feed our baby.

Brandon: Got you.

Amanda: But without further ado now, we can get into this list of FIRE extinguishers. We're going to go through them as quickly as we can so we can fit them all in, we're not going to be able to really do a deep dive on any of these today, we've done that in some previous episodes, we'll do that in future episodes. We want to give you this list; you could write down these eight FIRE extinguishers and think through your own finances and are any of these a threat to what you're currently planning for yourself and for your future.

Brandon: And not just currently, but they possibly can.

Amanda: Right. And whenever you're working with a financial professional you could ask them how is what you are suggesting a vulnerable to these FIRE extinguishers, or how are they not vulnerable, how could they withstand these. So write down these eight, use that list, we'll have them in the show notes too, and think through these things wherever you're at.

Brandon: So the first one is putting money in prison in a tax deferred plan, AKA, qualified funds.

Amanda: Yeah, the tax deferred plan, you might know these as 401K, 403B, IRA, those kinds of things. If you're planning to retire early, if your money is one of these types of plans, then it's kind of like it's in prison. The way that the laws are right now if you're younger than 59.5 and you take out these funds for other than certain like things that they let you do it for, but let's just say it's just to buy groceries or pay your rent or whatever, and you're younger than 59.5, you have to pay a 10% penalty. So if you want to retire early, let's say at 55, you're going to look at four and a half years of paying that penalty. Let's say you want to retire even earlier, like your money is in prison for that whatever length of time until you turn 59.5. And they're called tax deferred plans because you've delayed paying taxes on that money. Even with a Roth type play and then you've paid taxes on the money you've put in, you're still deferring taxes on the growth. And so the money within those is really strictly monitored and strictly enforced all these different laws and stuff by the government, it's a government plan. So it's basically like saying this nest egg that I'm going to try to save up, I'm in all intensive purposes giving it to the government to have until I'm ready to use it, but because they have it, they have all these rules and laws that have to be followed in order to use that in the future.

Brandon: So that's the first one. There's this other one that's sequence of return. Could you explain that one, Amanda? That one's a little, seems a little crazy.

Amanda: Yeah, this is one that I've never heard about until I was working in the financial sector, and it's kind of hard to explain without like a chart and going through the numbers, so I'm going to do my best here on the podcast to explain this. So let's say you have Jane and you have Jim, and they both have $500,000 just sitting in a brokerage account, in an index that's tied to the SNP 500. It's just sitting there, there's nothing, like it's not locked away in a 401K or anything like that, just it's there and the index is following the SNP 500. Then they retire early and they start taking it out, they follow the 4% rule, they start taking out $20,000 the first year, and over the next 16 years they continue taking that out, plus a little bit more for inflation. So Jane and Jim take out the same amount every single year for the next 16 years, yet at the end of the 16 years, Jane has $74,300 and Jim has $344,200.

Brandon: Somebody's losing there.

Amanda: Right, there's a $270,000 difference roughly between what Jane has now and what Jim has. What's the difference? Well the difference is that we took the actual returns year by year that the SNP 500 did, the index that they're following, and Jane followed exactly what it did for 16 years, and Jim, all he did was take what actually happened and invert it. So what happened for Jane in year one happened for Jim in year 16. And Jane's year two became Jim's year 15, and then Jane's year 16 became Jim's year one and so forth. So they got the same average return, but their return was in different orders. The same return every year but flipped. That's the only thing that changed, and that was a $270,000 difference in what they had at the end of the 16 years.

Brandon: That's $270,000 like loss for one of them, and they still got that, what is that? The average return.

Amanda: Right, they still got an average, a good average.

Brandon: Same average.

Amanda: Yeah. So that's called sequence of return risk, and it basically means the volatility of the stock market has a bigger impact as you're taking your money out and using it. Volatility can really impact how much you have.
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Brandon: And we're not even done, that's a lot of money lost there, we still got some extinguishers, like the big one, taxes. Or like we call it here, the Internal Revenue Service.

Amanda: Right. So with taxes, we did a whole episode about this before.

Brandon: We got a war to pay for.

Amanda: Yeah, that's the name of the episode. What we learned in that episode is that we're at historically low tax rates, if you look at the income tax from when it started in 1913 compared to today, and you follow all the way through. The taxes are actually pretty low. But what if you're 10, 15, 20 years into your early retirement or your financial independence and all of a sudden congress passes a law, president signs it, all those kind of things, and the Internal Revenue Service now can take more of your money. Instead of paying maybe 20% tax rate, you're at 30-40% tax rate. That could totally threw out of whack your financial independence formula. It could mean that you're not able to now cover your bills on a regular basis with your passive income, or that you have to take out more of your nest egg in order to pay those taxes and still have enough to cover your expenses. So an increase in the tax rate could really be a FIRE extinguisher to your fire.

Brandon: And I've heard it said that taxes will most likely go up at some point by people of authority, they've been touting that, so we don't know, but it's possible.

Amanda: It's a possible extinguisher.

Brandon: And then the fourth is inflation.

Amanda: Yeah, so this is where the cost of goods goes up, it's called inflation, it's based on fancy thing called the Consumer Price Index that the someone at the federal government sets. And we typically think of inflation is like 3%. It's like an average nice number that most people use to account for inflation. Yet, there's a couple problems with that. We have experienced times where inflation's been a lot more than that. I heard in 1980 that the inflation rate was 15%, so can you imagine paying 15% more tomorrow than you do today for that gallon of milk or a gallon of gas or what have you. And then also within that, the Consumer Price Index is exactly it sounds like, an index, it's an average, it's a rough idea of what prices are doing. But within that, you could have some expenses that increase a lot more than other expenses. So if you love milk, but milk is having huge inflation, maybe there's a cow plague or something and there's fewer cows so there's less milk and the price of milk is shooting up, then you could experience maybe a 50% increase on your milk, whereas maybe a gallon of gas stays relatively low and you don't have a huge inflation on that.

Brandon: We did have a gas shortage at one point I think.

Amanda: Yeah, that's happened in the past, yeah. Or what we've actually seen over the last 20 years or so is that the highest rates of inflation have been in things like the cost of education and the cost of medical expenses. So let's say you know it costs you $200 to go to your in your annual check up each year with your physician, and you account for that cost going up 3% each year, but what if it goes up by 15% in certain years? Or that kind of thing. It's hard to know what's going to happen with inflation overall, but also with things in particular.

Brandon: Yeah, I would think people who went to school like 15 years ago and the cost of going to school now is totally different.

Amanda: Yeah. Prescription medication is another example.

Brandon: Yeah. So inflation is a huge thing that we, again, don't have any control over. Another one is fees.

Amanda: Yeah. We talk a lot about different fees that our government charges, like in Chicago we have a city sticker, we have to pay that fee every year, what if that cost goes up. And of course, we pay all kinds of different fees in our lifetime, late fees, interest fees, like all kinds of things. But if you have this big pile of money or you're saving up this big pile of money, one of the biggest fees is going to be that asset under management fee, that whoever it is that's managing your money for you charges you. And the FIRE movement people, they definitely try to get this fee as low as possible, but it is something to factor in. Here's something that might surprise you. Let's say you get a 7% annual return on your money, that's a really good percentage, you probably hired a really good person to manage your money for you, 7% annual return. In order to get you that in return, they charge you a 1% fee which is decent, you know 1.5% I've heard is an average if you have your money in like an IRA. Some FIRE people are able to get way less than that, but let's just say 1%. At the end of 35 years, so they've had this big pile of money for you, they've grown at a little bit, but they've taken that one percent management fee. That would mean at the end of 35 years that your savings is actually decreased by 28%.

Brandon: What? 28%?

Amanda: Yeah, so if you had a plan that at the end of 35 yeas to have a million dollars, you had that 7% growth and you didn't factor in the fees, that fee would actually decrease that million dollars by $280,000, that fee would have eaten of your savings. That can be a pretty big expense to not remember to calculate in, that could totally put out your fire.

Brandon: I think in general there's so many little fees in our life and we don't account for them and that can really affect our lives. Even just thinking about fees and all kinds of ways and where am being feed for things. The sixth one is medical expenses and long term care.

Amanda: All I'm going to say about this one is that the average 65 year old retiring today will probably need about $250,000 to cover their medical expenses, and another $250,000 to cover long term care. And about 70% of retirees need long term care that they're going to need that at some point. So that's $500,000 just for the average 65 year old today. It's going to be about 30 years until I'm 65. I wonder how much that's going to be then, and that could totally put out my FIRE when I'm 65. That would be like taking a bucket of ice water and throwing it on my fire. Not even all of a sudden, if I just have routine things that I need. And then for the long term care if I have dementia or Alzheimer's or cancer, there's all kinds of things that could happen that could mean...

Brandon: That you don't know about.

Amanda: Right.

Brandon: The seventh is major expenses like cars or a house.

Amanda: Yeah. So the thing about this is that those expenses could decrease your funds that you have or mean that your monthly expenses go up, there's different ways to factor that in, but definitely something to be thinking about is how are you going to replace that car when it eventually breaks down or how are you going to help your kids pay with college, can you even help your kids pay for college if you're doing the FIRE movement, or trying to just be financially independent. Like how do these major expenses fit in and make sure you're factoring those in.

Brandon: And the eighth and final one, I'm sure there's others, is once the money is used, it's gone like you don't have it anymore.

Amanda: And it's not going to continue to grow, so you're losing any compounding, you've destroyed compound interest if you're taking that nest egg and you're living off the growth each year, you destroyed any compounding. Even if you never get into the principal, the nest that you have there, you're still destroying any compounding that's happened. And once you spend that money, you can't go get it back. So you got a think through how is that working out for you.

Brandon: So Amanda, what if I told you there was a way to save for whatever your financial goals were, to build independence, have that awesome retirement, to be able to grow your business, able to buy a home, you're able to pay for college, etc., and avoid these extinguishers of any of your personal or business calls, if you're able to do that, have FIRE and avoid extinguishers. What would you say about that?

Amanda: That would be pretty cool, and since I already know what's in the next episode, I'll just tease everyone that we'll be spilling the hot coals in the next episode. We'll be going into lots of detail about this perfect match for FIRE, in other words, we are going to get lit, but for now, the thing to know is that the strategy that we're going to share next time is one that we've seen personal benefit from, and it's also an asset class that half of all Americans were using for financial independence back in grandma's day.

Brandon: So we've been spending our time these days working with individuals, couples and entrepreneurs to achieve more wealth than they thought possible. We've experienced this ourselves, and want to help others experience it as well. So if you want to be part of building wealth and avoiding those FIRE extinguishers, you can reach out to us, discover our strategies yourself. All you have to do is go to and click "request a meeting", and right there we'll have 15 minutes to just chat, get to know some of your goals and concerns, those kind of things. I would love to hear more from you.

Amanda: Yeah, so like I alluded to earlier, next time we'll be digging into this perfect match for a FIRE, it's a great concept for getting fired.

Brandon: Until next time, keep building your wealth simply and sustainably for your own future and the future of our grandchildren's generation.

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