Does 'FIRE' still make sense in today’s high-interest rate environment?

The FIRE movement has been suspiciously quiet for the last year and a half.

Where once you could find its proponents singing its praises across social media, more recently, there’s been radio silence.

Is the FIRE movement losing its luster? Is the strategy beginning to fall apart amid today’s historically high interest rates and elevated inflation? Or does it remain an effective strategy to obtain financial freedom?

By the end of this article, you’ll understand precisely the challenges the movement faces today. More than that, you’ll learn the opportunities FIRE adherents can leverage in today’s high-interest rate environment.

But first ...

What is the FIRE movement?

The FIRE movement stands for “Financial Independence, Retire Early.” At face value, it’s incredibly attractive. Who wouldn’t be tempted by an approach that promises an early exit from the workforce?

The FIRE movement is more than just a financial protocol. It’s more of a full-on lifestyle approach. It typically demands sacrifices and extreme cost-cutting to achieve.

The main tenants of the FIRE movement include:

• Financial independence (FI): In the context of the FIRE movement, financial freedom means an individual has amassed enough assets or passive income to fully cover living expenses without ever working again. Independence allows you the freedom to determine how you spend your day. While it may be that you wish to keep working, for many, it will enable them to pursue hobbies, travel, or take on other activities outside traditional employment.
• High savings rate: People within the FIRE movement usually target aggressive savings rates. In some cases, adherents will aim to save 50% or even more of their income. This compares to traditional financial advice, which recommends 10% to 20% savings.
• Minimalism: Often, members of the FIRE movement espouse frugality and minimalist living. In practice, this means cutting unnecessary expenses and limiting unnecessary purchases.
• Investing: The FIRE movement relies on investments to help build its retirement nest egg and continually feed it during its subsequent active years. Adherents typically invest in the stock market, real estate, or other income-generating assets. Many in the movement are particularly fond of exchange-traded funds (ETFs). These products allow retail investors to quickly and cheaply gain broad stock market exposure. It’s not uncommon for proponents to set up automated contributions to an ETF like the SPDR S&P 500 Trust (SPY).
• Sustainable redemption rate: The FIRE community typically uses a 4% withdrawal rule for their portfolio. This assumes that withdrawing 4% per year will last at least three decades. This assumption, however, is based on historical stock returns. It’s entirely possible a 4% redemption rate would deplete a portfolio much faster.
• Early retirement: Proponents of the FIRE movement want freedom. Their main objective is financial independence, which permits them to retire early. Importantly, however, is that “retirement” in the movement typically means doing what one desires. In some cases, proponents will still work. But this work is often optional and likely more enjoyable than their previous, conventional nine-to-five.
• Flexibility: Given the long-time horizon assumptions, FIRE enthusiasts emphasize the importance of adaptability. Market conditions, assumptions, and needs can change. As a result, it’s critical to remain flexible.

Challenges for the FIRE movement in a rising rate environment

• Elevated borrowing costs: With interest rates at 5.5%, borrowers risk incurring costly monthly debt obligations. For FIRE practitioners with a mortgage or other debts, this could materially impact their financial trajectory.
• Lowering asset values: High-interest rate environments tend to suppress asset prices like real estate and stocks. FIRE movement members relying on appreciating assets, like a rental home, could find their value significantly depreciated.
• Reduced consumer spending: Many in the FIRE movement engage in side hustles to generate additional income to pursue their goal. Unfortunately, when rates are higher, consumers tend to spend less resulting in less revenue for side businesses.
• Higher prices: Today’s elevated interest rates are a direct reaction to surging inflation. While price acceleration has substantially slowed from the over 9% annual growth rate witnessed in the summer of 2022, inflation remains historically high. This means purchasing power is reduced and may prompt some in the movement to recalibrate and reassess their budget to avoid overspending.

Opportunities for the FIRE movement in a rising rate environment

• Higher fixed-income returns: For those with cash, today’s environment can offer exceptional investment opportunities in fixed-income. This is particularly beneficial for FIRE adherents because fixed-income is typically considered safer than other investments, like stocks. Fixed income also provides investors with consistent and reliable recurring income.
• Buying opportunities: Assets sufficiently depressed because of higher interest rates can provide attractive buying opportunities for those with cash to deploy. Over time, these assets can appreciate substantially.

So, is the FIRE movement still legit in today’s market?

The short answer is, yes, the FIRE movement is still legit in today’s market. However, the requirements and considerations have no doubt evolved in recent years.

The feasibility of the FIRE movement in a high-interest rate environment relies on several factors:

Savings

To succeed in today’s market, investors need exposure to the higher yields currently available. For FIRE proponents, this means it’s crucial—and perhaps imperative—to invest in high-yield savings accounts, money market funds, certificates of deposit, and other fixed-income products currently providing attractive yields.

Debt

Substantial variable debt is a significant risk in today’s market. While it’s possible rates move in your favor, they could very well continue to climb.

Higher rates can result in higher monthly debt obligations. For most in the movement, longer-term fixed rates help manage budgeting and financial forecasts.

More than that, fixed mortgages provide peace of mind during economic uncertainty.

Investments

Higher interest rates tend to act as a headwind against the stock market. To better reflect reality, it may be wise to use conservative performance estimates when forecasting and budgeting.

Potential for a “hard landing”

While the Fed’s goal to help suppress inflation is laudable, it presents a significant risk to the economy. Should the Fed tighten rates too high and too fast, many economists predict the U.S. economy could head for a hard landing.

A hard landing refers to a situation where the economy shifts rapidly from a period of growth to much slower growth or even a recession. A hard landing is characterized by economic contraction, like severe job losses.

The downstream impacts of a hard landing could make it more challenging to achieve FIRE objectives. Consequently, FIRE adherents need to be prepared for the potential outcome.

A hard landing could impact those in the movement in several ways:

• Decline in portfolio value: A hard landing could result in a prolonged bear market. This means your portfolio value may drop below the required level to maintain financial independence.
• Reduced withdrawal rate: The conventional 4% safe withdrawal rate assumption may need to be lowered to account for the economic downturn.

While higher interest rates no doubt pose challenges for those in the FIRE movement, they also offer potential opportunities. One’s success will largely depend on where they are starting.

Those with substantial variable debt may find it challenging to achieve their desired savings target in today’s market. At the same time, those with little debt and significant savings may discover today’s market presents numerous lucrative opportunities.