The FIRE concept — financial independence and retiring early — is gaining traction among younger workers, but as appealing as early retirement may be, it isn’t very realistic given the current economic conditions, according to experts.
Bonnie-Jeanne MacDonald, director of financial security research for the National Institute on Ageing at Toronto Metropolitan University, notes the population is actually going in the opposite direction. People are retiring later and later, so she doesn’t believe early retirement is feasible unless people completely change their lifestyles and financial goals.
The attainability of this concept also depends on what part of the country a worker lives in, says Mark Dowdell, senior vice-president at Arthur J. Gallagher & Co., as some regions make it easier than others to retire early based on the cost of living.
He believes the FIRE concept is somewhat limiting, because employees would be trying to save between 50 and 70 per cent of their income and may not be able to access those savings right away.
“With a workplace defined contribution pension plan, the required contributions are locked in so you can only access them up to 10 years before the normal retirement date, which is usually age 65,” says Dowdell. “So if someone’s looking to retire in their 40s or early 50s, they wouldn’t be able to access their employer pension funds.”
Thinking long term is key when looking at the FIRE concept, says MacDonald, adding employees tend to think short term when it comes to finances and don’t really understand they’re planning for a different version of themselves. “There’s a whole area of research around how to get someone to sympathize with their future self, especially if that future self has a chronic disease or is physically impaired. When people think of retiring early, they need to not just plan for the next five years, but potentially the next 50.”
Dowdell says there are two ways plan sponsors can help employees who are looking to retire early. One is to offer non-registered savings plans that don’t have any maximum contribution limit, but allow for payroll-deducted savings with typically lower investment management fees than a retail plan. The other is a tax-free savings account, but he notes individuals are limited to what the government allows them to put in the account.
Even though the FIRE concept may not be feasible for most, MacDonald believes there are many benefits to retiring later in life. “If people enjoy their jobs, research has shown there are social benefits [to] staying engaged and active and it’s more mentally stimulating. And of course, the longer you work the more money you get; you have a shorter period of time in retirement, so you’re going to have more financial security.”