When early retirement doesn’t work out

As a financial professional and an avid individual investor, I have followed the evolution of the Financial Independence / Retire Early (FIRE) movement with considerable interest. I have written a couple of blog posts on FIRE here and here. I just ran across an article saying that one of my favorite FIRE authors, Financial Samurai (aka Sam Dogen) has to return to work after seven years of “early retirement.” He is not alone. A number of advocates of FIRE have ended up chucking in the towel after a few years.

Dogen’s experience raises a number of important issues for people trying to figure out how to leave traditional employment and live on a combination of part-time income (such as from blogging) and various sources of passive income (rental income, for example). I have read several articles by Mr. Dogen and about his decision to return to traditional employment. Despite earning about $250,000 a year in passive income, his family requires more income to cover their expenses for two adults and one young child living in San Francisco. By his calculations, having a child and hoping for another appears to be what has pushed them over the edge: he budgets $30,000 a year for private preschool and education-related expenses per child in San Francisco.

The FIRE movement naysayers are right. Retiring early is nearly impossible if you have kids. Don’t be fooled by the people without kids telling you how you, too, can retire in your 30s or 40s and live a life of leisure.

Sam Dogen

Mr. Dogen is articulate and has written hundred of articles on diverse aspects of personal finance and FIRE. In this post, I examine some big picture lessons from his conclusion that “I don’t think we can hack it anymore.”

Plan for uncertainty and change

Mr. Dogen has been retired for seven years. He has written in several places that he got a very generous severance package when he left his job. He has also written that his wife continued working three years after he ‘retired.’ Oddly, Mr. Dogen partly attributes needing additional income to “a slumping economy.” By all measures I know of, we are far from a slumping economy, especially in the heart of tech bubble where he lives.

To read his posts, it appears that Mr. Dogen had not considered that his expenses would go up considerably if / when he and his wife had children. I find this quite surprising, not least because he has an MBA. Raising children costs money. This is not to say that everyone will need to budget for $30,000 in annual expenses for a pre-schooler’s educational needs, but there are substantial costs.

Aside from the predictable costs associated with our choices, there are also unknowns such as how investments perform and how expenses and taxes will change over time. Healthcare costs have gone up double digits every year over the past decade for my family, for example. Any long-term plan needs to work in the event of under-performance of investments or increases in household overhead. In Mr. Dogen’s case, if he can’t make the money work after ten years of a serious bull market in almost everything, it definitely makes sense to reconsider the plan.

The bottom line is that long-term financial planning is hard, and especially so if you are trying to build a plan before you have made a number of life’s biggest choices (children being the most significant). Life is full of uncertainties, both in how our lives evolve and external factors.

Maintain your human capital

Back at the end of 2018, Mr. Dogen was writing about looking for traditional employment, but he realized that many employers would have qualms about someone who had been out of the workforce for seven years. Human capital, your skills and know-how, decay over time if you don’t maintain them. Anyone who aspires to scale back, or leave traditional employment entirely, should plan to spend some time on building their skills and personal brand value. Becoming professionally marginalized is a significant risk with taking an early retirement path. If you need to earn money through traditional employment in the future but you have not maintained a professional presence, you will probably find that your value to employers is considerably lower than before you quit. This is why I believe that its a “no brainer” for people leaving traditional full-time jobs to continue to work as consultants or freelancers.

Good financial choices early in life provide options

Even though Mr. Dogen’s plans to retire early are not working out as he hoped, he appears to be in great shape financially. He may need to earn some labor income, but he is wealthier than the vast majority of households in America. He has an array of options to cover his unanticipated expenses. His experiences reflect the emerging landscape of work and income. Rather than people working in a traditional career for three or four decades and then retiring, more people will have extended periods of work and non-work. If you can save up substantial assets when you are young, you may have the option to take a period of years to try out a different career path or be a stay-at-home parent. These assets also provide the time to develop new directions for work.

Final thoughts

Mr. Dogen, after seven years of being out of traditional employment and writing hundreds of articles about FIRE, has concluded that early retirement is no longer an option. His experiences should be valuable to the large numbers of people who are exploring non-traditional career paths. Mr. Dogen’s story reinforces my belief that, unless you build in a very large financial safety factor, the best way to leave the 9-to-5 is to shift to part-time freelance or consulting work. This maintains your human capital and makes you far more resilient in the face of the inevitable unexpected twists and turns of economic life.