FI/RE is Indefinite Optimism

Spoiler: the safe withdrawal rate isn't safe at all

In Zero to One, Peter Thiel describes four ways to think about the future:

  • Indefinite pessimism represents a decline from some golden age. Indefinite pessimists know the future will be bleak and have no idea what to do about it.

  • Definite pessimism involves preparation for a future that is worse than today. Definite pessimists ruthlessly copy things that work today. They “make hay while the sun is shining” to avoid being caught off guard when things inevitably go south.

  • Definite optimism is a belief that the future will be better than the present. Crucially, definite optimists have a plan for how to make it happen.

  • Indefinite optimism fundamentally values optionality. Indefinite optimism has ruled America since the 1970s and coincides with the rise of professions like law and high finance.

FI/RE (an acronym for “financial independence / retiring early”) is the perfect example of indefinite optimism. FI/RE encourages a frugal lifestyle and a high savings rate. Opportunity cost be damned, disciples of FI/RE prioritize cash — the ultimate form of optionality.

Here’s how the FI/RE subreddit (with over 100k subscribers) describes their philosophy:

FI/RE (Financial Independence / Retiring Early) is a money movement that's sweeping the nation. By fighting for your financial freedom, you can begin to control your own destiny.

I can understand why people are attracted to FI/RE. Over the last century, the U.S. stock market has supported a dead simple investing strategy: blindly investing in the top 500 companies would have yielded an average return of about 6% per year. History has been good to the FI/RE investor.

FI/RE models promote a “safe withdrawal rate” of 4%. This means that with $1,000,000 in the bank you can withdraw $40,000 per year without touching your principle. The big number ($1m) is your “net worth”. Acolytes of FI/RE discuss strategies to hit their target number and coast off of the proceeds.

This lifestyle choice seems reasonable at first glance. Save some money, try not to live outside your means, and leave your well-paying but meaningless job.

Here’s three reasons why I disagree with FI/RE:

  1. It incentivizes against risk-taking. Since FI/RE encourages financial independence, there is pressure to take high-paying jobs that build your net worth. And because you’re supposed to retire early, you need to find one as soon as possible to make sure you don’t fall behind.

    This leads people to follow highly tracked career paths that are ultimately dead-ends. /r/financialindependence, a closely related subreddit, conducts a yearly survey of its readers. No surprise: it shows hundreds of people who all work in similar roles and follow the same playbook.

  2. FI/RE encourages people to reduce their burn rate to retire sooner. This is good advice, but it is often taken to extremes. Users fetishize extreme frugalism, posting detailed budgets that leave no room for unexpected expenses. This guilt about spending money can be pervasive. Self-discipline is admirable; severe asceticism as a middle manager in corporate America is not an enviable existence.

  3. FI/RE only works if no one does it. To return a safe-withdrawal rate of 4%, you need to put your money into financial instruments that will produce a steady stream of income. Most often, this is the stock market. The stock market is made up of companies, which are filled with people who work to produce the returns which fund your retirement.

The title of this post is: FI/RE is Indefinite Optimism. It’s indefinite because retirement means abdicating your role in building the future. It’s optimistic because it’s based on an assumption that others won’t.

FI/RE is a great way to make money when you have no idea how to create wealth.