Financial Independence, Retire Early (FIRE): Can You Invest in Your Values and Retire Early?
Is there a way to invest sustainably and retire early? Hint: yes! Learn about the FIRE movement and how you can prioritize your values and retire early with OpenInvest.
Financial Independence, Retire Early (FIRE) is a movement focused on cutting expenses, living frugally, and retiring early thanks to extreme savings and investment. Although there are different FIRE lifestyles to choose from, the main premise centers around putting close to 70% of your income towards savings and investments so you can retire early and live off of small withdrawals from your investment portfolio.
For most FIRE followers, the investment strategy tends to rely on low-fee traditional index funds and ETFs that offer the safest and cheapest return on your investment. Unfortunately, this means that for FIRE, most people shy away from a sustainable investment strategy due to fears of sacrificing financial returns.
Is it possible to invest in your values and retire early? At OpenInvest, we think that you can join the FIRE movement with the right strategy and dedication while still prioritizing investments that align with your goals and values.
What is FIRE?
The FIRE movement began in 1992 after the publication of Your Money or Your Life by Vicki Robin and Joe Dominguez. The book focuses on reducing your spending, valuing your time, and decreasing your consumption.
What originally attracted environmentalists and minimalists turned into a popular retirement investment strategy. The lessons from Your Money or Your Life became a guidebook for how to live a frugal lifestyle so you can quit that 9-5 job and enter your retirement years far before the age of 65.
Followers of FIRE cut down their spending until their savings reach about 30 times their yearly expenses. Some will stop work entirely while others, called Barista FIRE, might continue working part-time to cover expenses. To have “fired” is to have successfully retired at an early age and support yourself primarily through your investment portfolio.
An important thing to note as part of the FIRE movement is that it relies heavily on a healthy stock market and, in many ways, the privilege of wealth. It is incredibly difficult to retire early with any kind of looming debt, a minimum wage job, lack of opportunity, or restrictive family obligations. These privileges make it easier for some more than others to achieve a FIRE lifestyle successfully.
Why people don’t typically turn to ESG for FIRE
Many proponents of the FIRE movement will point towards concerns of diversification, higher fees, and riskier returns as reasons for staying away from ESG investing.
Yet, with the rise of ESG investing and increasing options to invest according to your values, the option to retire early while investing the way you want is far more feasible than ever before.
Opportunities for diversification
While some ESG funds exclude entire industries making them less diversified, ESG funds, like all funds, focus on financial performance. The difference is that ESG funds also weigh your values in addition to your financial impact.
What’s more, is there are so many different ETFs and funds that allow you to invest according to your values today. With OpenInvest plus our direct indexing technology, you also have access to incredible customization. This allows you to limit your diversification risks while building a sound FIRE investment strategy that keeps your values in mind.
While excluding certain industries or companies might open up diversification concerns, you now have more control than ever before to determine how much risk you are willing to take on in your portfolio. Plus, as ESG options continue to grow, so will the opportunities to invest according to your values.
Image source: Morgan Stanley Institute
Investing according to your values does not need to be a manual or costly customization to your portfolio. In the last few years, advances in cost structures, technology, and increasing consumer demand have made customization of your portfolio a more attractive and accessible solution.
ESG in an investment portfolio can help limit your market risk. This is because ESG funds consider financial performance and future risk factors like environmental concerns.
According to WEF’s Global Risk Landscape, ESG risks rank higher for impact and likelihood compared to more politically prioritized threats. This demonstrates the importance of prioritizing ESG risks in an investment portfolio to avoid future financial repercussions.
How to retire early while investing in your values
For those willing and able to put in the time and commitment to the FIRE movement, here are the steps you can take to get started and do it with your values in mind.
Step 1: Determine where you stand today and where you want to be
Before you begin firing away, it’s important first to take stock of where you are today and what exactly you are expecting from your retirement. These are some questions you should ask yourself, in partnership with your financial advisor, before you get started:
- What do you plan on doing during your retirement? Starting a business? Starting a family? Traveling? Before you can start saving, you need to know what you are saving for.
- What’s your retirement budget? Once you have an idea of what you plan on doing during your retirement, start planning a mock monthly retirement budget. What exactly will you be spending money on?
- What’s your retirement savings number? Now that you know your monthly retirement budget, you can calculate what that looks like in a year. Use that number to estimate how much money you need to retire.
- How much do you already have saved for retirement? What are you starting with? What’s the difference between what you need and how much you have? This is going to determine your saving strategy is moving forward.
Please note, the above is a non-exhaustive list of questions to consider. Consult your financial advisor before you get started.
Step 2: Identify your values
Before you can build the right investment strategy, you should define what those goals and values look like for you. What Causes do you want your investments to support? Do you want to eliminate climate change industries from your portfolio? Support businesses that are standing up for racial justice? Invest in women leaders?
It’s time to ask yourself what future you want to invest in as part of your retirement plan. Then, rank those values by how important they are in your portfolio. Once you identify what those values are and how important they are to you, you can start investing in the retirement future you are looking for.
Step 3: Match those values to your investments
Start by identifying if your current 401(k) or other retirement plan matches your decided values. According to the Plan Sponsor Council of America, only 2.9% of 401(k) plans have ESG funds.
There is a high likelihood your current retirement plan is not putting your dollars where your values are. For most people on an employer plan, the problem is that you might not have much say in where your dollars go.
If you can’t make a case to your employer for better, more sustainable investment options, then make sure to maximize your employer’s 401(k) while also looking into a more value-aligned retirement option.
With OpenInvest, we make it easy for you to build a long-term investment portfolio tailored to your particular goals and values. We do this by launching a broad market diversified portfolio that aims to track the performance of the market via a large-cap index that represents your values.
Socially responsible investing with OpenInvest allows you to screen out the companies you don’t want a part of and fund the ones building the world you’d like to see. As you build a plan for retiring early, OpenInvest can prioritize both financial performance and the non-financial impacts that matter to you.
Doesn’t investing according to my values mean I will sacrifice financial returns? Research conducted by the Morgan Stanley Institute on the performance of nearly 11,000 mutual funds from 2004 to 2018 found that there is no financial trade-off between sustainable and traditional funds.
According to Morningstar, ESG funds outperformed their traditional counterparts in 2020. 25 out of the 26 ESG equity index funds beat their traditional index fund benchmarks in the same category.
This resilience of ESG investing, especially in the context of the ongoing pandemic’s impact on public equity markets, demonstrates that this belief is nothing more than a myth. When it comes to FIRE, this may mean that we can stop shying away from ESG funds and sustainable investing and start strategically combining these strategies.
Image source: Morgan Stanley Institute
Step 4: Develop a game plan to reach your savings goals
Now that your investment portfolios align with your values, it’s time to start funneling money into your savings. The FIRE movement requires dedication to your savings and getting serious about putting most of your money into an investment towards your future.
This is not going to be easy. But it is necessary to develop a game plan now to make early retirement a possibility. Here are some strategies to get you started:
- Pay off your loans: Any kind of debt lingering over you can make early retirement that much more difficult. Debt drains your money. Start by prioritizing your savings towards paying off any loans or debts you may have.
- Budget all your current expenses: Take a hard look at how much you spend on all expenses. Could you cut out an extra $100 on subscription services or eating out each month? Put $500 of your vacation budget towards savings instead? That’s an extra $1,700 each year towards your retirement. Figure out how you can cut down those expenses and put extra dollars into savings.
- Reduce your retirement budget: Now that you’ve identified the retirement lifestyle you are looking for and how much you need to save to get there, ask yourself where you can cut back a bit. Do you need all that money in retirement for eating out or for travel? How can you rein in your retirement budget to get you closer to retirement? If you don’t want to sacrifice a certain lifestyle, be aware that you might need to work a bit longer in your 9-5 before reaching the point of retirement.
- Get a second job: If you can take on a part-time gig, this is a great way to funnel money directly into your savings. Anything you make in this second job can go right towards your early retirement goals.
- Keep track of your money: Work with a financial advisor to monitor and track your investment portfolio and your budget. Things might shift month to month, but you can make adjustments as needed to stay on target if you are regularly tracking your progress.
Invest in more than just your financial future
Retiring early is not always easy and will need strict adherence to certain sacrifices to save and invest. However, at OpenInvest, we don’t believe that you must completely sacrifice your values to follow the FIRE movement.
You can design a portfolio focused on building early retirement savings while also investing according to the values that mean the most to you. ESG investing is not black or white, where you either invest according to your values or not at all. Instead, it is about building the investment strategy that works best for you and your goals.