What happens if FIRE doesn’t work out?

If you have been reading this blog for a while, you know that I have been spending a lot of time writing about Financial Independence Retire Early (FIRE). Since our financial epiphany, we have been slowly building our passive income streams so one day the passive income can exceed our expenses.

You may be wondering, how much passive income do we need to cover our annual expenses?

Per our financial independence assumptions, I had made some estimates on how much we need to be financially independent.

Core expenses per month estimate

  • House property taxes $350
  • House maintenance $50
  • House insurance $100
  • Utilities $100 – water, electricity, and natural gas
  • Internet & cellphones $100
  • Groceries $800 – two growing kids
  • Healthcare $150 – based on current BC MSP premium.
  • Household supplies $100
  • Clothing $100 – mostly for the growing kids. Mrs. T and I buy new clothes very rarely.
  • Car insurance for 1 vehicle $120
  • Gas for 1 vehicle $50
  • Car maintenance $50
  • Buffer $200

Total: $2,270.

Our core expenses do not include expenses like eating out, charity donation, entertainment, side-business expenses, vacation, and education saving for the kids.

We estimated about $950 per month to cover non-core expenses.

So that means a total of $3,220 per month in expenses or $38,640 per year. We’ll round the number up to $40,000 per year for easiness sake.


Annual Spending from the past

If we look at our historical spending from the past few years, you’ll notice that the $40,000 estimate is way lower than what we have been spending. I do believe that when we are financially independent and I stop working full time (note: today we’re a single income family), our expenses will be lower than what we have today.

Total Necessities SpendingCore Necessities Spending per MonthTotal Annual SpendingTotal Spending per Month

If we average out the annual spending from 2012 to 2017, this leads us to an average of slightly over $47,000. Let’s be on the safe side and say we need $48,000 per year.

Therefore, we need anywhere from $40,000 to $48,000 per year of passive income to be financially independent. At 4% yield rate (or 25x the expenses), that means we need between $1M to $1.2M in portfolio value.

I have no doubt that our dividend portfolio value will reach $1.2 million one day. It’s just a matter of time. So in my mind, being financially independent is an event that will eventually happen. Mrs. T and I both know that we will get there one day, we are just not in a hurry to get there yet.

But what happens if we decide to retire early by stop working completely so we are no longer generating any active income?

That means we have to live off our investment portfolio and other assets.

What happens if things go wrong? What happens if FIRE doesn’t work out?


When the economy is going down the toilet

In many people’s minds, FIRE means you are not working at all and you are living off your passive income stream. If I look at people that are FIRE’d already, many of them rely on the two items below as their main passive income streams:

  • Equity investments – portfolio withdrawals, dividend income, term deposits
  • Real estates – rental income

Both of these are highly susceptible to a market correction. If there a bear market, that typically means a hit in your portfolio value, which reduces the amount of money you can withdraw. When the economy is bad, some companies suspend or reduce their dividend payout, so your dividend income may reduce. And finally, governments usually lower interest rates to stimulate the economy during a recession, so term deposit interest rates could be lowered which reduces your term deposit income.

The majority of our passive income comes from our dividend portfolio. Although many of the companies have solid dividend payout history and have raised dividend for many years, it doesn’t mean they can’t cut or suspend dividends during an economic downturn. We could be getting $48,000 in dividend income one year, then 40% less one year because some of the companies aren’t doing well. It’s unlikely to see such a drastic drop, but it certainly can happen and many long-time dividend growth investors have encountered dividend cuts and/or suspensions during the financial crisis.

On the other hand, when people lose their jobs due to an economic downturn, they may decide to reduce their living cost by renting a smaller place or move to a different city with better job opportunities. This can lead to an increase in the vacancy rate, making it harder to rent out your rental properties and reducing your rental income.

When the economy goes down the toilet, it can certainly lead to a lower passive income from your portfolio. At some point, your passive income may get so low that it no longer covers your expenses. When that happens, you’re in trouble. You are no longer financially independent. FIRE has failed!

Time to freak out!!!


Other freak out factors

In addition to an economic downturn, there are other factors that may cause FIRE to fail.

In the US, health care cost is a big unknown for many people that are FIRE’d due to US politics. Thanks to the universal health care system in Canada, this is something us Canadians don’t have to worry about. For that, I am very grateful. But still, it begs the question – what happens if you get sick and you need to be taken care of? What happens if you have to pay out of pocket for some medical expenses? The medical bills will start adding up quickly, causing your annual spending number to skyrocket.

What happens if your ageing parents need more caring and financial support than you previously anticipated? By looking after your ageing parents, you could incur additional expenses, causing your annual spending number to increase.

Another unplanned expense might be kids’ education and living expenses. What happens if your kids go to a university that cost way more you originally planned? What happens if your kids become a boomerang and keep returning back home to live with you?

All these factors could cause the sky to fall and cause you run out of money!


What to do when FIRE fails?

When I think about it, life is all about risk management. There are so many unknowns that we encounter on a daily basis. When you wake up in the morning, you certainly can’t predict that you might step on that LEGO block one of your kids left on the floor (damn that hurts!!!), or predict running into someone around the corner while carrying a hot cup of coffee and spilling hot coffee all over the both of you, or predict your car breaking down in the middle of a bridge, or predict losing that shiny new phone you just purchased a few weeks ago, and so on and so on.

Sh!t happens and you deal with it.

It’s the same thing when it comes to FIRE.

Catastrophes happen, you change and adapt.

The way I see it, financial independence (and the idea of retire early) simply sets you up so you are in a better place to handle things financially. But no amount of money can prepare any of us for every single possible disaster.

By reaching financial independence and perhaps retire early, that means you know how to save and invest money and you are responsible financially. You know which buttons to push when things get tough financially. You know which insurance to buy to cover yourself. And hopefully, along the FIRE journey, you have found your personal balance between saving for tomorrow and enjoy your life today.

So if Mrs. T and I are FIRE’d and we found ourselves running out of money, what do we do?

I think the solution is pretty simple. Swallow my pride, roll up my sleeves, and get back to the workforce, and start earning active income again. Mrs. T would do exactly the same. This way, we can start building up our passive income streams again.

Or maybe when we retire, we aren’t retired in the traditional sense. Instead of working for the sake of working, we are now working on something that we love and enjoy and we are getting paid. The money might not be great, but it creates a cushion.

Therefore, earning some sort of income from work that you enjoy doing when you’re FIRE’d is a great way to prevent a complete FIRE failure!

In the end, who cares if you are FIRE’d and you end up having to go back to a 9-5 job? I sure wouldn’t feel ashamed if I “retire” for 10 years then have to go back to the workforce. At least I can look at myself in the mirror and said: “I’m proud of myself that I have been able to determine my own schedule for the last 10 years, live the way I dream of, and spent quality time with my family and friends.”

FIRE does not exclude working and making income. They are not mutually exclusive.

Remember, life is not static, it’s fluid. So we all need to remain fluid and dynamic even in FIRE.

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27 thoughts on “What happens if FIRE doesn’t work out?”

  1. Hi,
    The next financial crisis is coming. Currently the stocks are at least 2 times more expensive compare to their real value. All of us, people chasing the FIRE, should consider what should be our next move or how to protect our self from market crash.

  2. Hey Tawcan,

    Going back to what you’ve said regarding “Be-Do-Have”, the person you’ve become in the process of attaining FIRE is someone who would be able to adapt in the face of the need to get back in the workforce, even temporarily.
    As you mentioned, there would be no shame in needing to take on a job, even a part-time job, to supplement your passive income (it’s highly unlikely that all dividends would suddenly stop getting paid).


  3. I haven’t worked a traditional job in more than 10 years and I keep finding ways of earning income. The blog used to make very good money and that went down. I started to take up dog sitting and that’s supplemented everything well. I’ve since taken on two more on-going contract gigs around blog management and customer service.

    If we had even one of those side gigs, it would close the gap in the case of a market drop leading to a loss of dividends/rental income. It’s amazing how much earning just a little income can make a difference.

    The other thing is that downturns are often temporary. Even if you lose some money for 5 years due to a market downturn, you still might be FIRE. You nailed the key point, adapt. There are often many, many ways to adapt.

    • You have a good point on that downturns are often temporary. If you can ride it out, you would be good. Having some sort of ways of earning income will help for sure.

  4. This attitude and approach to FIRE is why I left work last year without having the complete amount to secure both me AND my wife leaving work. I was at a point that our savings more than covered my share of our expenses and that my wife loves her small business and wants to work for another 5-10 years as it is her passion. My rationalization was I could have fun and make enough side money in FIRE to preserve my capital for a bit longer allowing my investments to grow. When I do end up dipping into my savings I not go past the SWR and if I have too, well there are so many part time jobs I could take that I would enjoy.

    • Exactly Chris, it’s not about hitting that “magic” number at all. It’s about being flexible and finding out what might work for you. Having some side income is a great way to FIRE without actually hitting that number.

  5. Very well thought out plan Tawcan. You have a great grasp on where your money is going so you know what you can pull back on if you need to. I am in the camp of not following traditional rules of estimating retirement spending. The cliche “70% of your current spending” is bunk. You need to first understand what your current spending is. Then, project out changes to your spending once the kids are out of the house and changes due to the retirement life you want to lead. I recommend avoiding using a simple percentage of current spending.

    As for freak out factors – they can and will happen. Mrs. r2e and I are FI but we have not done the RE part. She was recently diagnosed with a serious health issue. If there is any comfort in this, it is that we are in a position financially that her healthcare costs will not bankrupt us. Yes, it will put unexpected pressure on us both emotionally and financially.

    • Hi Mr. r2e,

      Yes, understanding your spending is a very important step, the second step is to optimize your spending. Very sorry that Mrs. r2e recently got diagnosed with a serious health issue. That’s good that you’re OK financially and I hope she gets all the health care she needs to get better.

  6. Great post Tawcan! I can’t wait for my portfolio to hit a point where I can quit my high stress job and enter part time employment in places I find interesting. Working for the sake of working and gaining experiences, not for increasing your yearly salary.

  7. Owwww stepping on a LEGO in the dark, been there done that..That is one of the few times a high use of profanity helps make the pain go away.

    The other nice aspect of going back to work (full or part-time) is you get to choose the job based on what you want and not worry about the size of the paycheck. Its all about the freedom of choice.

    • Stepping on a LEGO block at any time is not a fun experience.

      Yes, I totally agree, you get to choose the job based on hat you want and not worry about the size of the paycheck. That’s the power!

  8. Very cool graphic – or is it hot ? 🙂

    and another great blog post by Tawcan!

    The last resort, as you put it, after the sky has fallen, is to go back to work. I agree but one would have to aware that the jobs/work available in a state of economic armageddon will probably not be like your old job. Personally I was in the IT field and FIREd > 10 years ago (before FIRE existed as an acronym :). I think the probability of re-entering my old field is essentially zero. I would fall back on my handyman/jack of all trades skills instead (things always need fixing :). Again the probability to having to implement this strategy, in my case I think, is very small as I could get by even the most meagre of returns on capital and also would not hesitate to dig into that capital if need presented itself. I had a high school teacher (dark ages) who advocated always having a skill set which would always have some base demand (he had apprenticed as a butcher) and I took his lesson to heart.

    • Good point, some technical field is a lot harder to re-enter once you are out of the field for man years. But that doesn’t mean you can’t enter the workforce in a different field. Sure you might not get paid as much, but you’re probably just looking for an interim solution to bump up your passive income for a short period of time.

  9. that’s right. i can compare it to an investment you make that loses 30%. you’re still left with 70% more than if you chose to spend that money instead. it’s still BETTER. it’s the same with making all the right financial moves now. i don’t doubt most of us will earn something once traditional work stops. earning money is fun and so is building stuff. half of us probably should be coaching finance/investing, except for the boring insurance part.

  10. Nice perspective, Bob. There’s nothing wrong with going back to work if circumstances dictate it. Moreover, if passive income from your portfolio is still covering the bulk of your expenses (50%-75%), you can go back to work part time. And being half FIRE ain’t so bad. That’s more than most people will ever accomplish. As a pre-FIRE sage once quipped: “We have nothing to fear but fear itself.” Cheers, my friend.

    • Exactly. Your passive income shouldn’t just all of a sudden not covering any part of your expenses. Money doesn’t just go, poof, all of a sudden (well unless you are investing in bitcoins ha). Stop thinking and seeing early retire in the traditional sense. Just because you’re retired, it doesn’t mean you can work on something you enjoy doing and making a small amount of money.

  11. When I started reading this post, I thought ‘Wow, he’s being really pessimistic today” but you really turned it around there at the end.

    Everything you wrote is true of course, bad things can happen to anybody, but that’s no reason to fear life. Financially independent people get that way because they’re GOOD with money. That’s unlikely to change in the future. We know how to save and buckle down if necessary.

    In fact, the likelihood of a “perfect financial storm” is pretty low. Even then, worst case I’d just head back to work.

    • Haha, I’m totally going for the pessimistic vibes lately. :p

      Bad things happen in life and it’s not the end of the world. What’s more important is you have options so when bad things happen, you can decide for yourself what to do.

    • You are right in stating worst case you could just go back to work. Nothing beats escaping the rat race, but it’s good to know you have the option to go back to work if needed. No need to despair, just be practical and put you head down and work.

      I also agree with you Mr. Tako, in that, FI people are just good with money no matter what. I have had to remind some people that I am a PF blogger and I do the math before spending my hard earned money. I suggest for others to do the same for the sake of their finances and health because having more control over your money gives you peace of mind.


  12. “financial independence (and the idea of retire early) simply sets you up so you are in a better place to handle things financially. But no amount of money can prepare any of us for every single possible disaster.”

    You’ve said it right there. The same goes for working forever and burning yourself out too – when shit happens, then you’re out of luck and never got to enjoy the ride.

  13. That’s my plan too. I think that’s everyone’s fallback. If you have to go back to work, then go back to work. You’ll be where you are today. You don’t lose anything, right? Also, working a bit after early retirement is a really good idea. You need to challenge your brain. Stopping work completely is not a good idea.

    • Hi Joe,

      Being a bit flexible goes a long way. Working a bit (i.e. part time) after early retirement not only creates some financial buffer it also keeps you mentally engaged. 🙂


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