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Is FIRE a solution to the raising retirement age?

In most states with an aging population, there are ongoing discussions on the need to raise the retirement age in order to delay the collapse of the social security system. The permanent threat of bankruptcy of the social security system forces us to adopt investment plans, through which to try to ensure a future peaceful life. It remains to be seen whether the F.I.R.E. movement could be a solution to this problem.

Is FIRE a solution to raising the retirement age? This year, the discussions about FIRE (Financial Independence, Retire Early), a movement that had entered certain anonymity, became relevant again in the context of the unbelievable results recorded in most markets. The growth of most market indices made the ideal proposed by the F.I.R.E. movement of early retirement, to seem achievable. In many countries, raising the retirement age is being discussed in order to combat the problem of the aging population. These discussions make the movement extremely attractive.

What exactly is the F.I.R.E. movement?

This financial philosophy was proposed in 1992 by Vicki Robin and Joe Dominguez in their work Your Money or Your Life. It requires followers to adopt a frugal and economical lifestyle and invest between 50% and 70% of their income. The purpose of the movement is an early retirement from activity. In principle, F.I.R.E. adherents could retire starting with the age of 40, but only if the value of their investment portfolio exceeds at least 30 times their annual expenses. Subsequently, in order to avoid a return to work, they should limit their withdrawals from the portfolio to a yearly maximum of 4% of its value (the 4% rule). Using no more than 4% of the total value, the portfolio would have time to appreciate and ensure the funds for a satisfying life for at least 30-40 years.

The model is far from being perfect. Planning for the future based on current expenses leaves room for too many unknowns. We could adopt a frugal life style untill our 40s, but after that life becomes more expensive. Also, the inevitable deterioration of health, associated with advancing age, will have its say and put pressure on future spending budgets.

The success of the F.I.R.E. in the US is easy to understand. Americans do not have a social security system as complex as those in the European Union, which is why there is a constant concern for financial independence and livelihoods. Because they cannot rely on social security systems, the people of the United States educate themselves financially and act accordingly to the healthy market principles.

Could the F.I.R.E. movement be successful in the EU?

In the EU the situation is different. The existence of complex insurance systems in the EU has inoculated Europeans with a certain convenience, they are not as concerned about investments as the Americans and are used to leaving the problem of their retirement in the care of the state and of private pension funds. However, in the EU, as the retirement age moves towards 70, there is the potential for profound behavioral changes; but nonetheless, the F.I.R.E. philosophy is difficult to adopt.

Some Europeans could live frugally and save 50% of their income, but they would not sacrifice their future pensions through an early retirement. Early retirement would increase their social health insurance costs and pension contributions. Also, the free time gained leaves room for new consumption temptations. Retirees would quickly experience diversification of expenditures and speed up the depletion of funds.

What about Romania?

In Romania, the use of the F.I.R.E. philosophy is complicated. The country is developing rapidly and the gaps with Western states are shrinking in an accelerated manner. Incomes and the cost of living will continue to grow at an accelerated pace over the next decade. A portfolio 30 times more valuable than annual expenses could be irrelevant in 4-5 years. Currently, very few employees in Romania can afford to save such a large percentage of their earnings.

The principles of the F.I.R.E. cannot be applied ad literam in Romania and the other U.E. states. These states have a pronounced welfare character that is based on substantial social contributions. An early retirement would increase the costs of social security and therefore those of retirement. We would need to develop a more consistent portfolio, in order to be able to consider a withdrawal from activity.

The F.I.R.E. philosophy does not make as much sense in the countries of the European Union as in the USA. However, we can be guided by its principles for organizing expenses and developing an investment plan. It is difficult to invest 50-70% of our income for a 40-year retirement, but we can try with 10% -20%. The available capital is reduced by contribution to pension funds, but we can place our savings in good return asetss. For example, we could set up a portfolio of ETFs that would allow us to retire early. Those who do not want to risk their pension could retire early, in accordance with the law.

So yes, FIRE is a solution to the raising retirement age.

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