The Biblical Wealth Podcast

What I Think About The FIRE Movement?

March 23, 2022 Episode 68
The Biblical Wealth Podcast
What I Think About The FIRE Movement?
Show Notes Transcript

In today's episode I'm answer: 

1) What is the FIRE movement? 
2) Should I refi from a 30 year to 20 year mortgage?
3) What is a mutual life insurance company and does it matter what kind of life insurance company I use?

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All right. Thank you for joining me on today's episode of the biblical wealth podcast. I am excited to be here. And I'm excited to answer some questions. We've got three, you know, great questions to discuss today. I'm really excited about discussing all three of these, I think they're, you know, very important, and hopefully very helpful to you. And so just again, I'm excited for you to be here with me. Today's three questions I'll give them to you quickly, and then we'll go back and you know, hit them one at a time. But the first question for today, what is the fire movement? So I mentioned this? A few episodes ago, I forget how many it was, but a few episodes ago, there was a question about the fire movement. And so I brought that up. And so actually, this one's today's question or not today's questions. My question, my question for today. So this didn't come from a listener. But since it came up in a previous listener question, I thought that it'd be good to dive a little bit deeper into what the the fire movement is, and, and most more specifically, what I think about the fire movement. The second question has to do with refinancing a mortgage, the listeners asking if he should refinance from a 30 year down to a 20 or 15. Year and and give some context to that. So based on that context, we will talk about what I think makes the most sense there. And then finally, the third question for today, what's a Mutual Life Insurance Company? And doesn't matter what kind of life insurance company I use? So another great question, and I'll dive a little deeper than just a surface answer on that. And, and hopefully, that will be helpful to you. So question number one, what is the fire movement, and I said in the previous episode, fire stands for financial independence, slash retire early F, IR E, financial independence, retire early, and really more than being an investment or a financial strategy, that the fire movement is a goal, or, you know, some maybe call it a lifestyle, and definitely it can, you know, turn into a true, you know, lifestyle. There are a couple of different books credited for, you know, beginning the fire movement between 1992 and, and in 2010. But it was really through a few different bloggers and social media that the movement really caught traction and has become, you know, a semi, a semi mainstream idea. If you want to know more about the history, you can Google it, there's plenty out there, I didn't want to know that that wasn't what I thought was most relevant for, for my show, but that is, you know, I guess the origins of this idea of retiring early, and then not just that idea, but this method of doing so I guess. So a couple of questions about the fire movement, what are the goals? And how do you do it. And so I would say the goals are, obviously to become financially independent, and, you know, retire earlier than a traditional retirement age of somewhere in the 60s or early 70s. To go down a little bit level a little bit deeper, I would say the goals are to save as much as possible for a short and aggressive period of time. So people are trying to get savings rates of, you know, not just 10 to 15% their income, but 50% of their income or 75% of their income, you know, being saved and invested. So that they can become financially independent, you know, far sooner, you know, some people are shooting for in their 30s or 40s, you know, some in their 50s. But, but there are definitely people out there who are becoming financially independent in their 30s or 40s. Using using this method, and, of course, you know, whether you have two incomes or one income and how much income and there are a number of factors, so, it's not something that, you know, not everyone's path is going to look the same, obviously, but there are people who are making that happen. And then of course, they invest and, and for the most part, from, from what I have seen, and what I have read, most people are investing in a stock market to accomplish this, there are a number of index funds out there that people invest in. And, and then their goal is to get that up to, you know, a certain, a certain amount. Typically, I guess, by the book, so to speak by the fire book, so to speak, you're looking at getting 25 Or not 2525 times 25 times your annual income or your annual expenses, depending on how you want to go about it. And the idea then, being that you can live off of 4% so that, you know, this, this movement does teach the 4% rule that we've talked about, you know, a number of times on this show and in videos and things that I've done, and that's obviously not my rule, that's a pretty, you know, old school, you know, investment advisor role. It's based on the safe withdrawal rate that you can safely you know, withdraw 4% of your income a year from a stock market portfolio. And regardless of performance within reason, you shouldn't expect to run out of money within about a 30 year time. frame.

Now, if well, I'll get, I'll get into criticisms and things of that in a moment. So what you probably care more about is, you know, was my opinion of the fire movement. And unsurprisingly, I have mixed opinions, I think there's some good things and some bad things, or unhealthy things, not necessarily bad, I don't know, yeah, I'll probably use were bad, depending on how someone goes about it. Now, probably not surprising to you, I'm obviously for pursuing financial freedom. And I 100% agree that it's not necessary to wait until a certain age to have the freedom of time to do you know, what you are uniquely called to do. Now, again, that's not a possibility for everyone that all families are probably going to be able to, you know, retire early or become financially free, earlier than their 60s or 70s. But many can, and if you can, it's definitely not necessary to wait. While it's not, you know, bad to wait, you don't have to, um, you know, again, all for having the freedom of time to do what you feel uniquely called to do so. So in general, I think this is a good idea, I like that this is something that's being that's, that's out there that people are thinking about. But to dive a little bit deeper, there are a few, you know, thoughts that I have, and a few criticisms I have. And then I'll kind of finish it up on what I like about this movement more specifically, than just the the big, overall goal. So for me, when I when I think about whether, you know, like the fire movement, or what support the fire movement, it comes down for me primarily to what is the end goal after financial independence after you've retired early? You know, I think Scripture is clear, you know, and I forget where it is, it's in Luke, and I've used this, I've referenced this parable before, I don't want to just give a wrong, a wrong reference. So Lucas is as close as I can specifically get without looking it up. But the, it's the parable of the, you know, the rich farmer, the farmer who, you know, had his barns full, and when they got full, he wondered what he should do. And he decided that he would, you know, tear those barns down and build bigger barns or bigger store houses. And, you know, be able to store more grain and he would have all that he needed. And, and then he would spend his days, you know, relaxing, eating, drinking, being Mary, and in the Lord judged him for that, and, you know, took his life and said that, you know, his, all of his storehouse is would be distributed to others, and he would not, you know, see the fruit of that. So, if the end goal is to be a consumer, at the end goal is to be able to simply merely, you know, enjoy your time no longer have to work, then, I don't think that's a biblical idea. I think on the other hand, we're called to be stewards, we're called to be faithful stewards, and it doesn't matter whether that's with our career or outside of our career, you know, we're called to be faithful stewards and all areas and, and, um, you know, I'm not saying that I am perfect at that by any means, but that is the call that is the goal. And so I think that if, if the end goal is to have freedom of time, or financial independence, so that you can be a producer in some way, and that doesn't mean doesn't have to mean producing money, but that you are, you know, using the gifts and the talents that the Lord has given you, that you are seeking to, you know, be a blessing to others to impact others, that you are in some way, you know, producing and providing value for other people, whether that's through, you know, another career that you just enjoy more, and you're doing it because you want to or whether, you know, whether it's through ministry, or whether it's through, you know, homeschooling your children, or helping other people, you know, school that show them whatever it may be, is not what's important to me, as long as it is, you know, something that's, you know, aligned with scripture, and it's being productive and giving value, being stewards of what we've been given. And, and so I think if that is someone's, you know, in goal, if that is their purpose, for pursuing financial independence and retiring early, then I think that's a great goal. I think that is something that we should, you know, we should pursue, to the extent that we're able. So a couple of other criticisms of the movement, though, is one. It for a lot of people it is teaching, what I would call extreme frugality. And, and so, you know, unless you have a pretty substantially high income, where you can, you know, meet all of your financial needs and have a relatively normal life and still save, you know, 50 or 75% of your income, that that's not most people. It is some people for sure, but it's not most and so if you have a moderately average income, then the only way to get into savings rates that high is to be extremely frugal.

And so This, this gets into people trying to cut cost, you know, every everywhere. And and I'm certainly not against frugality, but I think if you just word of caution, you know, make sense here, and just getting really practical and, and somewhat personal, you know, into this. But I think that's important, you know, something like really inexpensive food, you know, it can be pretty bad for you, if you're trying to eat as inexpensively as possible. You know, on the one hand, you're probably not going to buy sodas and candy and junk, you're probably not going to be eating a lot of junk food, because that is wasted money. But you probably also also are going to be eating, you know, just a lot of relatively low quality foods that aren't, you know, quote, unquote, junk, but low quality foods, it'd be easy if you did this for a long time, you know, to have some, some possibly pretty significant health issues that that arise from it, you know, unless you're growing your own food, and some people do that they're growing their own food, and they're doing that pretty inexpensively. And so now they're getting, you know, quality, nutritious food themselves. But if you're, you know, relying on Walmart, and you're trying to spend as little as you can to feed your family of, you know, two or five or, or whatever, I worry about some of the long term health effects of that. And if it, you know, it's worth it, to be that extremely frugal and worth it to be able to retire early. You know, another thought that I've had is that extremely high savings rates would be much more difficult if you have children. And, and, you know, I worry that some who, you know, especially if they're starting young, and who may be really aggressive about fire, you know, may postpone or choose not to have children at all. Now, I know that children can be a sensitive topic. And you know, for the most part, I don't think as believers that we're often called to not have children. Now, of course, some people try and are able, and, you know, that's, that's not what I'm talking about. And I'm very sympathetic to that situation. But I'm talking about an intentional choice to, you know, trade, having children for financial freedom. Because yes, if you have fewer mouths to feed and clothes to buy, and you need less space, and things like that, you can definitely save more money by not having not having to support children. But I definitely wouldn't be in support of, you know, of not having children unless there were other factors involved. So, you know, that, obviously, is a very personal issue decision. But but that is my opinion, I'm sharing my opinion here. And some criticisms I have, potentially have of, you know, the fire movement. The last kind of issue with extreme frugality is not protecting against catastrophic risks in an effort to save more. And I've, I've heard questions, I've seen questions like this, a lot of, you know, Should I cancel this insurance and that insurance and things like that, because they're trying to save as much as possible. And, and to me, it is definitely not practicing good stewardship, it is not being wise, it is, in fact, quite risky. To cancel catastrophic, you know, or protection against catastrophic risks, just so that you can save a little bit money, a little bit more money just so that maybe you can retire, you know, a year or two earlier. Now, the reality is that, that maybe you have to work an extra three or four years, if you keep all that protection in place, that doesn't mean that you couldn't become financially independent and retire early. But in an effort to do it as quickly as possible, people often Well, I think, make bad and irresponsible financial decisions. And so those are a few criticisms about the extreme for galley, the other criticism, or maybe maybe one might call this a word of encouragement to people pursuing fire is their,

you know, their their kind of support to the 4% role. And we talked about that a lot here that, not that that is, isn't not that that is a bad thing, I think that you know, having a safe withdrawal rate, if you are going to be living off of an investment portfolio for a long time, then you definitely want to be conservative with that, of course, these families are, for the most part, have the ability to go back to work, if things don't work out, they can go back to work. They're not, you know, at a point where that would be a lot more difficult to do. So maybe they don't have to be quite so conservative with their, with their investments. But if they've, you know, gone to the extremes that people go to to get here, I'm sure they want to make that last and don't desire to go back to work from needs perspective. But, you know, you could get there a lot faster, if you understood how to invest for cash flow and how to have investments create the income versus just withdrawing a certain amount every year and following the 4% rule. And so maybe that good again, help someone get there more quickly. Certainly, it could help increase the security of their, you know, long term finances by learning to invest differently and not relying solely on the stock market. But also it could help families who, you know who have a desire, maybe even a calling to pursue financial independence because they want to be involved in ministry, they want to be producers and create impact. But who think that they can't do it, because that 25 times number is just too big, and they won't be able to get there more quickly, realizing that maybe they could do it on 12 and a half times or, you know, maybe 15 times or something, but a number of much smaller, that 25 times their income is possible if they learn how to invest differently. And so to those people, I would encourage them that, you know, financial freedom is something that you, you know, feel called to pursue, you know, there is there are ways of doing it, that it can be more successful, even if you do have a number of children, even if you aren't wanting to live extremely frugal, it is possible for more average families to achieve this than most people think, if they learn to invest differently, both along the way. And certainly once they reach that point of financial independence. So some things I like about it. I do like the awareness that this fire movement has brought to you the ability to pursue and achieve financial freedom before retirement age. And that's something that I talk about a lot. I don't think it's something that anyone has to do that we are, you know, commanded to do. But it definitely is a possibility. And it makes sense. And it's possible for a lot of families. So I'm glad that there is more awareness of this now. And I do think it's a good idea to pursue a higher savings rate than just contributing to a 401k. You know, which is what a lot of people do. But obviously, I also think there's a good balance, you know, to be pursued, I'm typically not on the extremely frugal side, my family certainly doesn't live, you know, in an extremely frugal way. And I just don't know that that's a great healthy, long term solution for most families. But if it works for you, and you're not, you know, sacrificing something that you shouldn't, that it makes sense. So, or it could make sense. At the end of the day, I think this comes down to one's heart, and goals in pursuing fire, you know, if the pursuit of financial independence is so that life can be spent eating, drinking, relaxing, and being merry, or, you know, if frugality leads to dangerous extremes or sacrificing, you know, the joy and Ministry of parenthood, or sacrifices a marriage because someone is working, you know, three different jobs and trying to save everything possible, then, you know, it's not worth it, it's not worth it, in my mind. And in that situation, if the goal of financial freedom is to have the time to be a producer, a steward of the talents God has given you, and you can pursue it responsibly, then I'm all for it. And not only am I all for it, I'm happy to help you know, get there faster and better, I'm happy to help make sure that you have the right financial foundation upon which to then you know, do that the the aggressive type of saving, and investing in a way that's going to give you better, more secure long term returns, and you know, be able to eventually compound your cash flow, which can certainly help you get there much more quickly. So that is the fire movement and and what I think about it, and I certainly welcome your questions, if you have questions, you can send them to me at biblical wealth, Jared, Jr, Ed, all one word. But we will move on from that topic and a move to question number two. So question number two is from Caleb. Caleb says background info, I am a single parent, teacher and getting child support, which I thought was interesting that I've never heard of a father getting child support. And I'm sure it's not, you know, a completely unusual thing. But that was new to me. I'm considering doing a refi on my home right now, in order to pay it down faster. Right now I'm

at a 3.75% on a 30 year mortgage, I'm considering going to a 2.875% on a 20 year. Right now, the payment is roughly 28% of my income on the 30 year. And you mentioned that that includes the child support that that he'll be getting. And if I refi to a 20 year, my payment would go up to about 30.5% of my income scale. Thank you for the question. This is a really practical question. I'm sure you are not the only person to be thinking of things like this, especially right now. You know, interest rates are going to be going up and people are trying to lock in lower rates, which I think is you know, that that's a good thing, but in the process, you may be considering, you know, reducing the term of your mortgage. So, I will I will cut to the chase with my opinion. Definitely do not refinance to a shorter time period. You know, I know that having a lower interest rate seems like a good idea. And certainly it could save you you know, total interest cost in the long run. But the trade off of a higher payment doesn't make sense for you right now. For sure. And for that matter, I don't really think it ever makes sense for for anybody. You know, I couldn't This question by giving an analysis of why it mathematically makes sense to have a longer term mortgage with a lower payment and how investing the difference could lead to more wealth. You know, we could talk about opportunity cost. And you know, I could create a spreadsheet that argues my point very effectively. But in your case, Caleb, and I really think I really think in the case of everyone who's kind of thinking through this question, that that's not the main point. Is it true that you could potentially, you know, make more out of investing the difference? And, yes, it is. But that is not the main point. The main point, Caleb, is that it's so important to have flexibility and control, you know, you're talking about something that's going to last 20 or 30 years, that's a long time, all kinds of things can happen and change in life over that over that time period. And especially, you know, for you as a single income earner, you know, if there's any disruption to your income for any number of reasons, and from what I've heard, that's a really common a common occurrence with child support that there are, you know, in frequency disruptions, irregular payments, irregular amounts, but even in your own income, you know, as a teacher, if there were, you know, some if you got sick or injured or if there were layoffs or, you know, whatever it may be, if there was any disruption to to your income, then a higher payment is much more burdensome, you know, if you are in the position that you have the extra cash flowed, and you could, you know, take on a higher payment for now, then just take that money and make additional mortgage payments, make additional principal payments, if that's what you feel compelled to do, you know, I'm not going to go into whether that makes sense, or you should put that money to other things that, you know, I'll talk about that, and lots of questions on the podcast, you know, that's fine, um, for paying off a mortgage. If that's what you feel compelled to do, and we have lots of clients who do want to be debt free before they move on to other things, that's all fine. And certainly paying it off early will save you use will save you some interest. But don't, don't let the bank lock you into a higher monthly commitment. It's just not wise for you. And frankly, I don't think it's wise for anyone, you do not have to have higher monthly commitment, payment committed payment to pay off your mortgage early. I'm a fan of locking in the lowest possible monthly payment. And if you still want to pay it off aggressively do it. And yes, you pay a little bit more in interest rate. And yes, it may make you know, a difference at the end of the day, some amount. But I think that that is it's kind of like flexibility and control insurance. I mean, it's a premium, to be able to have that flexibility and control in your life. And because it is so long term it because so many things can change. It's so important to maintain control, and flexibility, you know, that the reality is that, unlike other assets, you know, if you if you are in the final year of a mortgage, and you've paid off, you know, 99% of it, you're you're in the last year, and you you know you have, you know 98 99% equity in your home, if you stopped making the payments, if you couldn't make the payments, the bank could foreclose and take the entire property. Now, hopefully you could go and you know, do some sort of refinancing elsewhere, like there, there may be some safety nets and ways of dealing with it. But at the end of the day, they could take the entire home and take that equity all that you have because you're unable to make payments. And so

you know it, it just, it just is best to keep those payments low. I think I've I think I've beaten this, this dead horse. So Caleb, I do hope this was helpful. Keep as much control as your of your cash flow as possible. And and thank you for your question. I think I kind of hit that one hard. But I really want to see you make a what I think is a wiser decision here. And so I hope that is I hope that is helpful to you. Question number three, what is a Mutual Life Insurance Company? And does it matter? What kind of life insurance company I use? So, great question. There are two types of life insurance companies. One is a stock Life Insurance Company and the other is a Mutual Life Insurance Company. So stock life insurance companies are owned by stockholders. So these companies have either remained privately owned, and so the stock owners, the stockholders or the you know, founders or heirs, the founders, you know, are more likely they have at some point in time being sold to the public via shares in the stock market, which is the case for a lot of, you know, well known insurance companies, or they've been sold to another private company and that other company, you know, owns the shares of this, the stock shares of this life insurance company. A Mutual Life Insurance Company, on the other hand, has never been sold to the public and they are mutually owned by the policy owners. And so most of you are going to be are familiar with this type of distinction, this type of model, it's very much like a bank versus a credit union. You know, banks are privately owned by the founders of the bank or by public shareholders or again by another company. So same circumstances to stock Life Insurance Company. Credit unions, on the other hand, are mutually owned by the members of the credit union. Okay, so that's the technical difference between the two. But that's not really the question that matters, you know, the important question is, is there a reason to choose one over the other. And for me, there are two reasons why I choose to buy life insurance from a mutual company. The first is that if a stock holder is if the stock holder, sorry, if a stock company, there we go, if this stock company is a publicly owned company, meaning that you can, you know, buy shares of a stock, then it is not necessarily forced, but I would say tempted, at least tempted to make decisions based on how those decisions will affect the shareholders and the value of their stock, more so than what is in the best interest of their customers, the policyholders. So, because companies are required to report their financials every quarter, they would at least have a temptation to, you know, make short term decisions, in an effort to always keep the financials, you know, looking good, and shareholders happy, rather than making longer term decisions that may actually be better for the company over time. Now, the way this works is that, you know, there's a board of directors who hire CEOs and hire, you know, other C suite and executive folks in the companies and, and so, if stocks start not looking good, then all of those jobs, all of those seats become in jeopardy, they're up for question. And so the people who are making the the highest decisions are often I guess, really protecting their own jobs. And they do that by keeping shareholders happy. So that is how that sort of thing works. Now, conversely, mutual companies are owned by their customers, and customers have life insurance, want more than anything, to be absolutely certain that the life insurance will be able to pay their death benefit, if and when they need it, too. I know, for me personally, you know, I want the companies that I've purchased life insurance from to make the very best long term financial decisions. Because when the time comes, that they're going to pay out to my family, I want them to be there and be able to pay off my family.

So that's the first reason the other reason to buy from a mutual company is for the dividends. So let me explain both types of these companies profit, hopefully, you know, banks and stock life insurance companies, they pay their profits out in the form of dividends, to the shareholders and owners of the company. And likewise, Mutual Life Insurance companies and credit unions. They pay their profits out in the form of dividends to the owners of the company. But in this case, the owners are also the customers, and specifically, policy dividends are paid to the owners of whole life insurance policies. So while technically term and universal life policy owners are mutual owners of the company, they do not receive dividends. And to be honest, I don't know why the other types policy owners don't receive dividends. I haven't I haven't, you know, called and asked specifically, but I know that they don't. So I guess that leads to the next question real quickly of what are dividends. And we've said they're their profits, but I'll explain a little a little bit more. Dividends are most accurately thought of as sharing in the overall profits of the company. But here's an interesting fact, dividends from from life insurance companies, Mutual Life Insurance companies are actually classified by the IRS as a quote return of excess premium, which is great for policy owners because it means that the dividends are not taxable, whereas dividends as you know, capital gains or profit distributions, if that's how they were paid out, they would be taxable. So here's how this works. Life insurance companies make very conservative estimates each year, and over the long term of how much death benefit they'll need to pay out across all the types of policies and what their expenses are going to be and what their own internal investment returns will be. And it's good that they are conservative because again, we want them to be able to pay all the guaranteed death benefit that they owe. But because they are so conservative, they consistently come out ahead of their estimates and and are then able to share those surpluses with their mutual company owners, the whole life insurance policy owners as returns of excess premium meaning we ended up overcharging because we were being Conservative and things went better than expected. So we we really, we could have gotten by on lower premiums, and we don't want them to do that long term, that would be a bad financial decision. Again, we wanted to be conservative. So we want them to keep the premiums, you know, in these conservative realms, but on a year to year basis, they can say, well, we ended up charging a little more than we had to we could have gotten by on less, and so we return those excess premiums to the policy owners. And another way of thinking about them are in a non taxable dividends. So does that make sense? I hope so, I hope that is helpful. If you are interested in learning more about whole life insurance. I did a couple years ago recorded a three part podcast series that explains you know why I love whole life insurance and how both the permanent death benefit and the cash value can help you greatly accelerate your path to financial freedom.

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