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Commentary

How Feasible Is Early Retirement in the Current Market?

The Physician on FIRE blogger Leif Dahleen breaks down his journey to retiring early, highlighting the choices and circumstances that enabled him to do so.

Leif Dahleen, creator of the popular Physician on FIRE blog, joined Morningstar's The Long View podcast to discuss his path to early retirement. Following the "financial independence, retire early" movement, Dahleen retired from his career as an anesthesiologist at age 43. Since then, he has been blogging about his own FIRE journey, sharing his insights with others interested in pursuing a similar course.

Unpacking some of the financial and lifestyle choices that facilitate early retirement, Dahleen discussed generating passive income, the way the market impacts FIRE's feasibility, and navigating taxes during retirement. He also discussed the reasons why--and ways in which--he and his family give back to their community.

Here are a couple of excerpts on the FIRE movement's viability amid the current investing landscape from Dahleen's conversation with Morningstar's Christine Benz and Jeff Ptak:

How Can Early Retirees Navigate Low Yields and High Valuations?

Benz: There has been a lot of research recently about safe withdrawal rates potentially needing to come lower because of low yields and high equity valuations. How does that research influence your comfort with your plan? How should early retirees grapple with the phenomenon that low yields are pushing down on safe withdrawal rates?

Dahleen: That's a great question, Christine. I've read some of the same things that you have from people like Wade Pfau, Karsten Jeske from Early Retirement Now, and Michael Kitces. And it is a tough time with valuations as high as they are and yields quite low from bonds. So, I think it's wise to be conservative. I think 3% is still quite safe. It really depends, though, on what your risk tolerance is and how safe your plan needs to be. Do you want that 99% likelihood of success, or are you good with 80% or even 50%? Do you have a ton of fluff in the budget? Could you live on maybe two thirds of what you're spending right now pretty easily without any major hardships in your life? Would you be really upset if you saw your portfolio drop by 20% or 30%, or are you comfortable with more risk? I think just about anyone can feel pretty comfortable at about 3%. But that's assuming you're not paying 1.5% in investment management fees or something like that. As far as overall spending, somewhere in the 3% to 4% range on the low end works, if you're conservative. If you think you'll still do some paid work in retirement, or if you have plenty of room to cut back, then I think starting with that 4% or even a bit higher isn't unreasonable as long as you do have a contingency plan.

Is the FIRE Movement a Bull-Market Phenomenon?

Benz: One criticism that we sometimes hear about the FIRE movement is that it's a bull-market phenomenon. Do you think some young retirees might be in for a rude awakening in a sustained bear market?

Dahleen: Well, a sustained bear market would be something of a challenge. Although, I had one of those early in my medical career--and therefore early in my investing career--and it did wonders for my portfolio in the long term. I was investing starting in 2006 when I finished residency. I bought at rather high valuations then; I bought on the way down in 2008. I bought in March 2009, and I continued to buy on the way up. And when all was said and done, that really was like a nice slingshot boomerang that helped launch my wealth and net worth up, and thus helped me reach financial independence. Now, if you never had that buying opportunity, save for the blip we had in March 2020, then you haven't had the benefit that I did from a bear market.

Now, having that market at the tail end of your working career is a much worse sequence of returns compared with during your working years. It would make it more difficult to reach financial independence. But, like we discussed with valuations being a bit high, it's a better time to be a little more conservative with your withdrawal rate. I think the fact that we haven't seen a true extended bear market--at least in the past 13 years--has allowed people to see their balances increase, but it has not allowed them to buy at low valuations.

So, it's not necessarily all wonderful for people trying to reach FIRE right now; if they're early in their career, though, they would benefit from a bear market, like I did.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.