Author, show host, and financial "guru" Suze Orman has once again made waves in the financial world. Appearing on the Afford Anything podcast, Orman claimed you'd need at least $5 million if you wanted to "FIRE" -- an acronym for the ability to be financially independent and/or to retire early.

This isn't the first time Orman has used anecdotal evidence to make straw-man arguments that are easily refuted by...well...demonstrable facts. This claim takes that tendency to an entirely new level. 

But rather than throw the baby out with the bathwater, we should investigate the spirit of Orman's warning. Valuable nuggets lie there. So does a bunch of nonsense. I'm here to separate one from the other.

Scared and anxious young people (two men and a woman) who are hiding peek from under the table. Icons above their heads indicate that they have questions and ideas to solve a problem.

Image source: Getty Images

"You never know..."

The overarching premise of Orman's argument is solid: You never know what's going to happen. During the podcast, Orman said, "The worker that retires at the age of 30 -- if something goes wrong from 30 until 70 -- now they're in trouble."

She gives several examples of things that can go wrong: You get hit by a bus, you get cancer, AI takes over all of our jobs, tax brackets increase markedly, Social Security and Medicare disappear.

While these concerns might seem neurotic, there's a crucial principal at play: limiting your worst-case scenario.

Earlier this year, best-selling author and trader Nassim Taleb made a very similar point when I interviewed him:

As an investor you need to think about it in these terms: No investor knows what's going to happen to him or her in the future.

The market may deliver whatever people claim it will deliver. But if you have a drop in the market that may force you to liquidate -- particularly a drop in the market that may correlate with your loss of business elsewhere -- then, automatically, your returns will be the returns from today until that drop in the market. It de-correlates from the market.

Taleb might be the most important risk expert in the world today. The point he makes is in the same vein as Orman's. It's worth heeding: If you retire early, you must protect your downside.

Terrible math, self-aggrandizement, and general nonsense

Unfortunately, while the basis of Orman's warning is solid, the conclusions she draws from that warning strain credulity.

Let's consider how she arrived at her $5 million figure in the first place:

I took care of my mother [in old age]. Remember, it was $30,000 a month... So you're talking about maybe $300,000 to $400,000 a year. All right, say I'm wrong: you're talking about $250,000 per year there. 

Now you have other expenses -- food and everything -- and let's just say you need another $100,000 a year to live. So now you need $350,000 a year after taxes. You need at least $5 million, $6 million.

There are so many issues with this that I'm not sure where to start.

More than anything, Orman's true detachment from reality -- compared to how the average American experiences daily life -- is on display. This shouldn't be too surprising; she mentions multiple times in the podcast how she lives on her own private island and flies on her own private plane. 

Here's how her numbers hold up:

  • Actually, if you need $350,000 per year, using the 4% rule -- which she cites -- you'd need $8.75 million to retire early.
  • While I'm sure Orman -- like any of us -- got the best nursing-home care for her mother that her money could buy, it's not typical. According to SeniorLiving.org, the nationwide average for a semiprivate nursing home room is $82,128 -- almost 70% below Orman's "low-ball" figure. In some states, the average is below $55,000.
  • The typical American household in retirement (65 or older) spends just under $50,000 in 2017. And this is the mean! The median -- which is less affected by the wealthiest 1% -- is likely far lower. Either way, that's less than half Orman's example.

For most of us, Orman's $350,000 figure is outlandishly high. If you're the average American, $50,000 per year seems reasonable. Using the 4% rule -- and not including any Social Security, Medicare, or pensions -- this requires a nest egg of $1.25 million -- or 75% less than Orman's number.

It might be tempting to say, "But the average retired American is poor and miserable." But when we measure these things, we see the exact opposite: Retired Americans are the happiest, least stressed age cohort in America. And they do it -- on average -- with annual expenditures of less than $50,000.

But Orman's suspect math doesn't stop there. Long-term care insurance -- which can run between $3,000 and $5,000 annually for a couple  -- usually covers the first $150 per day in a nursing home for three to four years. Using the figures above, that means paying about $27,000 per year for nursing home care, plus the $5,000 per year in premiums -- which comes to $32,000 per year -- or what Orman claims you should be prepared to pay in a month!

That's why I call this a straw-man argument. The fact that early retirees need to protect their downside is obvious. Health, long-term care, life, homeowners' insurance -- all of these things are vital to support proper early retirement. But pretending there are no affordable and sensible options to mitigate these risks is just plain nonsense.

The big picture is what's really missing

Here's the bigger problem with Orman's take on "FIRE-ing": Her assumptions make it seem as if she read a single blog post about the movement and drew wild -- and highly inaccurate -- conclusions about what it means.

Alternately throughout the conversation, she says that retiring early is a bad idea because (1) you stop earning money during your compounding years and (2) you'll get endlessly bored by sitting around all day. 

I've been reading about -- and practicing -- this lifestyle for almost a decade. There's a reason for the FI (financial independence) to be included in the acronym: It's not about sitting around all day.

Instead, it's about meeting your basic needs and then freeing up the time. With that time, you can focus on the only three things that really matter in creating a fulfilling life:

  1. Connections to family and friends.
  2. Having purpose and meaning.
  3. Progress toward what you're working on.

That is the North Star of the FIRE movement. It is not a hope to become a multimillionaire, own a private island, or ride on a private jet. Sometimes you might get paid for following this North Star, sometimes you won't. The point is that you'll be OK either way.

We'd all be wise to heed Orman's advice about protecting our downside. But we'd be equally wise to ask ourselves where our level of "enough" really is and recognize that anything above it will have significantly diminished returns.

Your life might require $5 million to retire early, but 99% of earth's inhabitants would be just fine with far less.

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