What Do Millennials Know?

A spate of recent think-pieces, news segments, and even a forthcoming documentary film have popularized an internet subculture called the “FIRE” movement (which stands for “Financial Independence, Retire Early”).  In a nutshell, FIRE is about achieving financial independence earlier in life via extreme frugality and accelerated retirement savings.  Its adherents (typically Millennials) report saving as much as 50-70% of their gross income each year, in a bid to accelerate the point at which their investment portfolio can support their modest annual income needs, freeing them from traditional work obligations.

When you consider the life experience of a typical millennial, this yearning for personal autonomy makes sense.  This is a generation raised in the shadow of 9/11, a time when the government-sanctioned “threat level” indicator never dropped below yellow (“elevated”).  Millennials accumulated record amounts of student loan debt to acquire coveted college or postgraduate degrees, only to graduate into the worst job market in several generations.  The ensuing recovery was robust in terms of stock market performance, yet modest in terms of job and real wage growth.  Moreover, most of the jobs created after the financial crisis were in the “alt work” category—temporary or independent contractor work, often without steady hours or benefits.  Membership in trade unions has declined, and with it, the traditional entrée into middle class life for those without a college degree.  Advances in artificial intelligence threaten entire categories of employment in the coming decades.  Lifelong employment at a single company, with a generous pension to boot, is a pipe dream for today’s young workers.  Even worse, a fraying social safety net has them rightly skeptical about promised Social Security benefits decades hence.  Amidst this personal and professional uncertainty, it is little wonder that many young people are seeking an alternate path.

Even FIRE advocates will note with self-deprecation that their lifestyle has a “cultish” feel, and there are fair criticisms leveled at them from skeptics.  First, that they severely under-estimate the amount of money they will need to fully retire.  Many draw on the conventional wisdom of the “4% rule” as a level of sustainable withdrawals from their investment portfolio.  The problem is that this rule came about during a period of substantially higher interest rates and was only ever contemplated for a “typical” retirement lasting 25-30 years, not the 50+ years which some millennials are targeting.  Second, the current bull market is one of the longest on record, characterized by lower than average levels of stock price volatility.  This likely induces many FIRE advocates to over-estimate both their own tolerance for risk, and the sustainability of recent stock market returns.

At the same time, there are important bits of wisdom embedded in the FIRE movement, which all investors can appreciate.  The first is that most people—particularly high earners—are capable of living on much less than they make.  Incomes are indeed variable, but so are expenses.  Both sides of the ledger can be adjusted to achieve a desired savings goal.  Second, every bit of consumption today has an opportunity cost in terms of foregone consumption in the future.  Thinking more deliberately about that trade-off—and reducing or eliminating the expenditures which don’t significantly increase your personal happiness—is a worthwhile exercise. At the end of the day, financial freedom is not about spending your days sipping mai tai’s on a beach.  It’s about reclaiming your most precious and finite resource—your time—and directing it toward meaningful work, family, and community, all of which are better correlated with a happy and fulfilling life.

Last Minute Tax Tips
With less than 6 weeks left in 2018, tax planning this year takes on renewed importance considering the revised tax law, which removed some key deductions, added some new credits, and generally lowered marginal rates for most individuals.  At the same time, a cap on state & local tax deductions (SALT)—combined with an expanded standard deduction—means that far fewer people will find it advantageous to itemize deductions this year.  Those who were accustomed to deducting charitable contributions in years past should re-evaluate the optimal method based on their level of annual donations.  For some people, it will make more sense to “bunch” charitable donations in alternating years (perhaps utilizing a Donor Advised Fund).  Retirees over age 70.5 have another option: they can redirect some (or all) of the Required Minimum Distribution (RMD) from their IRA accounts to a qualified charity.  This satisfies the RMD requirement without the funds becoming taxable income to the account holder (effectively funding the donation with pre-tax money—an attractive proposition for those in higher tax brackets).

Speaking of tax brackets, it’s worth remembering that the lower marginal rates on personal income this year are scheduled to expire in 2025, unless extended by Congress in the interim.  Since today’s lower rates are temporary (at least as the law is written), individuals should plan accordingly.  In some cases, this could mean “pulling forward” discretionary taxable income for those who are currently in a lower bracket than they expect to be in a few years from now.  One demographic especially well-suited to this strategy is retirees in their early-to-mid 60s, who have large IRA balances and intend to postpone social security benefits until age 70.  These people may very well be in a low tax bracket until they hit age 70, at which point their taxable income (augmented by social security and RMDs) will increase substantially.  Therefore, they could benefit by taking IRA distributions earlier, while they are still in a lower marginal bracket.  Even better, they could do a series of partial Roth IRA conversions each year, which would shift more of their portfolio into a “tax-exempt” bucket.  The idea is not just to minimize taxes in any particular year, but to pay the lowest effective rate over a multi-year planning horizon.  In tax planning, as with investing, it pays to take a long-term view.  As always, we recommend you consult with your tax advisor to see whether these issues are relevant to your filing situation.