How do Ethics and FIRE mingle?

How do Ethics and FIRE mingle? This appears to be a topic that a lot of people struggle with, at least that is the feedback that we received after the last Meetup in Eindhoven. For the next meet up we will likely add a discussion on this topic. This development also caused us to rethink various question(s). What do we think and why? How does it affect our investment decisions? This poat could easily turninto an PhD thesis, so I’m going to try to keep it limited 🙂 Or better, a two post series! Today we start with part 1, will do part 2 later this week.

Ethics and FIRE

For sake of clarity I’m going to split the Ethics and FIRE discussion into two main components:

  • Ethics of FIRE itself (i.e. “living off the system”, while paying relatively little taxes and social security premiums); and,
  • Investment ethics (e.g. investment in oil, weapons, energy, real estate, cigarettes, etc.).

Today we look at Part 1: Ethics and FIRE.

The Ethics of FIRE

I have mentioned once to a colleague that I was planning to become Financially Independent and Retire Early (FIRE). Her first response was that it was unethical because I would not longer pay any taxes (funny note, most people first ask “how” to become FIRE).

Now, for the Netherlands this is far from true, as we are taxed on an assumed ROI of our wealth (the latter is defined as “assets minus liabilities” in tax Box 3). It is however true that we will be paying a lot less taxes and no more social security premiums when we stop working when we are FI. Obviously, we will continue paying taxes on our properties and fees for local water management and for garbage removal.

However, we recon that our overall tax burden (including social premiums) would drop by about a factor 7-8 once we are FIRE-d. But we will still be using public roads, the medical system, police and fire services, and perhaps even qualify for certain benefits and/or subsidies (albeit very few).

Taxation

Taxation

Ethics Discussion

This begs the question is this ethical? Paying less into the system, but still using it (both directly and indirectly). From a pure social perspective, it is not. However, we would have a lot of time to volunteer (and will likely do so). Albeit this does not directly mean anything in financial terms for the government. It does have a positive social and perhaps even economic impact. Would it offset the loss in taxes, I’m not sure, but it does make me feel better.

Does it feel selfish to FIRE? To a degree is does. Is it going to stop us, eh, nope. By the time we reach FIRE we would have worked about 40-50% of our “normal” working life. Due to our above average education and associated income, we pay well above average amounts of taxes. Does this make it right, probably not, but it does make it feel more acceptable.

Plus, we will continue to pay taxes, as mentioned earlier, on our investments. This amount will likely be more than some people pay with little to no income (ignoring people on benefits here too). There is the caveat that we are not contributing to the social system (we would not pay social premiums when FIRE), but are not allowed to use the system either (due to our wealth), with the exception of old age security (AOW) and the medical system.

Conclusions

Ethics will mean a different thing to everyone, which makes for interesting discussions and decisions. Same as “personal” finance, ethics is very much personal too. Ultimately you have to do what feels right to you. That being said, it might not be such a bad thing to also look at how your decisions impact others, directly and indirectly.

Is striving and becoming FIRE ethical? Depending on your opinions, country where you live, the local tax system and what you are going to be doing once you are FI, the answer may be different. There certainly is a selfish component to becoming FI and RE, but to say it is unethical is a bit much for my taste. As long as you stick to the rules of the system, “legally” there is nothing “wrong” with becoming FIRE.

 

What’s your strategy to combine ethics and FIRE?

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25 comments

  1. Finally time for some comments 😉

    I really don’t think FIRE is unethical. If we’d have society that would be totally FIRE we’d need less healthcare, daycare and even roads! People with more free time will have time for their family’s, healthy eating and no way they’d go out every morning to get stuck in traffic. They might want to travel more but that’s a good reason to increase taxes on carbon and consumption!

    Is it ethical to dome some kind of bullshit job that pays horribly and put your kids in daycare, eat crappy food because you don’t have time to cook properly and pay for that (clown) car to just drive to the supermarket and destroying our planet at the same time? It’s not ethical, it’s just stupid!

    I don’t think FIRE is unethical, it’s just finding a way in (or out..?) our (crappy) system. If FIRE is unethical it’s just a sign that the system we’ve worked out is not working properly. It’s based on money and economic growth and not on important values. But since that ís the system we actually have we’ll have to deal with it. And then you’d better use it in your advantage and deal with it in a smart way.

    I sound like a hippie!

    1. You are a busy hippie 😉 But we still like you anyways.
      Like your point of view though, looking at FIRE this way make a lot of sense and might actually be true too.

  2. Your arguments to support the idea that FIREing is ethical are not very good, I’m afraid.
    It sounds like you are trying to convince yourself that it is ethical.
    The fact that you are sticking to the law does not make it ethical. Apple stuck to the laws and paid less than 1% corporate taxes on their European profits for 10 years. Does that sound ethical?
    If everyone would FIRE investing in index funds the economy would collapse, simple. The economy and the taxation system are built upon the assumption that (most of the) people will work until retirement age (65).
    If more and more people will move to living off a passive income we will probably see in the future a shift of the taxation system to an increase of taxation of savings and investments.

    1. Hey Lorenzo, you hit the nail right on the head, sticking to the law does not make something ethical. The Apple situation is a case in point. I apologize if I gave the impression that I’m trying to convince myself that FIRE is ethical. To be brutally honest there are parts of me that think it’s not ethical. To a point I find myself rather egotistic for doing what I’m doing. But it’s not stopping me because I believe that the benefits of our lifestyle change has a greater impact. It’s a balancing act and I was really curious to see how others are thinking about it, hence the post.

  3. Interesting post to enter into a discussion.

    In contrary to many people above, I do try to live my life as if leading a company. This implies minimizing taxes and maximizing profits. Ethics are a selfmade reference framework of what is supposed to be good or bad. It is a vague concept. Therefore I try to optimize my path to FIRE whilst obeying the law. This is a clear set of rules to be followed.

    This is not because I hate the society, but because I truly believe I’m a better capital allocator than the government. So are you and probably most other people reading this post.

    Sometimes, just like the stock market, the government tends to behave irrational. Take the Belgian ‘effectentaks’ for example. Eventually they stopped it again because it was costing money instead of bringing in cash. This is because a lot of politicians have no clue about financial literacy and in my opinion, are only looking out for their own interests in order to prolong their mandate. A country can’t do much with a 4-5 year policy, and therefore does not always make the best choices in capital allocation.

    Another factor is that I don’t want to pay for certain services and therefore am a ‘forced rider’. I don’t want to pay for religious buildings, abstract art or certain infrastructure works because simply I do not support the decision.
    Another example could be an old man who has enough wealth to survive without a pension and doesn’t like kids. He is forced to pay for daycare, educational services and children’s benefits. This might be too extreme and don’t get me wrong, I am convinced this is necessary in the society. It just helps to illustrate my point.

    What about other peoples ethics? What about people who immigrate here with there family without contributing and just draining the state’s financial resources, on purpose? I’ve seen enough examples and the recent events in Brussels have fired (not in our good definition) the public opinion. Honestly, compared to that category, I don’t think my choice between a green product or normal product in the supermarket matters a lot.

    By the time we reach FIRE, or Belgians at least, we will have payed 50% of our wages in taxes. That is extremely high and I am more a supporter of the American take-care-of-yourself system. I know certain people will be at a disadvantage, but frankly, some don’t want to learn as well just because they know the system will be there to catch them. I am a firm believer of supporting the one’s in need, but unfortunately there is still a group surfing on the lacunes in the social system which I cannot stand.

    Reaching FIRE, I will probably spend more and thus pay more VAT. Living off my dividends will also benefit the government. I just received for example my dividends from a Danish company. After paying 27% Danish taxes, I still had to pay 30% taxes in Belgium. This leaves me with just 51% of my dividends. This is scandulous and does not encourage people to start investing, which is exactly what a country needs! In Belgium we have more than 220 billion Euro on saving accounts, top-ranked in Europe. No, no, no that’s not how you do it government! (referring back to my capital allocator argument).

    In the end, I think it’s a sum of the individual parts game we should play. I’ll use Warren Buffett as an example. Did he make very ethic decisions in life? I doubt it. He did make his fortune by investing in banks on the verge of bankruptcy, expensive loans/insurances, the sugar industry or restructuring and cuttings costs. Short term this has disadvantages but he has plead to giving away 99% of his wealth to charity when he passes away. In my opinion, this is still a positive net result. Imagine what you could do with $90,000,000,000 in a region like Africa.

    Here you have my 2 cents on the matter, hate it or love it 😉

    1. Nice essay mate! I can relate, an also agree, with many of your statements. Governments lack long term vision and often don’t make decisions for the common good, no debate here. I also agree that voting with your wallet is one of the best things you can do. Thanks for the comment!

  4. I look at it this way. If you want a society to return to a form of serfdom, then you can shame everyone to keep working until a society approved retirement age. Thank goodness no one is forced to work until 65 just to meet some supposed ethical high bar. You’ve already paid more than enough into the system for your share of services. If things get rough over there, we’re waiting to receive you here in crazy guns-a-blazin USA!

    1. The problem here is that in a social society as we have in the Netherlands, things like medical care and disability benefits exist (and are pretty good!) due to the fact that many people pay into them. You never know when, or if, you will be depending on this system. I’m not judging anyone’s opinion or decisions but I’m just asking the question.

  5. I also don’t think striving for FIRE is unethical. Until recently you could receive health insurance subsidies (zorgtoeslag) just based on your income. So you could be a multimillionaire, have zero income from work and therefore receive the maximum amount of health insurance subsidy. I did not agree with that, but that policy has now been changed and a lot of other social security policies no longer just look at income but also at your assets.

    Another subject that is related to this is one and that I struggle with myself is the fact that I could afford to buy all my food organic and fairtrade, but if I do so my savings rate would be substantially lower and FIRE would take longer. How do you balance the desire to buy ethically produced goods (food, clothing) but then spending a lot more so FIRE is going to take longer.

    1. Yup, if your wealth is over €125.000 (if I recall correctly) you’re out of any benefits such as healthcare subsidies.
      Good point on the organic food and fairtrade clothing, that one had not crossed my mind yet. But I do agree about the struggles when you stand in the supermarket and are doing groceries. Ethics vs Savings Rate!

    2. You raise some very interesting points. I try to eat local and and in season so organic is still affordable. I suppose you could also grow or forage part of your diet. As for clothing I usually buy second-hand (win/win!) or invest in timeless quality pieces. Still, I often face the same dillemas as you. But then I believe FIRE (or at least the FI part) is now and I can choose to spend more money on things that are important to me.

      1. Do you ever struggle with the balance between “you” and “everyone else”? I certainly do, that is why FIRE is very important to me. I’d do things now to get to FI faster, and would let them only when FI. Is that unethical behavior, or just egoistic (or both)?

      2. I struggle with that all the time! I try to do thing in a way that aligns with my values, but sometimes you have to choose between frugality and ethics (luckily most of the times the two align). If, for example, you’re waiting to grow vegetabes until fire because you have more time then I totally understand. Perhaps you could give me an example of a situation you were thinking of?

      3. Not looking at the details of certain investment products (ETF’s or individual shares) would come to mind first. Fortunately this has not happened lately 🙂

  6. Interesting topic indeed! 😉

    A lot to say, consider and discuss about this, but I am not going to write a book here. As for taxes, IMHO it makes a big difference if you try to use the tax system in your advantage (for example, trying to earn just enough not to have to pay taxes) or whether it is a side effect. In case of FIRE, it is a side effect.

    Secondly, your contribution to society as a volunteer might be much bigger than by earning a lot of money in a bullshit job. Adding value is certainly not just about money.

    1. I was so hoping for your book 😉 Like your view on the taxes, the intend is really key indeed on whether something is ethical or not. At least you would have thought about it. Thanks Lonneke!

  7. Nice take on it. In FIRE we pay almost no income taxes now and receive quite a bit of free public goods and services from the government. However, I’m still paying many thousands in sales tax, property tax (pays for local government and education here in the States), self employment tax (from having some blog income; supports the Social Security system which is Old Age Pension in US).

    So what do we do? We give very small amounts occasionally for charity (nothing to write about – $50 here and there). But we live well. Don’t spend a ton, don’t have a huge carbon footprint compared to most millionaires. We help out in the community with time and expertise. We volunteer at the kids’ schools. As far as kids are concerned, we’re producing 3 high achieving kiddos (hopefully) that will eventually become productive members of society and produce valuable goods and/or services and pay quite a bit of taxes themselves.

    1. Interesting to see the massively different system in the states from a tax perspective. Think you guys have it much better from a taxation perspective in FI, but (and correct me if I’m wrong) the social/medical benefits are quite a bit less too. FYI our sales tax is 21% 😉 That being said, ethics remains a personal topic and one has to make decision that make you feel good when you fall asleep.

  8. Nice subject;-). In my opinion, deliberately working less and spending less does not sound unethical. It is up to the government to decide the ratios between tax on income and tax on property. In the future it might be inevitable that we will gradually move to the latter.
    I think that it is much more more important to stay socially connected to the system: inspire and help others etc.

    1. Well, you started it 😉 Spending less (at least on “stuff”) is pretty ethical if you ask me. There is an unintended consequence on the tax side, but as you point out, the government will adjust accordingly. Staying socially connected is certainly a good thing for the system, therefore our volunteering note.
      Thanks for the feedback.

  9. Ethics became more of a topic for me as well after the recent meet-up. It made me aware that there are side effects when you choose not to follow the standard path to retirement (by not working and paying taxes on the income) until you retire. Because that is obviously one of the key assumptions that our tax system(s) are built upon.
    I consider the ethical impact limited. No social security tax, indeed. But also not entitled to it. And after all, what is the standard path anyway? I do not own a car, so no road tax and fuel tax. And I minimalism my consumption, so am I stealing VAT? I am not consciously taking measures to avoid taxes (like some companies and super wealthy appear to do), I am just following a path of life that is not the most common. And the tax system is largely based on the most common denominators.
    I am struggling more with the ethics side of investing. Most of my ETFs track indexes. Therefore I invest in weapons, nuclear power, tobacco and the like. I have looked at more ethical alternatives, but at that time you paid a hefty price in terms of higher fees and lower returns. I’m curious for part 2.

    1. Yeah. There are some options for greener/ more ethical etfs but I’m always worried about 1: just how ethical they really are, and 2: how the return on them is.

      I noticed Meesman switched to greener versions of their funds this October. Interesting move!

      1. Hey Erik, I share both of your skepticism of validity and return on investment of these products. Than again, continuing on the current path of investing in non-sustainable/ethical companies or products isn’t going to do much, is it?
        I noticed the change with Meesman too, a move that is to be applauded. Just hope that the return on investment is limited, selfish thought, I know 😉

    2. Thanks for the comment Geldnerd! Stealing VAT, now that is an interesting line of thought 🙂 Go minimalism! I’m more worried about the environmental side of things than the financial (tax) side. Buying less crap will be the best choice for me, hands down.

      Erik made a good point about the Meesman change, they seems to have changed their sustainability profile. Curious to see how that will impact the ROI.

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