Does the idea of retiring in your thirties with a million dollars in the bank sound appealing? You will then have many good years in your life that you can spend as you wish without having to work for money.
This bold financial move is the idea behind the FIRE movement. The acronym for Financial Independence / Retire Early is that you spend the first part of your career aggressively maximizing income and minimizing expenses so that you can save as much as possible, ideally well over 50% of your annual income. Once you hit the transition point where your annual expenses are less than your after-tax investment returns, you can just get away from work and spend the rest of your years doing anything they Value.
Fascinated? Let’s take a closer look at that.
Is early retirement a big goal?
Let’s start with Why. Why should someone choose to view their finances from a FIRE philosophy? Is retirement really a big goal someone in their thirties or forties might want?
Don’t think of it as retirement‘
The most important element of this story is not to see the ultimate goal of FIRE as retirement, or at least not as retirement in the popular sense of days of golf and gardening.
Think of it like this: What would you do with your days if you didn’t have to work to keep up your standard of living?
Many people would identify something personally significant to fill their time. You could pursue a personal passion, such as becoming an artist, a writer, or going back to school. You could dedicate yourself to a life of service through community service.
Others could radically change their lives as they no longer have to work for financial security. They could buy a tiny house or RV and live in it while exploring the country on their own terms and schedules. Others may choose to live in the mountains in a very secluded location where they can spend their days largely freely as they wish.
Our FIRE is dreaming
My wife Sarah and I plan to retire earlier than the traditional retirement age. What are we going to do with our time?
First, we want to retire around the time our youngest child is completely independent of us. Before we FIRE we want to make sure that all three of our children are independent.
Our plan at this point is something we’ve talked about for many years. We plan to tour the country for several years, alternating between periods when we explore national parks and hiking and periods when we carry out service projects. In between, we visit our children and friends, and we both have some artistic projects that we’d like to pursue while traveling (for me it writes a number of high fantasy novels in a world I’ve worked out over many years). .
How shall we do it?
What do you have to do to get there?
Intense frugality to maximize your savings rate
To achieve FIRE you need to have a very high savings rate. Your savings rate is the percentage of your income that you set aside for the future. The higher your savings rate, the faster you can get to FIRE.
To do that, you have to be very carefully about your expenses. Intense frugality is just part of the equation. Regardless of how you choose to do this, you will have to spend significantly less than you make, and that means you will keep choosing to minimize your non-essential expenses.
Every day they choose to forego short-term pleasures – especially those with financial costs – in order to gain more personal freedom in the long term. However, it is important to note that the big savings come from the large expenses like your home and your car. It also comes from keeping regular bills under control and avoiding debt as much as possible.
This can mean that you are going for a very basic house, where you keep costs as low as possible and invest time and energy in building a house that you are happy with. It means practicing hedonism frugally – you seek joy in the restriction of not spending money and discover all sorts of things that you have not considered before. This means continuously evaluating the long-term and short-term evaluation of money consumption.
Your goal is to keep your savings rate as high as possible every year while enjoying everyday life. This brings us to the other part of the equation.
Intense pursuit of income early in life
The other way to keep your savings rate as high as possible is to keep your income as high as possible. Every career choice is about generating maximum income in the shortest possible time. You have to be aggressive with your career. Focus on what will maximize your income, not the easiest way.
The downside to this is that you may end up in work or in a workplace that doesn’t meet, but you won’t do this for life. Rather, leave this position the second you are ready to FIRE.
The best approach here is to use every free moment of your professional time to maximize your income over the next decade or two, rather than the length of your career. This can mean taking on freelance work and side appearances. This may mean that you are choosing a more “business” work option than a casual and fun option. The goal is to maximize the amount you can save each year.
Our way to FIRE
How does it look for Sarah and me in terms of our daily financial decisions? We live far below our means. When we travel we mostly visit national parks and camps. We buy used models (mostly) and drive them until they are literally worn out. We bought a very modest home on the lower end of our budget just big enough for our family of five and we have resisted the temptation to upgrade. We keep a close eye on our regular bills like auto insurance and our energy bills.
In short, we have deeply internalized the idea that wealth and spending are not the route to happiness. It seems like an unusual lesson for a personal finance side, but the truth is that personal finance is just a tool to help you build the life you want. For us, this life means maximizing personal freedom.
The math for FIRE
Let’s work through an example of how financial independence could work for a recent college graduate.
Let’s say a person graduated with a $ 40,000 student loan at age 22. Their first job makes them $ 50,000 a year. You opt for a savings rate of 50% and live on $ 25,000 per year. What would your FIRE path look like?
First, let’s set your goal. They want enough in their investment account to be able to withdraw 4% of the balance per year when they retire and expect it to last for a very long time, if not forever. Assuming persistently low inflation, this should ensure a long-term sustainable lifestyle. Hence, they need to save 25 times their annual spending, in this case 25,000 times 25 times or 625,000 times.
If that person implemented a 50% savings rate and applied all of this to their student loans and then to savings, they could repay their entire student loans in about 20 months and save $ 8,000 that year. After that, they could save $ 25,000 a year. Assuming they are investing aggressively and having an average annual return of 7%, that person would achieve their goal by the age of 39!
Inflation isn’t really a problem either, provided that person received annual increases at least equal to inflation and kept their savings rate of 50%. Your annual expenses could increase over time, but so too could the amount you invest. So by the age of 39, you would almost certainly have more than enough investments to retire immediately.
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