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Early retirement is possible if you start early and make saving a habit.
Early retirement is an exciting goal. However, this goal requires big tradeoffs. For many, it’s worth the sacrifices. While for others, adopting one or two of the FIRE tactics is enough to be quite beneficial.
The FIRE Movement
Financial Independence, Retire Early (FIRE) is a personal finance strategy that young workers can adopt to plan for an early retirement before their sixties.
In fact, many followers of FIRE strategies aim to retire in their forties or before.
Foundationally, the FIRE model relies on having a detailed plan and sticking to it.
The origins of the FIRE movement are often attributed to a 1992 book. Called Your Money or Your Life, transforming your relationship with money and achieving financial independence, written by Vicki Robin and Joe Dominguez.
Dominguez was a successful financial analyst on Wall Street before retiring at the age of 31. The authors say that FIRE is not just about retiring early. Instead, it teaches you how to consume less while living better.
Since only 43% of Americans aged 18-34 have any type of retirement account, the FIRE system could, at the very least, introduce them to key personal finance concepts, if not an early retirement.
So, what’s the secret for attaining early retirement? Actually, there is no hidden secret. You use the same principles that many people do to plan for retirement. However, you do more of each of these to the extreme:
- Live frugally
- Save money
- Invest wisely
- Pay off debt
- Create income
To achieve early retirement, the FIRE ideology advises that you calculate how much money per year you’ll need, based on your expenditures and plans. Then, multiply that number by 25.
For example, if you determine that you can live on $40,000 per year, your goal would be to have $1 million ($40,000 x 25) saved in a combination of savings and passive income.
Americans’ current average life expectancy is 76.4 years, but many people live far beyond that age. If you believe you could live until 85, and you plan to retire at 50, that requires enough money for 35 years, not 25.
Then, once in retirement, you must limit your spending to 4% of it per year.
For FIRE followers, gaining financial freedom outweighs consumerism. In other words, they are willing to give up many goods and conveniences in order to attain early retirement and support themselves later without working, or working less.
“For today’s evolving workforce, work is a means to the lifestyle they aspire [to]. And they are starting to plan early. If we look at the broadening definition of employee wellness, it encompasses physical, mental, emotional, and financial wellness,” says Ms. Sonica Aron, founder and managing partner, Marching Sheep.
She adds, “They are making some very different choices like not to buy a vehicle but to Uber/Ola it; or not to buy a house but to stay on rent; to delay getting married or starting a family and so on. This very diverse and well-read set of people is looking for individualized plans according to their own life stage, risk appetite, future goals, and time frames.”
Incorporate FIRE Practices
Granted, you may think some of the actions of FIRE devotees are too extreme for your lifestyle.
Nevertheless, adopting one or two of the general guidelines could help your own retirement plans materialize. In fact, you could make a somewhat early retirement a reality.
Live Frugally to Save Money
Most FIRE adherents put aside between 25% and 50%, and up to 70%, of their income every month.
Usually, in order to save this amount of money, you need a good-paying job, spend money only on essentials, and find ways to save money on everyday needs.
Some FIRE couples consist of one partner with a good job, and one who contributes some money.
The initial savings are earmarked for an accessible emergency savings account. The emergency fund should have three to six months’ worth of salary set aside.
Aside from the early retirement scheme, having an emergency fund is recommended by professionals for everyone. By having this money set aside, your plans and budget won’t be derailed by home or car repairs, loss of job, or another unforeseen event.
Additionally, it will reduce high-interest credit card use.
The other account you’ll need to fund over time is a bridge account. To explain, the money you save in retirement accounts such as 401(k)s, IRAs, etc. is not available to you until you are 59 ½ in the US.
If you plan to retire at age 50, there are nine and a half years you’ll need to support yourself through another source.
The amount you’ll need is the annual amount of money you’ve estimated for retirement, times the number of years between early retirement and the date you can access your retirement accounts.
As with all of these suggestions, be sure to consult a professional financial advisor to learn the best type of account to use for this. There may be distinct growth opportunities and tax advantages of one type of account over another.
Boost Your Income
For the purpose of intensely saving money, you’ll have to work hard to bring in as much money as possible.
To be sure, those employing the FIRE formula commit to keep their expenses extremely low and find ways to raise their income.
Extra income can come in many forms. For example, staying on track in a potentially high-income job may be your best choice.
On the other hand, creating a side business, or taking on a part-time job on the weekends might be the best for you.
There are many sources of ideas for how to make money on the side.
The next place your saved money goes is into investments. The aim is to make sure your savings grow as you continue to work.
For this reason, FIRE adherents invest larger portions of their income than the average person.
Many FIRE investors choose cheap tracker funds that mimic the performance of the stock market.
Purchasing buy-to-let property is another popular investment choice.
Of course, participating in workplace retirement funds, especially when matched at some percentage by your employer, is a great choice.
Whether the money will fund early retirement or not, consistently contributing to your retirement fund is the basis of financial stability in your later years.
Ultimately, the goal is to increase your savings over time while generating multiple lines of income.
Consulting a professional financial advisor about the best investments for your goals can be critical to long term investing success. Your advisor will also have ideas for reducing taxes that can eat away at your nest egg.
Pay Off Debt
Of course, clearing debts now results in needing less money later. For this reason, early retirement planners avoid racking up debt.
If they do have debt, they spend a larger proportion of their income to pay it off as early as possible.
Credit card debt is very expensive in the long run. Americans currently spend almost a third of their budgets to pay back debt. Much of it is on credit cards.
Some FIRE promoters advise that using the perks of some credit cards can help you save more money. These include cash back, points, and discounts.
This is true if you have an emergency fund in place to cover unexpected costs, rather than charging them to a credit card.
However, and most importantly, there is no room in a FIRE budget for credit card interest, which was averaging over 20% in late 2022.
Factor in Current Events
FIRE adherents’ early retirement plans benefited from the rising stock market until 2022.
Additionally, the FIRE movement drew in new followers during the pandemic as people reassessed their lives during lockdown. They also found they were saving more of their income.
However, since then, the stock market has fallen and many gains were lost.
While it’s true that many people were able to save more money staying home during the pandemic, the following inflation and cost of living crisis have eaten up much of those savings.
To be sure, many people are spending more on household bills than they budgeted for, which leaves them with less disposable income to save and invest.
Finally, there is the American healthcare dilemma. Despite the cost of having to cover the Medicare gap, the average American still retires at age 61, according to the latest Gallup poll data, four years before they become eligible for public health insurance.
Planning for early retirement requires budgeting to buy health insurance on your own. And, the cost goes up with age.
What Are Some FIRE Variations?
Within the FIRE movement are several variations.
Despite seeing the benefits of FIRE, some people want a more easygoing attempt to save while giving up less. Fat FIRE is for them.
On the other hand, Lean FIRE requires devotion to strict, minimalist living.
Finally, Barista FIRE is for those who want to quit the nine-to-five rat race. In this version, you get healthcare benefits through part-time work.
The goal is to pay off all your debts and start generating passive income before retirement. So, you might have to practice frugal living today to enjoy a comfortable life tomorrow.
Aisa International, s.r.o. is a wealth management firm with an award-winning team who provides investment advice, financial planning, and asset management for U.S., U.K., and E.U. expatriate citizens residing abroad. Holding all current regulatory licenses, including the FCA license in the UK and the Investment Licence in the European Union, Aisa International is uniquely qualified to provide personal financial advice for U.K. pensioners living outside of the U.K. Headquartered in Prague, Czech Republic, Aisa International serves its global clients where they reside through its OpesFidelio network of highly-qualified advisors. For more information, please visit www.asiainternational.cz.
The views expressed in this article are not to be construed as personal advice. Therefore, you should contact a qualified, and ideally, regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. Consequently, if you do not, then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Importantly, where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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