What does it take to reach FIRE (Financial Independence Retire Early)?
In this post, FIRE blogger Caleb Jones from Monkey See Monkey Dough outlines the required savings rates to hit that early retirement.
How much do you need? And how much can you spend?
And as Caleb outlines, FIRE can be more about that freedom, the freedom to continue to work, where you want and when you want.
I recently penned What Would It Take To FIRE and REALLY Retire Early.
It was a more that popular post that garnered almost 200 comments, yes many of those comments are from yours truly, I do take quite a bit of time in the attempt to respond to as many wonderful comments as possible.
My take on the FIRE movement is expressed in that article. I'd suggest that many are playing with FIRE and that it usually costs much, much more to retire than many would think, and that the risks are obviously greater the earlier you retire.
Let's hear from a real FIRE guy.
I've been in touch with many in the FIRE community, including Caleb Jones from Monkey See Monkey Dough. Caleb is certainly more of an optimist on this retire early, very early thing. But he is very measured in his approach and he will outline 'what it takes' for his readers.
Caleb read my FIRE post 'with interest' lets say, but he will offer up a few thoughts and an outline of what is FIRE, and how do we successfully execute a FIRE strategy.
The following is from Caleb, I will add my additional two cents in the article summary.
Note: the following is published with the permission of Caleb Jones.
What is the FIRE Movement?
How many hours a week do you spend working and commuting to a job you’d like to quit? How many do you spend with friends, family, doing work you actually like, or on hobbies that make you happy? Is that how you want it to stay until you're 65?
There is a different option.
Maybe you’ve never heard of the financial independence retire early, FIRE, movement. Or, maybe you’ve heard a lot of opinions on it, and you aren’t sure what’s true and what’s hype. I’m writing here to show you what FIRE is, and how the money and time actually makes it work
An Introduction to the FIRE Movement
The FIRE movement is a growing grassroots movement characterized by extreme savings rates, increasing income with weekend jobs or other side hustles, and decreasing expenses with the goal of achieving financial independence and retiring early. Most use the acronym FIRE for short.
You’re considered financially independent, FI, when you have enough passive income from investments to cover your living expenses without working. For example, say you live on $40,000 a year. Assuming a 4% withdrawal rate, you need (40,000 / 0.04) $1,000,000 invested to be financially independent.
The “retire early”, RE, portion is the main draw of the movement. It does not necessarily mean you stop working. It means you can choose what you do, when you do it, and where you do it. You aren’t trapped by a J-O-B for money.
How quickly can you retire to have command of your life? The simple answer is your savings rate, as a percentage of your take-home pay. For example, if you save 70% of your take-home pay, it will take 8.5 years to retire. Here is the number of years you’ll need to work for an array of savings rates starting from zero net worth.
Savings Rate (%)
Working Years Until Retirement
How the Money Works for the FIRE Movement
Financial independence planning is divided into two timeframes. The divide happens along the traditional penalty-free retirement withdraw age of 59 ½. Proper planning for both is required.
We’ll stick with the $40,000 a year from above. You’ll need $1,000,000 invested. For demonstration purposes, we’ll split their investments in half between pre-59 ½ and post-59 ½.
Pre-59 ½ Financial Independence
The most natural question to ask about retiring early is, “How do you eat before retirement age?” Great question!
Use taxable investment accounts like Vanguard, Betterment (robo-advisor), and checking/savings accounts. If you use Betterment, it will automatically manage your investments. Simply set up automatic deposits. Vanguard lets you manage your own money.
Mr. Money Mustache, the blog that popularized the FIRE movement, advises a simple low-fee index fund approach to investments before and after the traditional retirement age. He specifies “buying pieces of real, profitable companies, which pay dividends and appreciate over time.”
Generally, the FIRE movement assumes a 7% appreciation rate, a 3% inflation rate, a 1.8% dividend yield, and a 4% after-inflation stock market return on index funds. These numbers are based on historical rates. For those without finance degrees, that means that a $500,000 initial balance in taxable accounts with a $40,000 annual spending rate will last ~23 years.
Obviously, that could leave a bit of a gap if you retire at 30. There are two options: use a loophole to avoid the 10% early withdrawal penalty (partially works), or do the math before you retire early (always works). Using the same numbers as above, having $60K more in your initial balance covers the gap.
Does every FIRE movement follower invest like Mr. Money Mustache? No. He advises index funds because they are simple, not because they are always the best option.
Post-59 ½ Financial Independence
Meanwhile, your run-of-the-mill retirement accounts have grown. The initial $500K in retirement is now worth ~$1.5 million. That is more than enough to live on for traditional retirement. At this point, you may also think about increasing to a higher yearly withdrawal rate.
That leads to an excellent retirement question. Will you live on less per year or more? You’ve been living on $40K a year, but you’ve saved a huge chunk of that income. Do you need $40K, or will $20K do for you?
Less means putting money into pre-tax retirement accounts like a 401(K), 403(B), RRSP (Canada), or IRA. This allows you to dodge the higher taxes of a $40,000 a year income for a much lower $20,000 a year.
Or, maybe, you planned on living it up in traditional retirement by increasing your yearly living rate. In that case, use a Roth-IRA, TSFA (Canada), or Roth-401(K). Pay taxes on your $40K lifestyle to save on your new, higher-income life after retirement.
It is something you need to know before you start seriously investing. Using the right retirement account can significantly reduce your tax burden.
How you choose to invest within the retirement account is totally up to you--unless it’s restricted by the account. Index funds, exchange-traded funds, mutual funds, dividend stocks, single stocks, and real estate are a few options. Keep it simple, and stick with it.
What Do You Do Once You’ve Retired Early?
Imagine for a moment you retire by 30. You have 60 or 70 years of no obligations. What do you do now?
First, be healthy. Sleep 8 hours, workout 1-2 hours, and eat like you want to live to 100.
Second, quit any job you wouldn’t do for free. You no longer need the money. Choose where you want to work, or if you want to work (highly recommended for life satisfaction reasons).
Third, prioritize time with your family and friends. Study after study finds a link between healthy social lives and healthy lives. It can improve your mood, perception of the difficulty of life events, and physical health. Don’t be a shut-in.
Finally, have fun. You have a whole lot of time to enjoy. So, go and enjoy it. You can bike, walk, travel, start a business (my plan), volunteer, learn a new skill, play board games, or anything that brings you joy.
Remember, the FIRE movement isn’t about money. It’s all about time and how you choose to spend it. You can be trapped by a J-O-B until your 65, or you can dare to do something different to have complete command over your schedule.
FIRE Wrap From Dale
I am certainly aligned with Caleb in that FIRE is often more about the freedom to leave full-time work and pursue other interests and work part time. Hey I get that, I live that. It can be as much about a life plan as much as a money plan, but certainly we have to have a more than meaningful portfolio (and other sources of income) that can truly sustain a retirement that lasts for 40, 50, 60 years or more.
We should be careful when 'playing' with FIRE. But who's to argue with the basic premise of sensible borrowing, budgeting, saving and investing and financial planning?
Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. On the retirement front, I'd always suggest you contact a trusted financial advisor and retirement specialist. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.
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