By Hanniz Lam
I’ve been hearing about the FIRE movement which stands for “Financial Independence Retire Early” but never really paid much attention to it till lately.
When I was in my 30s and fresh in business, I thought I might like to retire at 40 a millionaire. Now that I’m in my 40s, I’m thinking that I might not want to retire just yet but I’d really like a more passive role in my business(es) while earning passively from investments.
The dream of early retirement is nothing new to most of us. It’s no surprise that people would want to quit their jobs in their 30s/40s/early 50s to spend more time travelling the world, seeing their kids grow, indulge in their passions or live extremely frugal lives.
Here are five things you can learn about the FIRE movement:
1. YOUR SPENDING RATE, RATHER THAN INCOME, IS A KEY RETIREMENT MARKER TO NOTE (AND IT’S MORE CONTROLLABLE)
You might have read that you should aim to have saved 1x your income by the time you’re 30, 3x by 40, 6x by 50, 8x by 60 and 10x by the time you retire.
Formulaically, if you accomplish this, you’ll have enough to replace 85% of your pre-retirement income for the following 30 years.
The FIRE movement principles argue that income is the wrong number to be watching—instead, you should aim to save 25x the amount you spend each year. (The amount you’re saving is the X factor. If you’re saving 25% a year or 50% a year, you don’t need to replace that in retirement.)
And once you’ve got that, if you withdraw at a rate of about 4% per year (some say 3.5%, some say 3%) it should last indefinitely.
2. FIRE MATH CAN BE FUN
Check out these numbers: If you’re saving 1% of your income, then it takes you 99 years to replace one year of expenses.
If you can get to the point where you’re saving 25% (And note: Matching dollars always count), for every three years you work, you replace one year of expenses.
And this is where the math gets “magical”— “if you can save 50% of your income, one year of savings gives you essentially one year of freedom right at its most basic level.” Then compound it. If you can do that over 10 to 15 years (maxing out what you can save in tax-advantages), and you’ve got the money working for you in a diversified portfolio of investments, what you build is a “perpetual money making matching that with some reliability can fund your lifestyle for the rest of time, loosely based off the 4 percent rule.”
(One note about 4%: It’s not perfect. But if you vary your withdrawals slightly based on fluctuations in the market, taking a little less when they’re down—particularly if they’re down in the early years of retirement—it tends to hold up.)
3. YOU’RE NEVER TOO YOUNG FOR LIFE SATISFACTION
You don’t want to enjoy life only during your “golden years”. You should be enjoying life while you’re young and fit.
“Financial independence” in FIRE allows us to build that into the conversation. Some people want to get to a point where working is optional. For others, it’s about if you decide to work, it’s out of a sense of purpose and actually adding value to your life.
4. RETIRED DOESN’T MEAN NOT WORKING OR NOT EARNING
You don’t have to retire in a traditional sense. When you’re financially free of debt, you can choose how you want to live and work. Sleep as late as you want, live off your savings/investments and Social Security; live life to the fullest.
5. FIRE IS AN ELEMENT OF CONTROL
There are things in your financial life that, whatever you do, you simply cannot control: the markets, interest rates, and, to a lesser degree (although changing jobs and prioritizing gaining the new skills you need to do so is an option) your income.
FIRE focuses on things you can control. The amount you spend. The amount you save. Proponents make big changes—like moving to a less expensive area or downsizing way before they have to—in order to tighten the reins, but they’re their choices. And doing so provides freedom to spend that other prized commodity, time, as they choose.
Having more control makes us happier.
Source: ChooseFI podcast