The Path to FIRE <PersonalFinance>
Don’t panic, I am not referring to an actual fire, but rather to the one of the more popular up and coming financial/social trends which has emerged over the past few years – F.I.R.E. – Financial Independence Retire Early. If you have heard of FIRE before and are aware of it’s basic concepts, awesome, if not, this article could really be an eye opener for you! At the heart of it, FIRE is centered around building a significant stash of money by saving a LOT of your income and spending only a LITTLE. The idea is to save huge amounts of money now and enjoy the benefits in your middle age years, moving away from the traditional model of retiring at 65 – 67.
I am by no means an expert at FIRE, in fact I only started reading about it a year ago. But what I can tell you is that it makes so much sense and seems to click with a lot of things I have been thinking in the back of my mind. For example, going back a few decades, I imagine the mindset was work hard, support your family, be loyal to a company, and retire at 65 with a nice pension. And I respect that, and I also almost wish things were still like that – Find a good, hard-working job, and rest assured that your employer will take care of you when you retire. But in reality that’s no longer the case, not only because pensions are fast disappearing, but more closely tied to the fact that technology has advanced so far, and people are demanding more. When you have the world at your fingertips via a smartphone, and can probably do most of your job from any location (for corporate roles), the old model no longer seems to fit the bill. And in turn you might start to question where the fresh air is, does it really make sense to stick it out at a job you may or may not like, or is there an alternative?
I should circle back to the definition of FIRE and touch upon the purpose. It’s not to become egregiously wealthy. It’s not to quit your job and be a lazy couch potato. It IS about being truly free and independent, finding work that you love doing, and giving back to the world. It is what you could imagine yourself doing every day for the rest of your life, if you didn’t need to worry about money. It is also about simplifying your life – Becoming less of a consumer, and making the most of what you have.
So far as the actual financial mechanisms, they are centered around your retirement accounts. The basic advice is to contribute as much as possible to your employer sponsored 401(k), an IRA, and then if you have money leftover to other tax-advantaged brokerage accounts. Do that consistently for several years (the earlier in your career the better, but better late than never), until you hit your FIRE number. Your FIRE number is basically the number at which you can live off the passive income from your retirement accounts, based upon a 4% annual withdrawal rate, for the rest of your life. It’s based upon the Trinity Study which basically proved that the market on average will return 7%, minus 3% for inflation, leaving you with 4% to safely rely upon each year (granted the market will always fluctuate however keeping in mind this is a long-term average). In order to calculate your FIRE number, the short-form is to simply multiply your annual spending by 25. So as an example, if your annual spending is $30,000, the short calculation is $30,000 x 25 = $750,000. In this case you are good to retire once you’ve accumulated $750,000. You can also live on less (leanFIRE) or live on more (fatFIRE) but the 4% rule is generally considered a reliable standard.
Oh, I should mention and will spare you the full details because it will likely call for another full article, however Yes you can withdraw early from your retirement accounts without being penalized. It is very much possible so don’t worry about that being an obstacle.
Obviously, if you are early in your career then you have the benefit of time and compounding interest on your side. Go for it. Doesn’t matter if you’re making $10/hr or $50,000 per year. Work your tail off and aim to save at least 50% of every paycheck (if not more). Stay at home with your parents as long as you can, throw as much of your paycheck as possible into savings. (I should have mentioned, the 2017 contribution limit for 401(k) is $18,000 and for an IRA is $5,500). While these may seem like impossibly high numbers, there are lots of ways to cut out expenses, and the more you focus on FIRE the more you will that you really don’t need to spend much of anything outside the essentials (shelter, food, clothing, healthcare).
For those later in their careers or even close to retirement, it’s all good, make the changes now and you will still benefit. I know personally it pretty much feels too late to FIRE (cough cough, anyone with a mortgage can probably relate), however do make whatever changes you can to even incrementally increase your savings and decrease your expenses. Make lunch at home. Make your own coffee. Cut the cable. Down-size your home! Changes can range from mundane to extreme, however if you put the effort you can significantly increase your savings and decrease your spending, and after time you won’t even feel like you’re missing anything. You may even feel more optimistic in general, as your savings starts to grow and all that ‘stuff’ you used to purchase is no longer cluttering your view.
The time to FIRE is now!
Game Together, Fame Together <Gaming>
A quick update on Halo 5, I actually went from level 145 to 147 over the past month. Oh dear. Getting that game time in while I can. :[] A few of us established a Spartan Company (an online multiplayer group) which is pictured below, we are all about having fun and improving our skills at the same time, there is some really great teamwork in our matches.
My dogs (and my wife) think I am a little crazy when I am exclaiming into my headset, however I assure you the people on the other end are real! It is pretty amazing how far games have come since the Nintendo and Mario Bros days, to the current state where our consoles are directly connected to the net and multiplayer dominates so much game time. Nothing will ever beat the classics though (Double Dragon, pictured at the top of this article). That gives me another article idea which will have to wait until another time… until then!
One Comment
Great advice! Good luck achieving your goal