Retire at 30 or 40?!? Did that get your attention? It certainly got my attention when I first learned that there are people working 10-20 years and retiring “early” – according to social norms. You may recall the classic Keanu Reeves movie called the Matrix? In the movie, Keanu Reeves plays a character (Neo) that is stuck in the Matrix and is not aware of the real world until it is shown to him. I like to think of the professional world like the Matrix and we are all stuck in it. Selling our life energy…our time. Time really is the only commodity that we have as human beings and we sell our very limited resource in exchange for money. Every single day that passes is one fewer day in your life energy bank. But there is a different path if you choose to take it. I have found an entire community of people that refuse to live by professional career standards and they are actively leaving the Matrix in the prime of their “career”.
What is FIRE?
Financial Independence Retire Early – FIRE – is a movement (cult?) of people that seek financial independence from an employer and design a very intentional life that maximizes time with family, friends, or passions. Some retire at 30 while others retire at 40 or 50. It really depends on when they learned about FIRE and started making more intentional life choices. Imagine waking up at any time you wish and spending your life energy on passion projects, hobbies, or creating a small business? Imagine having the ability to spend every waking moment with your spouse, children, or aging parent/grandparent? Imagine climbing that mountain on your bucket list on a random Tuesday? Creating art or music full-time? The FIRE community has a roadmap that most individuals can adopt to become financially free and retire early (if they wish).
FIRE Roadmap
First and foremost – FIRE is a life commitment. It is by no means easy to design your life in a manner that goes against the norms of society. It requires choices (which may be difficult for some people) and very intentional living to achieve early retirement.
Common Elements of FIRE:
- Extreme frugality – Some in the FIRE community forgo owning a car or home. This really depends on your salary level. Most do away with restaurants, bars, new clothes, iPhone/Apple products, and Amazon spending. Having a hyper-focus on spending and cost savings is one core element of creating an early retirement.
- Avoid debt – Aside from a mortgage, many in the FIRE community strive to have zero debt as soon as possible. No car loans, no student loans, and tackling mortgage debt with velocity banking and other strategies is a common feature. Part of avoiding debt is living within (and below) your means so buying a home that is well under what you can actually afford is often a goal.
- High savings rate – Financial advisors typically recommend a savings rate of 10-15% of your salary. The FIRE community achieves a 50-90% savings rate in their earning years (10-15 years). Extreme frugality and avoidance of debt is critical to achieving a high savings rate.
- Simplified investment strategy – The FIRE community typically try to simplify investing to 1-3 low-cost index funds. That’s it. No individual stocks, no high-risk investments, and absolutely no crypto. Just a simple index fund for two.
- Lots of focus and determination – This can’t be understated. It is a lifetime commitment for an individual or couple to make since it will impact all areas of their life.
A common question for people that learn about FIRE is “won’t I run out of money”? Our parents, financial advisors, and so-called financial experts (looking at you Suze Orman!) have told us that we need to work until we are 67 and save as much money as possible for our retirement years. In the United States, the life expectancy is 77.8 years old (it’s 81 years in Canada and the UK). This means we would only have 10 years to enjoy our retirement and we would most likely be in poor health. Why not just change our expectations and retire at a much younger age and enjoy much more than 10 years of retirement?
Types of Fire
FatFIRE– Aims to maintain spending levels on par with your highest earning years but not having to depend on an employer. This approach fully replaces the current salary and covers the basic expenses plus travel, luxury items, new cars, etc.
LeanFIRE – This approach trims down annual expenses to the bare minimum and assumes a lifestyle of sustained frugality and minimal spending.
BaristaFIRE– This is a hybrid approach to FIRE (although not really retiring) where the individual leaves a career to work a job that is personally rewarding but not necessarily financially rewarding. This approach allows the individual to “retire” from one career and replace it with a part-time job, passionate work, or start a small business.
How Much Do I Need for Retirement?
If you talk to a financial advisor, they typically determine your retirement needs based on your CURRENT income and spending. This is a flawed approach since it assumes you will have all of life’s CURRENT expenses (mortgages, kids, student loans, etc) in retirement and does not account for a different future. The FIRE Community has simplified the approach by determining a “Safe Withdrawal Rate” and a “Financial Freedom” number.
The Safe Withdrawal Rate is the maximum rate at which you can spend your retirement savings and not run out of funds. To determine the safe withdrawal rate, many in the FIRE community look to the Trinity Study for guidance.
The Trinity Study is the informal name of research conducted by three professors of finance at Trinity University in 1998. The study examined the investment portfolio mix and the desired withdrawal strategy that minimized the possibility of the retirement savings running out before the retiree passes away. The study did not aim to preserve capital in the retirement accounts but rather the focus on drawing down the funds over retirement. Put another way, they attempted to determine the “ideal” percentage rate of annual withdrawal from retirement accounts which led to the adoption of the 4% Rule.
4% Rule
The 4% Rule was originally developed by financial planner William Bengen and was also examined in the Trinity Study. Bergen attempted to determine the highest withdrawal rate possible and the Trinity attempted to determine a portfolio success rate across several simulations. It was determined that a 50/50 S&P 500 and Bond portfolio would remain intact over 30 years using a 4% annual withdrawal rate. Increasing the withdrawal rate to 5% resulted in the portfolio remaining intact only 68% of the time. (See full chart HERE).
Example: A 4% withdrawal of a $1 Million (50% stocks/50% bonds) portfolio would yield $40,000 annually and continue to produce $40,000 annually for at least 30 years according to the Trinity study.
There are many caveats to the 4% rule. The rule does not consider the financial advisor fees, mutual/index/ETF fund fees, it has not been replicated in other countries (outside of the US), and assumes the retiree will live 30 years. The FIRE community has made this research and the 4% rule the basis for early retirement. The Trinity Study can be used to determine the size of a Financial Freedom number.
Financial Freedom Number (aka 25x Rule)
Example: $60,000 in annual expenses needed in retirement x 25 = $1.6M. In this example, you would need at least $1.6M invested to safely withdraw $60,000 annually.
Pete Adeney
Pete Adeney, a software engineer from Colorado, and his wife had a combined average annual salary of $134,000 over the course of their careers. Pete and his wife led a very intentional life of extreme frugality, zero debt, and high savings/investment rate. At the age of 30 years old, they held over $600,000 in investments and lived in a mortgage-free home valued at over $200,000. By applying the 4% rule (ie Trinity Study), they retired at the age of 30 with a $24,000 annual income from their nest egg. Pete has not worked a day since 2005. He has raised his son, traveled the world, experienced life, and worked on his passion projects for over 15 years.
Pete’s extreme frugality led to him selling his car and used a bike as his only mode of transportation. Here is Pete taking his son for a ride on the snowy streets in Colorado.
Photo Credit: http://www.mrmoneymustache.com/2013/05/04/anti-automobile-april-conclusion/##MMM##
Helpful Resources
What is my approach to FIRE?
-
I am still in the Matrix (although I have retired from Pharmacy) and accumulating wealth…but I do have a line of sight to my Financial Independence. I most likely won’t fully retire from a career but I will take long sabbaticals and spend less time working.
-
My family of four humans, two canines, and one feline live a relatively frugal life when compared to my peers. We rarely eat out in restaurants, we never pay for services (plumbing, electricians, lawn care, etc), we tackle all home improvement and auto repairs on our own. We don’t keep up with the Joneses.
-
I strive for a 50% savings rate and use the savings to invest in my brokerage account and pay down debt.
-
I maximize all retirement investment vehicles annually. This includes my 401k, HSA, Roth IRA, and SEP IRA.
-
I have focused on paying off debt so I currently don’t have student loans, personal loans, car loans, or any other kind of non-mortgage debt.
-
I use credit cards to pay for everything and collect reward points along the way. In 2020, I funded an entire family vacation using credit card rewards points. Free Money! That said, I pay off the credit card each month and never incur any finance charges.
-
I am planning to pay off my home mortgage within the next 3 years to improve our near-term cash flow. I will, however, continue to hold mortgages for my investment properties. I’ll explain my reason in a future blog post.
