Financial Independence, Retire Early

Financial Independence, Retire Early is a lifestyle movement (FIRE) with a goal that I would think the vast majority of us can get behind: achieving the financial independence to retire early.

I am no millennial, but I was working toward that goal long before millennials started online communities using blogs, podcasts, and online discussion forums to try to figure out a path to FIRE.

This had to be the goal for many people going back decades (maybe centuries). But I know that even for my parents’ generation the idea of retiring before 65 with any kind of financial independence was unrealistic. For the post-WWII generations, working for 20, 30, 40, maybe 50 years for the same company and getting a pension and Social Security was about as good as it was going to get.

Attaining FIRE requires very intentional efforts to maximize your savings rate by finding ways to increase income and decrease expenses. You need to accumulate assets to the point that they return passive income that provides enough money for living expenses in perpetuity.

If you read about the FIRE movement, you will find the suggestion of using the 4 percent rule as a guide. The four percent rule is a rule of thumb used to determine how much a retiree should withdraw from a retirement account each year. This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing through retirement. This means that you set your goal at getting at least 25 times your estimated annual living expenses. That’s a lot of money.

Of course, many people couldn’t even give you an accurate account of what their annual living expenses are, so there is a lot of calculating to be done.

Many people point to the FIRE movement originating in the 1992 best-seller with a great title, Your Money or Your Life, and the 2010 book Early Retirement Extreme. The books encourage simple living and income from investments to achieve financial independence.

You need to look at the relationship between your savings rate and the time to retirement which allowed individuals to quickly project their retirement date given an assumed level of income and expenses.

That relationship will show you that FIRE is achieved through some very aggressive saving on your part.

Many financial planners and guides will suggest a “standard” 10-15% savings rate. That would work if you start young and stick to it – and you don’t plan to retire until you are at least at Social Security age.

Assuming constant income and expenses – a heck of an assumption – and neglecting investment returns (I wish I could), if you had a savings rate of 10%, it would take you (1-0.1)/0.1 or 9 years of work to save for 1 year of retirement. That means if you want to retire at age 50 and want to plan to live to age 90, you would need to save at that rate for 360 years. I guess if you can become a young YouTube star or hit the lottery in fifth grade, you might have a chance.

Increase that savings rate to 25% and it takes (1-0.25)/0.25 or 3 years of work to save for 1 year of retirement. That means those 40 years you want of FIRE only require 120 years of savings.

Okay, you can follow the older rule of having 25 times your annual expense and then you only need to save for 75 years.

The time to retirement decreases significantly as savings rate is increased. A savings rate of 50%, takes (1-0.5)/0.5 or “only” 1 year of work to save for 1 year of retirement. You would have to start at age 10.

Finally with a savings rate of 75%, it takes (1-0.75)/0.75 or just 0.33 years of work to save for 1 year of retirement. At that rate, it would take less than 10 years of work to accumulate the 25 years of living expenses suggested by the 4% rule.

So, if can can start saving 75% of your income starting at age 40, you are on track to retire at your desired age 50.

If you achieve FIRE, then paid work becomes optional. This is what I call “unretirement.” You work if you want to work, doing things you want to do, for pay or as a volunteer. My Boomer generation is poised to live longer in better health than any earlier generation and also seem to be extending our working lives, often with new careers, entrepreneurial ventures, and volunteer service. The formula for unretirement is not the 4% rule.

If you have made it this far, you are likely to think that this is an unlikely life/work plan. FIRE has its critics who will say that it only works for the already rich who can achieve that high savings rates. You also need to start young. Starting at age 25 gives you a better chance, but takes away most of your income during the years when you are likely to need it for home and family.

And real advocates of FIRE talk about retiring at much lower ages than 50. The 4% rule, which was recommended to me for my investment withdrawals when I went into unretirement in my late 50s, was developed for a traditional retirement time frame of 30 years and retiring in your 60s.

FIRE advocates will say that this can only happen with more than just aggressive savings. Add into the plan cutting back on lifestyle choices, wise investments, retirement plans like pensions, tax shelters and 401K plans, and a plan to continue working in that unretirement mode or part-time in the later years.

My parents generation would have laughed at FIRE. My generation would like to at least achieve a portion of it. My children believe it is a real possibility.

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A lifelong educator on and off the Internet. Random by design and predictably irrational. It's turtles all the way down. Dolce far niente.

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