However you feel about the FIRE movement (more details in just a moment), it never hurts to review your current resources, habits, and time when it comes to preparing for retirement. If you’re in the category of wanting to retire early, this article will give you the “how-to” breakdown on working towards this goal. If you’re nearing the age when retirement is becoming a possibility, there are some valuable lessons to take away from the FIRE movement as you make your way into working less and living more.
The FIRE (“financially independent, retire early”) movement, offers young stocks investors a methodology for making smart choices to gain more freedom.
Most people think of their grandparents buying an RV and spending their days golfing in Florida when they consider retirement. However, there’s a growing culture of people who would rather not work to live and, instead, work enough to support the kind of life in which they have flexibility and independence in their day-to-day lives.
One writer on the FIRE mentality, Mr. Money Mustache, would say of the movement, “Retirement is earning the privilege of being free to enjoy the balanced lifestyle of our dreams, without ‘working for a living’ getting in the way too much. You don’t have to quit working altogether, you just have to feel secure enough to be choosy about your work, and your schedule.”
Young investors in stocks looking to retire early know they must spend less and save more.
Whatever you spend today is that much less to have for your living expenses later in life. For some, it helps to think of saving money as spending money in the future.
This means looking at what you actually spend and evaluating the worth of your purchases. Very few people look at their spending habits or stick to a budget with an intentional savings process. It may sound a little dull or even like a killjoy to think about whether or not buying a new pair of $150 shoes is worth the week’s worth of groceries one can buy during retirement, but, the math might be convincing.
(For easy ways to save and invest for an early retirement, read 13 of the Best Apps to Make Saving and Investing Money Easy.)
For investors with portfolios comprised of a stocks-to-bonds mix ranging from 50-50 to 60-40, the 4% rule will help calculate the amount needed for early retirement.
Financial advisor William Bengen studied stock and bond returns over a 50 year period in the 90’s. He determined using 4% of a nest egg annually over a 30 year period would help sustain the retiree comfortably regardless of how the market fluctuates.
To use the 4% rule, add up your annual living expenses during retirement and then multiply the total by 25. Whatever the answer, this sum is how much you will need to save to safely withdraw your required amount to live year by year. If you decided you need $40,000 annually to survive comfortably, the total you need to save is $1 million. There’s room within the rule to adjust for inflation; however, the rule does not cover medical emergencies or low bond yields. Nonetheless, the figure is a ballpark for the net worth one needs to reach prior to giving one’s two week notice.
This rule was developed with a more traditional retirement age in mind; therefore, the rule needs adjusting for those who wish to retire young. Moving to a 3% annual withdraw may work for some early retirees to stretch out the time frame to 50 years. Some answer this conundrum with part time or seasonal work to supplement certain periods of retirement.
Young investors seeking early retirement may consider investing in low-fee index funds.
Index funds are designed to monitor a specific index without requiring a heavy amount of investor oversight. They also cost less than mutual funds which, conversely, do require more investor management.
The returns are rather attractive to young investors, too. There are greater returns expected with index funds than mutual funds. According to a 2017 study performed by S&P Global, over 88% of large-cap mutual fund managers were unable to top the S&P 500 index over a 5 year trailing period.
Savvy young stocks investors looking to retire early know they need to lower their living expenses to reach a comfortable savings total or nest egg.
One of the largest expenses most Americans pay for their day-to-day lives is housing. Consider downsizing or renting a portion of your property to someone else to reduce this expense. Look out for transportation costs as well. A used car might take you further into your retirement than buying a brand new vehicle with all the bells and whistles.
Considering placing money into tax-advantaged accounts rather than into the numerous other luxuries we afford ourselves on a regular basis will also place those seeking early retirement at a tremendous advantage. Examples of these types of accounts include IRAs (individual retirement accounts), 401(k), 529, and HSAs (health savings accounts).
The lessons seniors may learn from the FIRE movement may still place them at a higher advantage over ordinary stocks investors for the long haul.
Among the lessons learned by those who are of a more traditional retiring age is this: we manage what we monitor. As mentioned earlier, many people avoid tracking their expenses. When one spends the time to really look over spending with some objective distance, one may identity unhelpful habits towards the goal of retiring early. If one is paying 50% of his or her monthly income on rent, this is not an equation for early retirement.
Another helpful lesson is to make saving the default reaction to acquiring income rather than prioritizing expenses. Normally, people pay bills and leisure fees on things they enjoy and then take whatever is left over to put into savings. Instead, those who subscribe to the FIRE path would say one should save first and then live on what’s left.
Lastly, FIRE advocates shop when they actually need something, not to improve a bad mood. They are deliberate about their purchases, buying what they need at a fair, decent price rather than binging on shopping for short-term pleasures when it suits their schedule. Borrowing books from the library rather than buying them is just one example of swapping out shopping for wants to borrowing luxuries.
Early retirement is an obtainable goal with thoughtful preparation and determination.