How to Retire Early - F.I.R.E Movement
*This article was originally published on October 2019 and has been kept in its original form
You may have heard some interesting things coming from the Millennial generation, but one that stands out from a financial perspective is the FIRE movement, an acronym which stands for Financial Independence Retire Early. If you know anything about the retirement landscape in South Africa and across the world, it’s likely the fact that people are not saving enough for retirement and essentially can’t afford to retire and maintain their level of lifestyle that they are used to. So to hear that a group of selfie-taking millennials are advocating retiring early, might make you think that we are doomed, but quite the contrary.
The main ideas behind the FIRE movement originate in the 1992 best-selling book Your Money or Your Life written by Vicki Robin and Joe Dominguez. The linchpin for being financially independent and retiring early lies in the following three steps: 1. Cut spending drastically so that you can save about half your income, sometimes even more 2. Investing in low fee retirement accounts to maximise tax deductibility (and save even more) 3. Reducing lifestyle costs – avoiding “lifestyle creep” Those seeking to attain FIRE intentionally maximise their savings rate by finding ways to increase income or decrease expenses. The objective is to accumulate assets until the resulting passive income provides enough money for living expenses in perpetuity. To put this idea in perspective let’s look at some numbers (without taking into account growth or inflation) just the raw savings:
At a savings rate of 10%, it takes = 9 years of work to save for 1 year of living expenses.
At a savings rate of 25%, it takes = 3 years of work to save for 1 year of living expenses.
At a savings rate of 50%, it takes = 1 year of work to save for 1 year of living expenses.
At a savings rate of 75%, it takes = 1/3 year of work to save for 1 year of living expenses.
You will see that in the extreme cases of savings you could save up to 30 years worth of income in 10 years and this is what followers of FIRE are doing. Reducing the amount of money that you live on is as crucial as saving the rest. When you can employ that much capital into the market to grow, the effect of compound interest works in your favour to a great extent “buying” you even more years.
There are however criticisms towards the FIRE movement:
• Some critics allege that the FIRE movement “is only for the rich” – pointing to the difficulties of achieving the high savings rates needed for FIRE on a low income.
• Another common criticism is the FIRE movement’s early retirees have not adequately saved for retirement. For example, if you retire at 30, the retirement phase of FIRE could potentially last 70 years, making 10 years of high savings insufficient.
Now you might think that retiring in your mid-thirties or forties is unnecessary, I mean, what would you do? I think this seems to be the point – that you can do what you want – pursue a passion, start a business, change the world, travel.
Having the freedom not to have to work on other’s terms but your own. I certainly understand that saving up to half of your income is not for everyone, the thing however that we can learn from the FIRE movement is saving more is certainly possible, and challenging our ideas about how we can save is crucial.
If you would like someone to chat to regarding increasing your level of savings, get in touch. WE LOVE TO HELP
