What does financial independence mean to you?
For many, it's about reclaiming the time that’s so often been on loan to someone else. And if you've heard about FIRE ( Financial Independence, Retire Early ), you're tapping into a movement that redefines the role of work in our lives. We’re talking about discovering a richer, purpose-filled existence beyond the 9-to-5 grind.
The concept is hotter than Birdsville in December, but how do you even begin? How much do you need to stash away to make this dream a reality? And what does the Aussie FIRE look like?
In this episode, we dive deep into the world of FIRE, stripping away the jargon and answering these questions for you. We also discuss the concept of savings rate, the types of FIRE, and exactly how to crunch your FIRE number. So, if you're keen on retiring before your super account opens, this is one conversation you won't want to miss.
What is FIRE (Financial Independence, Retire Early)?
As we mentioned above, FIRE stands for “ Financial Independence, Retire Early ”. But what does it actually mean?
In a nutshell, FIRE is your ticket out of the rat race way earlier than you might think. It’s about building enough wealth (mainly through investing and/or saving) so that work becomes optional.
Sound like a far-fetched dream? Well, hold onto your fire extinguisher, because FIRE is a reality for some. And luckily for you, it’s easy to learn how to make financial independence inevitable in your future as well.
The basic principles of FIRE
At its core, FIRE revolves around these three basic elements:
Saving a large chunk of your income
Every dollar saved today is another step towards FIRE tomorrow. But remember, FIRE doesn’t have to feel like pinching pennies. In our previous episode, we talked about planning your budget in a way that doesn’t make life miserable right now.
Invest in long-term assets
It’s not just about stashing away cash but growing that savings pot. The more you pour in now, especially in shares or exchange traded funds (ETFs) , the more you have to sustain you later. Over time, the passive income becomes larger and steadier as the investments grow, making that 9-5 job more of a 'maybe'. While many in the Australian FIRE community favour shares and ETFs , others utilise real estate, bonds, and other investing avenues.
Starting while young
Start early and let compound interest do its thing. The longer your money is invested, the harder it works for you.
Reality check: is FIRE for everyone?
Let’s not sugarcoat it. Treading the FIRE path demands grit, planning, and long-term commitment. Moreover, it comes with its fair share of challenges. And, yes, a starting point of some privilege is a huge advantage.
However, the FIRE journey isn’t only for those with heftier paycheques and a knack for trimming expenses. Here, starting young is another advantage—because the magic of compound interest has a lot more time to grow your wealth.
How much you do need to save/invest to achieve FIRE?
The path to Financial Independence, Retire Early (FIRE) requires planning ahead while thinking of your future needs and lifestyle. And it starts with understanding the 25x Rule to arrive at the FIRE number.
Withdrawal percentage based on Trinity Study
What if we told you there's a percentage you can withdraw from your retirement fund every year without ever running out of money? Well, the Trinity Study from 1998 set out to determine just that—a sustainable withdrawal rate.
For those unfamiliar, the study wanted to pinpoint how much you could comfortably live off after leaving your 9-to-5. After some rigorous number-crunching, they settled on a sweet spot: 4% for a 30-year retirement .
But here's the catch: this is based on 50% shares and 50% bonds. Some of the FIRE heavyweights you may have stumbled upon online opt for 100% shares.
While an update in 2011 still backs the 4-5% withdrawal rate, it's pivotal to remember the old investment adage: past performance isn't always an indicator of future results.
Calculate your retirement fund
"So, how do I know if I'm on track?", you might be wondering. Enter the 25x rule, explained by Tash. At its core, it's straightforward: you save 25 times your annual expenses. Based on the 4% withdrawal rate, this rule gives you a ballpark of your retirement number.
Here’s a snapshot:
- Determine your annual expenses : How much do you spend yearly?
- Do the maths : Multiply your yearly expenses by 25.
- Your ideal retirement fund: This number shows you how much you need saved up to consider early retirement.
So, if you're living on $40,000 a year, you'll need a million stashed away ($40,000 x 25). For those on an $80,000 yearly budget, $2 million is the ideal amount for your retirement nest.
Remember, this rule is a guide only . Every individual’s path to FIRE is unique. It's essential to adjust based on your comfort, risk appetite, and life changes. Some FIRE enthusiasts even choose to save up to 30 times their annual expenses to play it even safer.
What is a savings rate and how can you calculate it?
Your savings rate is the percentage of your take-home pay that you pop into your savings jar (or account, for us grown-ups). Simply put, if your savings rate is high, your road to retirement is shorter.
This isn’t some obscure, fresh-out-of-the-oven concept. In fact, the idea was popularised by an American blogger, Mr. Money Mustache. His principle is straightforward:
- You need to know how much you earn annually.
- You need to be aware of how much you’re spending.
Here's where it gets interesting. If you, hypothetically, spend every single cent of your income, retirement is just a mirage. However, if you don’t spend a dime, you can retire right this moment.
While the idea sounds enticing, it comes with a catch. For that to happen, you'd need a whopping 95% savings rate. Which means your expenses are almost non-existent. Seems like a tall order, right?
Yet, don’t be disheartened. This isn’t a one-size-fits-all approach. Many have tread this path and found their sweet spot. They adjusted their savings rate and ultimately achieved FIRE.
Here are other examples:
|
Savings rate (%) |
Working years until retirement |
|---|---|
|
5 |
66 |
|
10 |
51 |
|
50 |
17 |
|
80 |
5.5 |
|
85 |
4 |
|
90 |
< 3 |
|
95 |
< 2 |
|
100 |
0 |
There’s also a plethora of savings rate calculators that can guide you in visualising your unique journey. Once you've figured out the math, you'll discover there's more than one way to live your FIRE dream.
What’s your idea of financial independence?
Here’s the thing: FIRE looks different for everyone. For Alice, it might be ensuring her family's always warm and cozy. For Jose, it could be the luxury of turning down a job because he feels like it. And for Charlie, perhaps it's about waving goodbye to a draining 9-5 routine.
No matter the face of your financial independence, the essence remains. FIRE is about crafting a future where you decide when the alarm goes off, how your day unfolds, and where the journey takes you.
Different types of FIRE
Before we light up this conversation, remember that personal finance is as personal as your fingerprint. Unique. Yours alone. What might be a roaring bonfire for one might merely be a flickering candle for another.
So, how do you know your type of FIRE? To start with, find your type of FIRE —a specific picture of your destination. What’s that day look like and who are the people you want to be there with you?
When you know what FIRE means for you, you’ll start to clearly see the right path to that dream. It will also be easier to keep the motivation and embrace the challenges that lie ahead.
1. Traditional FIRE: The Classic Route
It's all about building a wealth buffer through your investments, so when retirement calls, you're set to live life on your terms. Ever dreamed of waking up without the blare of an alarm? This might be your track.
2. Lean FIRE : A Thrifty Adventure
Lean FIRE fans champion a frugal lifestyle. Imagine you're on a financial diet—cutting costs to the bone and boosting savings and investment. Think packed lunches, thrift store finds, and a life free of excess.
3. Fat FIRE: Living the Plush Life
At the other end of the spectrum, Fat FIRE aficionados save a larger amount so that they don't just survive but thrive in their retirement years. A little more space in the budget, a tad more luxury.
4. Semi FIRE (or Barista FIRE): A Mix of Both Worlds
The term comes from the idea of combining the freedom of FIRE with the employee benefits you receive from part-time work. In the U.S., for example, a part-time gig at Starbucks could earn you health insurance, while you’re still enjoying a semi-retired life.
5. CoastFIRE: Working 'cause You Want to
It's that "I've made it" feeling. With CoastFIRE, you've saved up enough for a traditional retirement. You still work, but without the constant glancing over at your retirement fund.
6. GeoFIRE: Globetrotting on a Budget
Ready to take your coffee adventures global? GeoFIRE is your passport to keeping your FIRE goals intact while feeding your wanderlust. The key to this FIRE dream is strategically picking countries with low cost of living to let your money stretch farther.
How do you achieve FIRE in Australia?
Everything that we’ve discussed here brings us to the big question for many Aussies: how can you retire early in Australia ? When it comes to dreaming of Aussie FIRE, we've got two big boxes to tick. And that’s investing inside super and outside super .
The Super Strategy
If FIRE were a game, Aussies would be playing from an advantageous position because of our superannuation system. Why is your super fund so 'super' (and the envy of the world)? It's the most tax effective investment option we've got. Yes, the government is literally giving you a hand in growing your retirement nest.
However, while the super is great and all, there's a catch. You need to wait until you hit at least 60. So, if your dream is lounging on a beach in Bali at 45, solely relying on your super might not be the wisest move.
The big question is: do you have a coin jar outside of the super to sustain the margarita-filled dreams until then?
Non-super investments
This brings us to the crux of the matter. It’s not just about hoarding money in your super. If you're looking to clock out early, you’ll need some investments outside of super.
The game plan? Diversification—investing both inside and outside the super.
Then again, depending on how close you are to retirement, your investment strategy may need a little twist. If you’re far from the age of 60, wouldn't it be wise to have investments ripe and ready for those early retirement years? But if you’re closer to the super's “ preservation age ”, then perhaps it’s about balancing and weighing the tax benefits of the super.
Take action this week
Feeling inspired after learning the principles and methods of achieving FIRE? We've thrown a lot at you, but remember, knowledge without action is only a fun fact. To help you truly embark on the FIRE journey, we're setting you these tasks for the week.
1. Calculate your projected expenses
The key to early retirement starts by jotting down your monthly expenses. Next, figure out your ideal early retirement fund (remember the 25x rule). With those numbers, you can:
- Trim your expenses
- Boost your income
- Grow that gap (the difference between income and savings)
2. Are you retiring sooner or later than you think?
If you want to map out your working years until retirement, it helps to know how much you stashed away in the past months. Savings rate is a simple, yet powerful, percentage that can help you track your journey to FIRE.
Check out your bank statements or investment account. How much did you save last month? Divide that by your monthly income. That's your most recent savings rate. The higher it is on a monthly basis, the sooner you retire.
Additionally, tools like Pearler’s FIRE calculator can help you estimate the years until retirement. You’ll instantly get an idea after plugging in the financial basics, like your super balance and the amount you invest annually.
3. Imagine your future
Of course, life isn't always predictable. Right now, you might be a happy camper renting a cozy apartment. Fast-forward a few years and maybe there's a mini-you on the horizon or a countryside home calling your name.
It's essential to keep these potential life changes in mind. So, when calculating your FIRE number, remember to factor in these future possibilities.
We’ve only just scratched the surface here, so give our full episode a listen for deeper insights and some anecdotes.
And while you're on this journey, remember that you're not alone. Share your FIRE goals, dreams, and progress shots with us on
Instagram
. We've also got a newly minted
Facebook group
for you to meet us and other kindred FIRE spirits.
Happy investing!
Tash & Ana
