Several ways to avoid waiting for retirement
Participants in the movement FIRE (Financial Independence, Retire Early) believe that people can save enough money to quit their job and start enjoying freedom in the middle of life already.
Many people dream of turning off their computer one day and leaving the office for ever. To do this at the age that is considered to be the peak of working life,you need to take care of the stability of your financial situation.
The FIRE movement, which is attracting more and more followers, encourages people to save a lot, spend little and invest wisely. This approach will allow you to retire decades earlier than your peers – in some cases even up to 40 years.
At the same time, it is not the size of the salary that is important, but how much of it you manage to save – according to FIRE principles, it is better to set aside 50% to 75% of income after taxes. At a time when many hardly manage to make at least some pension savings, this sounds unrealistic, but this doesn`t stop the movement’s supporters.
Deny yourself a lot for a dream
Alan Donegan says he achieved financial independence before the age of 40. Now he is doing what he always dreamed of – writing the script for the film. Before, he consulted for startups and ran a business school. The resulting income allowed Donegan and his partner to create an investment portfolio. Now they can afford not to work – the accumulated amount allows them to maintain their old way of life.
In the process of saving, they taught themselves to invest money instead of spending it:
“Most people think that the more they earn, the more they can afford. We were guided by the motto: “Buy yourself freedom first””.
They now own a two-room apartment in Basingstoke and drive a Skoda Citigo. I like to have coffee in a good cafe, but overall I try to spend as little as possible,” says Donegan.
Critics of the FIRE movement point out that its principles are impracticable for people with low incomes – – those who can`t save even small amounts,not to mention half the salary.
Donegan admits that it is easier for people with an annual income of 55 000 to accumulate the required amount than those who earn 21 000 USD a year, but a stable income is not the only condition for success. To achieve the goal, you will have to change the usual financial behavior, and not everyone is ready for this.
“People with higher incomes get used to spending more. As a result, it is more difficult for them to achieve financial independence,” he explains. Doneganbelieves that the freedom he has gained pays for all the efforts to achieve it.
“I may not become a great screenwriter, but I can definitely try,” he says.
Save enough money
How much money do you need to live comfortably in retirement? FIRE representatives believe that this is an amount that is 25 times higher than the annual expenses.
With expenses of 13 thousand dollars a year, it is enough to save 350 thousand dollars, but if a person spends 55 thousand dollars, more than a 1 million is already needed.
Savings will allow you to collect the required amount faster. “If you save 10% of your income, you will have to save for 51 years”, says Canadian Pete Adeny, personal finance blog author and FIRE activist. “But if you can save 5% more, you can reach your goal as much as eight years earlier.”
By putting aside half of your earnings, you can accumulate pension capital in 17 years, and if you getto 75%, you could accumulate it in 7 years.
This approach is based on the so-called 4% rule, outlined by three professors at Trinity University in Texas. Their article says that by investing this amount in stocks, you can withdraw 4% per year and live on interest – however, you need to be ready to save during crises. Followers of this movement invest in low-cost exchange-traded funds (ETF). Vanguard funds are especially popular, fees there can be as low as 0.06% per year versus 1.5% in some actively managed funds.
This small difference is significant with a long-term investment. Let’s say you invested 140 000 dollars at 6% per annum for 30 years. In a fund with an annual fee of 1.5% per annum, you will receive 524 000 dollars and in a fund that charges 0.06%, already 789 000 dollars. Choosing the wrong fund could cost 265 000 dollars.
Consider the financial situation
Damien Faye, owner of a personal finance website, says FIRE’s ideas have been gaining popularity lately,especially among millennials: “These are traditional financial planning ideas taken to an absolute.”
However, he doubts that the 4% rule is relevant for those who plan to retire at 40 or even 50: the amount collected will not be enough for four or five decades without work. A prolonged downturn in the stock market or other force majeure situation can further complicate the financial situation of such people. The amount of savings is calculated taking into account inflation of 3% and an average return on invest