FIRE stands for Financial Independence Retire Early. It’s fairly self explanatory – you get yourself to a point where you have enough wealth that your passive income covers your expenses and you no longer HAVE to work. You’d be living off the wealth that you already accumulated. There are different types – lean FIRE, where you live on a very tight budget, and fat FIRE, where you are rich as all get-out and can splash your cash around.
What exactly is passive income? It’s income that, in theory, you don’t have to work for. Dividends from investments, interest from your bank, or rental income. If you are raking in the dough without having to do anything, then that’s passive income.
Sounds expensive and hard to set up right? It’s really not. It can be a little bit scary, and requires some self-education, but it’s not too difficult. You’re probably already making a bit of money from a high interest savings account. Unfortunately, since interest rates are kind of woeful for savers right now, you probably aren’t making much – I know I’m not.
Think about your skills – can you make something that you can sell? Short how-to e-books or manuals are a form of passive income. The idea is to create a range of income streams that will allow you the freedom to walk away from work, or the security to not lose your marbles if you get laid off or can no longer work due to ill health.
The idea that passive income takes no work is a bit of a fallacy. It can take a great deal of work to generate and maintain multiple streams. If you can manage to build enough to just survive with bank interest and dividends propping you up, then more power to you – you can chill out until the cows come home.
The 4% rule is also known as the safe withdrawal rate (something that MongrelPunt finds quite funny). Under the 4% rule, you can withdraw 4% of your portfolio per year, and in theory, still have assets after 30 years of retirement.
Everyone bangs on about the Trinity Study, conducted in 1998, which basically looked at historical data to determine how much someone can spend over a period of 30 years without running out of money. The payouts also increase alongside inflation.
It’s a pretty neat rule. It really is. But you can’t just jump on and ignore reality. You need to adjust as you go. If you have some terrible years (and they will happen), then you need to tighten your budget accordingly. 4% is a good spine for vague future planning, not for people who are intensively on the path to FIRE.
What does Financial Independence mean to you?
Does it mean being able to take up a different career? Quit work entirely? Cover your basic expenses every year? To us as a couple, financial independence just means that if we need to, we could stop working. We would have enough to live a reasonably comfortable life, and not worry too much about money.
What do you have to give up, and is it worth it?
To achieve FIRE you probably need to give up a few things. One is any reliance on credit. You never ever buy things if you don’t have the money immediately on hand. If you need it and can’t afford it, you go find a second or third temporary job. I worked some absolutely shocking second jobs to pay for things I wanted.
Some people just don’t want to give things up. Especially experiences. They follow bands around the country, or go to every hobby convention they can possibly attend. They spend their wage, max out their credit cards, and take personal loans (personal loans being the biggest spud move someone can make). An early retirement will not happen unless it’s well planned and thought out. There’s a certain amount of sacrifice required.
Sometimes it’s not worth giving up the thing you want. My daughter is the biggest expense I’ve ever had. But my family has made me happier than I ever thought possible. I know I might have to give up my personal wants, such as extensive travel, in order to make sure my family is secure, and that’s something I’m OK with. The point is, we wanted to grow our family, and we also want to FIRE, so we gave up other things.
You need goals
If you want to FIRE, you need goals. Otherwise it can seem absolutely overwhelming.
FIRE seems impossible until you do the math. Most people don’t actually know anyone who has retired early due to good planning. In a lot of cases, a two income household should be able to live off one wage and save/invest the other. Imagine paying down around $50000 of your mortgage per year, or investing that amount.
It sounds insane and painful, but it’s really not. I think around 70% of my spending prior to thinking about FIRE was both unnecessary and forgettable. And that’s the crux of it. I could have just dropped the money on the ground for all the good that those purchases did me.
Where we are at
I’m not a huge fan of the 4% rule in practice. I am responsible for my family’s budget, and I just couldn’t stand the stress of watching the markets and freaking out every time there is a substantial drop. I have a high risk tolerance at the moment. When one of us retires, my appetite for risk will drop dramatically.
This means that almost all of my calculations are extremely conservative. Once we retire, I don’t want us to HAVE to go back to work. I would love to keep our capital intact throughout our retirement but this isn’t strictly necessary. For example, if we get to our 80s and start drawing down, I’m OK with that.
At the moment we are working towards getting our obvious major expenses out of the way. The biggest expense has been renovating our townhouse. It’s little, and has two bedrooms. It was never meant to be a family home, but when faced with either getting a mortgage and moving, or bending the house to our purposes, it was an easy choice. We are now in the process of chopping our lounge room in half to gain an extra room, which will double as a spare bedroom for family and an office for me. We will hopefully build extra storage above our stairs, fence off our front yard and replace the oven and stove.
So, we currently have no mortgage but some renovation expenses which will come straight out of our savings. We both work part time so we can hang out with our daughter. This restricts our capacity to save. Because of that, this year we have worked on reducing our day to day expenses and on renovating.
In our worst case long term scenario, I get no wages increases, and our returns never go above 3%. Using these factors, MongrelPunt is 12 years away from being able to retire, and I am 20 years away. Best case scenario has a wage jump in roughly five years time, and a consistent 9% return. MongrelPunt could then retire in 7 or 8 years. Not too bad for two middle-income earners.