How to retire early with the FIRE lifestyle

You might have heard the proverb “the best time to invest was yesterday but the second-best time is today”. Financial advisors and successful people quote this every now and then to motivate people.

Luckily this proverb has taken its roots in the millennial mindset and is helping them prepare to achieve Financial Independence and Early Retirement (FIRE).

What is FIRE in finance?

The core components of FIRE are FI – Financial Independence and RE – Early Retirement/Retiring Early. Breaking down both FI and RE is extremely crucial as one thing leads to another and together both of these constitute to financial wellness.

how to retire early
Photo: Getty Images/iStockphoto

Financial Independence

FI means having enough income generated by accumulating assets that take care of your living expenses (in your retirement years) thus ending your dependency on 9 to 5 jobs and helping you retire early.

All of this is directly dependent on the fact that you spend less than you earn and invest the remaining in building assets.

FIRE finance
Photo: Wikipedia

Adopting the FIRE lifestyle not only makes sense financially but also for living a healthy lifestyle. The average age of retirement in America is close to 60 years with a life expectancy of 80 years leaving only 20 years to enjoy the retirement age. With FIRE, the retirement period can be increased depending on your passive income and the age at which you achieve RE.

Every person thinks (and tends to believe) that they are too late to begin investing and saving for retirement.

RELATED: Emergency funds – All your questions, answered

What is the FIRE lifestyle like?

FIRE lifestyle has 3 main components that everyone must adhere to:

  1. Reducing expenses,
  2. Increasing income, and
  3. Investing

1 – Spend Less & Save More:

If you are dedicated to achieving RE decades before the average retirement age, you need to start taking measures now. The most common ways for millennials to save money are:

  • Minimizing taxes by investing in 401K or Canadian RRSP- Reducing living expenses by moving/renting a smaller home
  • Reducing transportation costs by living closer to work, or by using bicycles, public transport or used cars to travel
  • Learning self-sufficiency skills, like cooking, automobile repair, gardening etc to reduce miscellaneous expenses

2 – More Income:

Working for a high paying job is not the only way to earn more while working. Millennials realize this and have started taking measures to make the most out of what’s available to them. Some of the most common measures are:

  • Choosing a better career path and learning relevant and useful skills. By focusing on education and gaining skills that are the need of the hour millennials have now started focusing on skilled jobs rather than unskilled jobs
  • By taking more responsibilities, working extra hours, accepting challenging assignments etc
  •  Negotiating to get paid what you deserve based on the extra hours and challenging tasks you have performed.

3 – Investing (or protecting your investment):

Even though millennials are scared of investing in equity after witnessing the 2008 financial crash, they are getting smarter in making their living choices. Some of the choices that helped them save tons of money are:

  • Investing in financial instruments like mutual funds, shares, ETFs, bonds etc. Investing in any kind of financial instrument requires extensive research and due-diligence, just like you do for any other form of investment.
  • Investing in passive businesses and real estate. Running a side gig, renting a property, or finding good real-estate buy-sell opportunities provides a tremendous opportunity of making passive income.
  • Conducting due-diligence before buying a house. Renting a property makes more sense if the demographic has approached its maximum economic capacity.
  • Protecting your marriage and taking preventive measures to save your wealth in case of divorce.
  • Be cautious before taking a loan. Millennials have started protecting themselves from taking loans on depreciating assets like cars, electronics etc

Retiring Early

Retiring Early, (RE) as the name suggests, means having enough savings and passive income that would pay for your reasonable living expenses in perpetuity without working for that income.

The most common doubt that arises is how much does a person need to retire?

Luckily, the answer to this question is given by some professor of Trinity University (Texas) known as “trinity study”. For this study, the return on U.S stock and bonds market is calculated for every 15-30 years for the period between 1925-1995 (the data was last refreshed in 2009). According to the study, if you withdraw 4% of the amount of your portfolio (your investment portfolio) every year, you have a 95% chance to not run out of money during a 30-year period.

Another, simpler way of explaining the results of the study is that you need 25 times your annual living expenses to live comfortably for another 30 years.

For example:

  • If you need $50k annually for expenses in your retirement, you should have $50k*25 = $1.25M
  • If you have $1.25M in your retirement account, you can spend $50k (4% of $1.25M) for ~30 years

This target amount does not account for the inflation factor for the next 30 years of your retirement. The historic average annual inflation in the US is 5%, to cancel out the effect of inflation to achieve financial independence investing in stocks instead of lower-yielding financial instruments will ensure success (since historically, gains on the stock market have been more than inflation).

Attaining financial independence and early retirement looks like a mammoth task but with the power of FIRE, anyone can retire early if they start working towards it.

A normal investor saves 10% of their annual income for their retirement plan, but people looking for early retirement practices frugal lifestyle, makes calculated investments and saves more than 50% of their income to reach their goal as early as possible.

RelatedBreakdown of Monthly Household Expenses in Canada & Saving Tips



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