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Playing with F.I.R.E.(Financial independence, retire early)

Did you know that you don’t actually have to work until you’re 65? What if I told

you that you didn’t have to have a full-time job in your 30s?


If you like that idea, maybe you should get into the F.I.R.E. movement.


"Playing with FIRE (Financial Independence Retire Early)" Scott Rieckens, February 15, 2019

General idea

The main goal of this movement is to save enough money so you can stop working in your 60s and to live off the amount you’ve accumulated - often called 'the nest egg'.


The nest egg

If you estimate your desired retirement age, your life expectancy, and the amount of money you need every year plus some assumptions like annual withdrawals and retirement returns, you can calculate your 'nest egg'. Of course, these calculations are not perfect because of taxes and inflation, but it gives you a rough idea of the amount of money you need to save before reaching your desired retirement age. When thinking about starting your nest egg you need to remember that it is the amount of money you need to live off of. That means paying off all your debts, saving money from EACH of your paychecks, and investing in e.g. index funds.


Problems

The point of the F.I.R.E. movement is EARLY retirement, so that means you have to accumulate a bigger nest egg in a shorter period of time. Being truly financially independent means living fully off the income from your investments, and not needing to draw on your capital to fund expenditures. So the calculations we made before assume that by the time you think you’re going to die you deplete all your savings. Instead, some F.I.R.E. followers look into the 4% rule


The 4% rule

This is a rule that came from a research paper called the trinity study, which showed that if a person only withdrew 4% from their investment portfolio every year, it would be hard for them to exhaust their capital over a 30-year period because the investment returns would sustain the withdrawal requirements. It means that if you’re able to live off the 4% of your investment portfolio, your savings should fund your retirement for about 30 years. The good thing is that this approach could theoretically fund your retirement forever, which is an important thing for the F.I.R.E. followers because they want to retire early. It is easy to calculate the amount of money you need to accumulate because you just simply have to divide your desired retirement income by 3%. The problem with this method is that you have to save a much larger amount of money in an even shorter amount of time.


So… Is it worth it?

Well… it depends. The main thing about this movement is frugality. If you’re an average person earning an average wage, you will have to forget about fancy long vacations and buying that new car. But you don’t have to retire. If you save money and still work while getting these savings, you still come out on top.


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