What’s All the Fuss About Fire?
Financial Independence, Retire Early (FIRE) is a movement dedicated to aggressive savings and investments to create a sustainable source of income. This allows advocates to possibly never work again, and therefore retiring from the workforce far earlier than the traditional retirement age.
Though it’s most often associated with early retirement, the core foundations lie in investment and savings stability and with that: financial independence and freedom to choose a career more aligned to holistic values rather than paycheck value.
The Origins
The FIRE movement is usually traced back to the 1992 bestseller book, “Your Money or Your Life”, by Vicki Robin and Joe Dominguez. FIRE values embody a core premise of the book: Spend time and energy on true fulfilment rather than on things that don’t.
Instead of spending on consumer goods or staying in a stressful and unsatisfying job, FIRE advocates have aggressive saving and investing goals, which accumulate with compound interest, property or share market values and so on. By lowering expenses and pocketing income increases, the faster financial independence is reached.
The final goal is to have enough invested to return a passive income, lessening the pressure of working, or even making a traditional 9-5 job obsolete. Time spent at work could instead be spent on true fulfilment: be that with family, starting a business, volunteering or travelling.
Let’s Run the Numbers
Yearly Expenditure
The first step in the FIRE process is to calculate a figure which represents a total expenditure or budget for the year. This is how much the investment portfolio needs to generate to cover all living costs for the year.
Safe Withdrawal Rate
A Safe Withdrawal Rate is the percentage of assets that will be withdrawn from the investment portfolio each year, to create the required source of income. A common and historically recognised safe withdrawal rate is somewhere around 3-4%.
The theory behind the safe withdrawal rate is that despite withdrawing 3-4% of the portfolio, it will last until the end of life, without running out of money.
The Fire Number
The Fire Number is the total amount of the investment portfolio.
To roughly calculate, simply divide the Yearly Expenditure by the Safe Withdrawal Rate represented as a decimal (that is, 4% would be 0.04).
The result is an approximation of the total amount an investment portfolio will need, in order to generate the required source of income and be financially independent.
Australia Specific
Reaching FIRE in Australia is different from reaching it in other countries due to Superannuation, which has a 58-60 age-based access rule. A person wishing to retire earlier than that age would be unable to access those particular investments.
With incentives such as compulsory employer contributions, very low tax rates, and pre and post voluntary contributions, Aussie FIRE advocates will most likely be comparing and balancing two investment portfolios. A Super portfolio and an investment portfolio outside of it.
Millennials
The FIRE movement is seeing a new wave of interest by millennials. Disillusioned by rising housing and childcare costs, education debt, new career movements such as digital nomads and working from home, and even existential crises like climate change or consumer waste, millennials are being drawn towards the enticement of autonomy that the FIRE movement brings.
Although initially drawn to the positives of self-directed freedom, intentional living and being able to opt-out of work, regardless the FIRE movement can ultimately boost financial knowledge in young workers and set them along the path of financial literacy.
They are one of the age groups to really benefit from investing early, as we all know, the magic of compound interest lies in time.
Levels of FIRE
There are many different levels of FIRE within the FIRE movement, depending on intensity and lifestyle choices.
For example — “Fat FIRE” aims for a more luxurious retirement but with a longer working timeline; “Lean FIRE” lends itself to minimalist living, extreme savings and a restricted lifestyle. “Barista FIRE” or “Coast FIRE” are for followers who work part-time to cover current expenses or to keep a safe buffer.
IN coNCLUSION
FIRE isn’t a set and forget method. Volatilities in the stock market, property or interest rates could cause a shortfall in income and stress of returning to work after a large gap of retirement.
Also, extremely high rates of saving at the expense of current quality of life and lifestyle are not for everyone.
When choosing to retire early, semi-retire or retire at a conventional age, there might be interesting FIRE principles to consider in your financial management strategy. Please do not hesitate to reach out to Shape Financial to discuss your financial goals.