How to Retire Early
Sipping cocktails on a tropical beach, enjoying a round of golf at the club or simply enjoying more time with your loved ones are some of the benefits people expect to enjoy once they retire. Often times, it is these expectations of a better future that give us the strength to continue to pull through the daily grind.
However, this is becoming an increasingly difficult dream to achieve. It seems like back in the 80s, one could easily retire from a “regular” job at 55-60 and enjoy a substantial enough government pension to never have to worry about working again. (This was at least the case with my grandfather)
But it is no secret that state pensions are not what they used to be, at least in most European countries. An aging population together with an ever increasing public deficit have made it even more difficult to sustain the level of pensions that seniors today enjoy.
Pensions are not increasing, while the retirement age is, and this has pushed many people to take matters into their own hands.
By working extra hard and saving by cutting down on superfluous spending, some people are trying to achieve financial independence and early retirement. After all, what is the point of enjoying life when you are 70?
There is a new movement going on, some might even call it a philosophy, which has been labeled FIRE
What is FIRE?
FIRE stands for Financial Independence, Retire Early. It sounds great, doesn’t it?
The truth is, that attempting FIRE takes much discipline. The basic idea behind FIRE, is to save anywhere upwards of 40% of your income. Doing this is no easy task. It requires a change of life and mindset.
The first and most important thing with FIRE is to decide what FI and RE actually mean to you.
- What does financial independence look like to you? How much money do you think you’ll need? Does financial independence mean not working at all or just working part-time?
- And what do you consider an early retirement? Do you wish to retire at 30, 40, 50…?
- More importantly, what does retirement in itself mean to you?
Take a moment to think about this. Retiring means having spare time on your hands, and you have to know before you get to that stage what you are going to do with it. Many FIRE devotees have a calling, they want to achieve financial independence so they can “work” at something they love without having to worry. Others may just want to keep enjoying an easy-going minimalist lifestyle. Which one are you?
Once you have given all these questions sufficient thought and you still think FIRE is the right move, you must devise a strategy.
There are numerous subreddits dedicated to the idea of FIRE, we recommend you signup and add them to your subscription there as there is a wealth of information about this subject for you to read and participate in the discussions.
How to FIRE the right way
It’s vital that you calculate the amount of money you will need to be financially independent. This number will vary greatly depending on your expenses, where you plan to live, how much you expect to make and how many years you are planning for.
some FIRE aficionados estimate that “once your net worth is 25 times your annual expenses, you’ve achieved financial independence.” You can do the planning on your own or consider getting help.
Another important element of fire is you cannot have any debt. Having debt completely nullifies any other wealth-building activities. This is a problem most middle-income families suffer from. It has almost become a cultural norm to acquire debt. As early as 18 we indebt ourselves to pay for education, this continues when you need to buy a car, followed by a house, followed by so many other things. We must realize as a society, and as individuals, that debt takes away our freedom and often it’s not worth paying the price for it.
If you have debts right now, I’d suggest getting help from a specialized company that will help you get better deals or write off your debts.
Once you are debt-free, you can actually start saving. This is the main point of FIRE. Like I said earlier, you must aim to save at least 40% of your income, if not more, but this depends on your personal plan.
There are two-sides to saving, making money and not spending it.
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Making money is something very different for everyone, FIRE doesn’t really focus on this much. What FIRE does focus on is how to live cheaply. In this sense, FIRE is almost an anti-consumerist philosophy, something I could not agree more with.
We are constantly being bombarded with advertisements telling us that happiness can be achieved through material things. Sadly, we are all taken in by this false claim to some extent. We believe that wit comfort we will find contempt. That with luxury we will impress our friends. That buying shit will make us happy. This is not true.
While everyone enjoys having nice things, we have to understand what the price to pay for these is, namely, having to work 40+ hours a week. Is it really worth it?
Once again, I feel like, as a society, we have been lied to. At some point in our lives, we were told that we would find meaning and fulfillment in our daily work. That working in something you love will make you happy. But work and love simply don’t go together for most people. Work is, by definition, something you do not enjoy, as in, the opposite of leisure.
Even for those that do what they love, the financial element of it can suck the joy right out of it. I may love having my own flower store, but knowing that if I don’t make enough sales this month I won’t be able to pay rent is stressful.
And that’s the whole point of FIRE! Not stressing about money. Some people actually want to achieve financial independence because they want to work in what they love, without having what they love being their only source of income.
Having said this here’s a few areas where you can make big savings on a monthly basis.
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There are countless ways to save money. Here’s a list of some of the biggest costs that FIRE practitioners try to reduce through some creative methods.
Without a doubt, buying/renting a house will be one of your largest monthly expenses. In order to lower their housing costs, some people choose to live in “micro-houses”.(How much space do you really need after all?)
Another great way of cutting down on housing costs is living outside of the city.
Taking things a step further, you could even opt to live in a city with lower living costs.
According to this Forbes article, you could easily live in Lisbon, Portugal, for as little as £1000 per month. If you are more adventurous, consider somewhere such as Thailand or Bali, a paradise-like island where you can live comfortably for under £1500
These are all great options, especially for those who are already embracing the gig economy and making good money from the comfort of their own home, wherever that may be.
Owning a car, is in most cases, a terrible idea. It’s a depreciating asset which loses half its value the moment you purchase it. Then you have to deal with insurance, maintenance and repairs, parking and, let’s face it, the occasional speeding ticket. To paraphrase a wise man, if you have to pay to park your car, you are not meant to have one. Take public transportation and use that spare time to read, or make even more money.
Alternatively, if you must use a car, take advantage of the sharing economy. Renting/Car-sharing has never been easier and cheaper.
Unfortunately, we all have to pay taxes. But that doesn’t mean you can’t pay fewer taxes. Get informed and make sure you are optimizing your tax situation. If you are a freelancer or have a business, make sure you are always deducting things. Also, make sure you take advantage of tax-free investment vehicles such as 401ks.
You probably want to cut down, if not eliminate altogether, eating and drinking out. You’d be surprised what a big difference this will make to your finances. Small savings accumulate over time.
When it comes to groceries, buy in bulk and keep your eyes peeled for exclusive deals. Use cheap ingredients such as vegetables and beans. Whole books could, and probably have been written on incredibly cheap and equally incredibly healthy meals.
Cable and Telephone
Do you really need cable TV in this day and age? And how much mobile data do you actually need when Wifi is so easily available? I know changing phone companies is a hassle, but trust me, you can probably find a better deal and it is worth it.
Increase your income
If you are young and serious about FIRE, make the most of this time. You have the energy and the motivation, something you will lose as you get older, so put it to use. Work extra hard to get that promotion, or find an alternative source of income. Thanks to the internet and the rise of the gig-economy, it has never been easier to put yourself out on the market and get paid for your unique skills. Try websites such as Guru, Freelancer, and Upwork, to begin with. You’d be surprised at the incredible amount of well-paid jobs you can get.
Make your money work for you
So you’ve eliminated debt, you’ve begun saving a substantial amount of income regularly. Now it’s time to put that money to work.
I have already covered investment extensively in my previous articles.
All I will say is this. Investing doesn’t have to be difficult. Why would you waste time researching stocks when you could actually be making money working? Unless you are actually interested in the investment world this is silly.
There are tons of places where you can get investment advice from experts.
But that’s not even necessary. Something as simple as putting your money in an index fund or a basket of reliable blue-chip stocks is all you need. The stock market has delivered annual returns of 7-9% in the last century. Over time, as you re-invest your earnings, this will make a massive difference to your savings. This is the power of compound interest.
Let me go ahead and illustrate this with an example.
Let’s say you already have 5000 pounds saved-up. Every month you can save 1000 more. You invest in an index-fund, something effortless and almost costless, at an annual rate of 7%. Every year, you take those earnings and re-invest them.
Over 20 years, your savings would look like this:
|Year||Year Deposits||Year Interest||Total Deposits||Total Interest||Balance|
The final amount? Just over half a million pounds.
Not too bad. I know 20 years seems like a long time. But if you can start doing this by age 25 you would probably be able to comfortably retire by 45.
With half a million invested at 7%, you’d pretty much be making a full-salary, 35.000, just on interest rate payments.
Let’s take it a step further. Can you save 1500 pounds a month? Invest more aggressively and make a 10% return?
By the end of the 20 year period, you would be a millionaire.
Don’t waste another second. Your journey to financial independence and early retirement begins now.
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