Ok so the plan is to become financially free asap. It’s what’s known as FIRE – financial independence, retire early.
You’ve already covered all the basics. You’ve cleared your bad debt – check; you’re earning more than you spend – check; you’re investing the difference – check; and now you have to rinse and repeat for what seems like an ungodly amount of time, while your investments slowly grow to your FIRE number, which is the amount of money that you need to retire early.
It’s a long and perilous journey between now and your FIRE date – the date at which you can break life’s chains and become financially independent. Your FIRE date could be many decades away, so naturally this might feel demoralising.
In this post we’ll show you how to easily calculate your own FIRE number and FIRE date, and then we’ll look at some ideas for how you can REDUCE your FIRE number, so you can retire much sooner. Maybe there’s even a way to retire earlier without reducing your FIRE number at all, so you can live a life of luxury. Let’s check it out…
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A major reason for wanting to FIRE for many people is that feeling of emptiness. Working a job long-term that isn’t fulfilling is no way to live, and FIRE is a genuine and achievable escape plan. You don’t even have to hate your job but knowing that you could do so much more with your life is all the motivation you should need.
Once you have achieved FIRE, what you do with your newfound freedom is completely up to you. The freedom to do as you please, rather than what you must, is liberating. Many people choose to travel. Others do volunteer work. Some start a business once there’s no pressure to succeed, and some even CHOOSE to continue working – quite often on a part-time basis or doing something more enjoyable.
What Is Your FIRE Number?
Financial independence is achieved by building up a large investment pot that produces an income which covers your living expenses from now until your death. The 4% safe withdrawal rate (SWR) tells you how big that pot needs to be although some people choose to use a slightly different percentage.
Say that your living expenses are £20,000 a year. The 4% SWR therefore says your FIRE number is £500,000. The maths behind that is £20,000 divided by 0.04. Note that the £20,000 used in our example is not your income but your living expenses. Once you have retired you can stop saving, so the goal is for your FIRE number to cover your living expenses – not your current income.
If your living expenses were £40k a year you would need an investment pot of £1m.
What Is Your FIRE Date?
Calculating your FIRE number is pretty straightforward but calculating your FIRE or retirement date is a little more complicated. We’ve put together a FIRE calculator for this, which is free to use.
Bang in some numbers and tweak your withdrawal rate and this handy tool will chuck out your coveted FIRE date, as well as your FIRE number, and some other handy stats.
Let’s work through an example. Chris is 30 years old. He currently earns £30,000 after tax and lives on £22,000 meaning the difference is invested. One way this particular calculator stands out from similar tools found elsewhere is it allows you to set different annual expenses in retirement to what you currently spend.
You might have paid off your mortgage in 5 years’ time; maybe the kids will have grown up and flown the nest; or perhaps you plan to cancel some life insurance policies that are no longer needed.
Let’s say Chris will have paid down the mortgage, and so will only need £16,000 once retired. He’s also been saving diligently in his youth and has already built up a tidy nest egg of £100,000.
We can then bang in Chris’s asset allocation (Stocks: 70%, Commodities: 10%, Cash:10%, Other: 10%) and the expected real rate of return (that’s after inflation) (average 3.8%), and finally set his withdrawal rate (4%). The calculator will instantly crunch the numbers and spit out your FIRE date. In Chris’ case it was in 18 years’ time.
Hopefully your date is not too far in the future – but most likely it might as well be a million years away.
How To Reduce Your FIRE Number Or Bring Your FIRE Date Forward?
If your FIRE date was too depressing, let’s look at some ideas of how we can bring it forward.
Don’t Be Single
If you’re living alone your living costs are going to be much higher than for those in a couple. A couple gets to split all the major living expenses such as mortgage or rental costs, gas, electric, broadband and tv subscriptions. All the major appliances that you need can be also shared – ovens, washing machines, dish washers, TVs, laptops, and so on.
Not to mention the tax advantages of having a spouse’s personal allowances to play with for investing. One study (Good Housekeeping Institute) says the cost saving for a couple, per person, is £2,000 a year but we’d say that was a conservative measure.
“Don’t be single” doesn’t have to mean settling down with a partner. An alternative to this is getting a housemate to split all the bills with. The extent you do this could really help to bring forward your FIRE date. We heard a story about a guy that literally rented out every room in his house and he himself slept on the couch.
Such extreme sacrifices are probably not for everyone but for those that want FIRE asap, it’s a possibility. You could at least settle with one housemate, right?
Geoarbitrage is a fancy word with a simple meaning. It simply means to move in order to lower your cost of living.
“Geo” means geography, and “arbitrage” involves taking advantage of a price difference between two or more markets.
Broadly speaking, you can apply geoarbitrage in two ways.
Firstly, if you are able to maintain a higher income during your working years but live in a low-cost city or country, then you will be able to save and invest more – allowing you to achieve FIRE faster or a better-quality FIRE.
If this isn’t possible or desirable, then a second option is to relocate to a cheaper city or country once you’ve ACHIEVED FIRE – meaning your required FIRE number could be smaller as a result.
In most cases relocating to cheaper cities or countries will also result in a fall in your income, which is why most people would be reluctant to do this until they’ve achieved their FIRE number and ready to retire.
If you do plan to move abroad during your working years to make the most of geoarbitrage, ideally you want to continue to earn your income in a strong currency like Dollars, Euros, or British Pounds as these currencies will go a long way when converted to weaker currencies like Thai Bhat.
We run a financial website and YouTube business that targets a UK audience and so primarily earn in British pounds. We could in theory do this work from anywhere in the world and still continue to earn the same income but unfortunately like most people we’re both creatures of habit and stuck in our ways.
If you’re a little more open minded than us, then consider geoarbitrage to reduce your FIRE number!
Reconsider Your Lifestyle Cost
We’ll keep this brief as cutting costs is such a FIRE cliché. Do you need to spend as much as you do? Do you really need that four-bedroom house when there’s just two of you? Do you need a new car every few years? Do you need to holiday in Florida, or would Spain be more than enough?
What about your hobbies? Horse riding, go-karting and scuba diving are all great fun, but would you be equally as happy with a bike ride and swimming in the sea that cost nothing, or close to nothing?
Also, the permanent cost savings from adapting your lifestyle has a double impact on your FIRE number and date. Cutting costs allows you to invest more and simultaneously lowers the size of the required retirement pot.
If cutting costs is the sword in your sheath, then boosting income is the bazooka in your arsenal. Cutting costs can only go so far but boosting income is limitless.
For most people already in their careers the fastest way to earn a small boost to income is to switch jobs. Earning a promotion internally is a long and risky, not to mention boring, process. Much easier and faster to go elsewhere.
We call this ‘self-promoting’ and during our employment years we did this throughout – earning a promotion and a significant pay rise every couple of years. No brown nosing required!
However, there are too many downsides to working a job, including a ceiling on the amount you can earn without selling your soul to your wage master. Instead, we always encourage people to start working on a side hustle that you control, that will bring in a small income, and that will hopefully eventually replace the job when it has had enough time to flourish.
While you’re building that side hustle you can channel all the profits into the stock market, which will get you to your FIRE number much sooner.
Increase Rate Of Return
While your investment pot is small, your contributions are the most important element driving the growth. Once the pot begins to grow the focus shifts towards your return on investment.
If you have a play with the FIRE calculator, change the rate of return to see what impact it has. Changing it from 5% to 8% for example would shave years off your retirement date.
So, what does this mean? It means you need to take some “risk” with your investments. Not doing so is the RISKIEST thing you can do financially as it puts an end to your retirement dreams.
What does ‘taking investment risk’ mean? It doesn’t necessarily mean pouring all your money into bitcoin – although it could. For us it means we invest in small cap equities and emerging markets, alongside our exposure to developed markets like the US.
For us it also means sacking off low performing assets like bonds. Bonds are good for stabilising portfolio returns but not so great for epic, long-term returns. We accept that volatility risk in order to maximise our chances of FIRE.
Should You Extend Your FIRE Date Instead?
In this post we’ve been looking at getting to FIRE faster, but maybe that’s not in your best interest.
A potentially better idea would be to go part-time immediately and push back your FIRE date. It could well be that you don’t hate work (if that was your main driver for FIRE) but instead hate the amount of time working. Man was not born to slave 5 days a week.
Interestingly, cutting down on your workdays has less impact on your take home pay than you might think. The way our tax system works is it punishes those who work more. You could cut down 1 working day and therefore increase your free time by 50% – that’s 2 free weekend days turning into 3. But the effect on your take home pay might be a loss of just 15%.
You can have an immediate boost to your happiness without waiting to FIRE completely.
Another positive of this is that it gives more time for your existing investments to grow and compound because you don’t need to drawdown on them.
Say that your pot is currently £250k and due to going part-time you can no longer contribute. Earning a 5% real return, after 10 years the pot is worth £407k. But after 15 years it’s £520k. You can now FIRE in full and getting there was not the torture it would have been.
To what lengths do YOU go to achieve FIRE? Join the conversation in the comments below.
Written By Andy
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