The Basics of F.I.R.E (Financial Independence Retire Early)

The Basics of F.I.R.E (Financial Independence Retire Early)

How would you feel if I told you that you could retire in ten years? Now how would you feel if I told you that there are literally thousands of people that have already done this? I didn’t believe this was possible either, until I came across a blog post by Mr. Money Mustache. He has an entire army of like minded individuals called Mustachians that have already reached F.I.R.E (Financial Independence Retire Early) and retired in their 30’s and 40’s. Here is how they did it…

Have 25x of your annual expenses saved, withdraw 4% of your portfolio annually, and you will have enough to live on, indefinitely.

Did you hear that? Indefinitely. Meaning, your nest egg should last you forever. You are essentially living off of the interest of your investment without ever touching the principle.

Think of it like the goose and the egg. The money you save is the goose and the interest your money earns is the egg. The goose will continue to lay eggs as long as you ensure your goose is not touched. Below is a simple example of how to calculate your FIRE number:

If you and your family need $50,000 a year to live on you need to save $1,250,000 (50,000 X 25 = 1,250,000). 

If you and your family need $30,000 a year to live on you need to save $750,000 (30,000 X 25 = 750,000).

Easy right?

If your FIRE number terrifies you, don’t be because the two factors that will help you to financial independence is one hundred percent in YOUR control…

1) Your savings rate and
2) How much you need to live on

For every $100 you cut from your monthly expenses, you can reduce your FIRE number by $30,000 ($100 X 12 months X 25 = 30,000). What if you cut your monthly expenses by $500? You can reduce your FIRE number by $150,000! And what is $500 to the average person living in America today? A car payment? The lunches we buy while at work? Our morning Starbucks coffee run? The fancy restaurants and bars we go to on the weekends? Our monthly shopping spree? The list goes on and on.

Reducing your monthly spending is more beneficial than increasing your income. The reason is because of two factors… 

1) You will have more money to save and invest
2) The amount you need to live on will decrease permanently

I challenge to look through your monthly budget items and see if you can cut just $100 from it. I bet you that you can easily find a few items lurking around that you never realized was there.

Here is a website that the FIRE community recommends to calculate your retirement date. Simply enter a few items and calculate how long it will take you to reach financial independence.

Assuming that you have a 5% investment return (after 3% inflation) and you withdrew 4% annually to life off of, here is a graph from Mr. Money Mustache that will show you how many years it will take you to retire:

Isn’t this incredible? Increasing your savings rate from 5% to just 10% will help you reach your retirement date fifteen years quicker!

I have worked as a Pension Administrator in the retirement plan industry for ten years and I see too often just how many people are working well into their 60’s and 70’s because they do not have enough saved. DO NOT BE ONE OF THESE PEOPLE, I beg you. You are in control now of how much you save, and you are in control of how much you spend.

Do not feel pressured to buy the nicest house, the nicest car, gadget, toy, and clothing simply to impress people you don’t even care about. At the end of the day, you have to sit down and evaluate what you truly value whether that be family, friends, your faith, creativity, productivity, a morning cup of coffee, volunteering, a walk outside in nature, travel, and so on. Material possessions is not the way to true happiness.

ACTION STEPS

What is the point of accumulating knowledge that will benefit you if you do not apply them? Well let me tell you… absolutely nothing! I challenge you to complete the following items.

  • Calculate your FIRE number by multiplying your annual expenses by 25.
  • Go to the retirement calculator to see how long it will take you to early retirement.
  • Cut as much as possible from your monthly budget. Start with $100 and then re-calculate your FIRE number and early retirement date.

Is there a difference? Share by leaving me a comment or an email.

– Ann

Read my other posts…

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