Is Financial Independence, Retire Early (FIRE) worth doing?

We are all told from a young age that the thing to do is work hard, save and invest your money wisely and if we do this we might be able to retire at 60 and enjoy the fruits of our labour. While this has been the roadmap for generations, there are people out there frustrated by the societal norms of retirement.

Financial Independence, Retire Early (FIRE) is a radical savings strategy that is gathering a lot of attention from people around the world who are disillusioned by the 9-5 work life, wanting to retire as early as possible.

In this blog I will dig into what the FIRE movement is, how to implement the strategy and some alternatives.

What is the FIRE movement?

FIRE stands for Financial Independence, Retire Early. It is a retirement strategy that stemmed from a book written in 1991 by Vicki Robin and Joe Dominguez called, ‘Your money or your life’. The concepts of trade-offs are discussed in the book, and readers are asked to consider what they are willing to trade in the pursuit of more money. This has developed into a retirement strategy that requires you to make some lifestyle sacrifices in pursuit of financial independence.

The retirement strategy can provide for a modest or comfortable retirement, depending on the individual and their retirement goals. The ultimate goal is to rapidly save and grow wealth, in order retire early and live off it. Retirement goals usually vary, between retiring as early as 30 and through to age 50.

How does FIRE Work?

Firstly, for the FIRE strategy to work you need to set an income target. How much income do you require to live off without working? This will vary for different people, some will be ok with a modest retirement receiving $50,000 for example. Some may need $80,000 per year for a more comfortable retirement.

You then need to work backwards to get your savings/passive asset goal, and for this, it is common to use the 4% rule.

The 4% rule is a popular way of estimating how much your will require in passive assets and savings to produce your require retirement income. You are assuming that your capital will produce 4% income each year.

Retirement Income = Retirement Savings x 4%

If we have your desired retirement income, we can rearrange to solve for Retirement Savings.

Let’s say that you will require $70,000 each year in order to retire from working. We could solve for how much you will need in savings;

$70,000 = Retirement Savings x 4%

Retirement savings = $70,000/4%

Retirement Savings = $1,750,000

I would suggest taking this a step further though and factoring in inflation (CPI), as your cost of living will increase over time. Using an estimate of 3% pa CPI, and expected retirement time of 10 years, we can extrapolate how much you will require adjusted for inflation.

$70,000 x 1.03^10 = $94,074 pa.

So, $70,000 of todays dollars is equal to $94,074 in 10 years’ time.

Plug this back into our Retirement savings calculation;

Retirement Savings = $94,074/4%

Retirement Savings = $2,351,853

So, after adjusting for inflation you would require $2,351,853 in passive assets or savings that will be able to pay you $94,074 (4%) in 10 years’ time.

That is the first step done. Now you need to set out your budget.

FIRE Budget

FIRE participants realise that sacrifices need to be made today in order to retire early. The average savings rates are in between 50% to 75% of salary being directed to savings or paying down debt. Many will also try to increase their income by getting an additional part-time job or starting a side hustle.

Investing strategy’s will vary from investing into exchange traded funds (ETF’s) through to high interest savings accounts.

Is FIRE achievable?

Let’s run the numbers using the above scenario of achieving $2,351,853 in 10 years and assume that we have a couple earning $120,000 combined income. This is split $80,000 and $40,000 between the couple.

Firstly, we need to strip out tax. A simplistic tax estimate would be approximately $22,434, so Income after tax is $97,566.

If we apply the most radical scenario of saving 75% of income, this couple would be saving $73,174 per year.

On face value, this would leave them considerably short.

$73,174 x 10 = $731,740

But the strategy is to take your savings and invest this money into either high interest savings or exchange traded funds (ETF’s). So let’s take the average rate of return on the S&P/ASX 200 of 9.3% and revise that down to 8% pa to adjust for some risk.

When we do this, adding $6,097 (73,174/12) per month to the S&P/ASX200 at a rate of 8%, you would have $1,122,858 in 10 years’ time.

Still short.

What this doesn’t take into consideration, is Superannuation savings. Your employer is mandated to add 11% per pay check into Super which is also growing year on year. This may be the missing piece in the scenario, however you aren’t able to access this until you are 60.

If you take this view, the savings outside of Super that this couple has accumulated might just bridge the gap between retirement and attaining a condition of release (turning 60 and retiring).

With the super projector on the ASIC money smart website, using 11% contribution rate and 8% average annual return, this would give the couple a projected Super balance at age 60 of $621,000.

So is FIRE achievable? Maybe, but it isn’t easy and in this example the couple would have to do one of a few things;

  • Work longer and push out their retirement deadline. 10 years probably isn’t achievable but if they were to work a bit longer and save more, it might be.
  • Reduce down their retirement income goal. They could possible retire in 10 years but will have to sacrifice on lifestyle and reduce their retirement income goal of $70,000 pa.
  • Earn more income. The reality is that they will likely get some salary increases from CPI along the way, so they will get some natural uplift in income. They may also get some promotions or larger salary increases as well. They could also consider a second source of income or a ‘side hustle’.

Is FIRE worth it?

So having gone through the numbers and the FIRE strategy to retire early, is it worth it?

It depends. It depends on your level of income, if you are in a couple and if you are already very frugal livers. I will let you decide.

If you are asking for my opinion, I look at the sacrifices you have to make to achieve the FIRE goal.

What quality of life will you have if you are solely focused on saving for a retirement 10-15 years? What experiences will you forfeit in your golden years and will it add stress to your relationships with your spouse and family? Personally, I don’t think it is worth the risk of losing the aforementioned.

There is a quote attributed to Ralph Waldo Emerson, “It’s not the destination, it’s the journey”. Not to get too philosophical, but I think it fits well here. Rather than doing everything you can to retire early, could you instead find work that is fulfilling? Conversely, you could find a way to enjoy your work, while being able to sprinkle in holidays and hobbies that boost your quality of life.

I believe in finding a happy medium. We preach the following steps to financial success, which can be done without the radical lifestyle sacrifice;

  • Spend less than you earn
  • Invest the rest in good quality growth assets (shares and property)
  • Own your own home
  • Reduce Inefficient debt (non-deductable) and look to increase efficient debt (tax deductable)
  • Build a professionally managed share portfolio
  • Implement smart Superannuation strategies to increase your super balance and reduce tax
  • Protect yourself with insurance
  • Have a plan, and get help from a Financial Adviser

If you would like to discuss savings strategies or your retirement goals, contact one of our qualified Financial Advisers via the website or by contacting our office on 07 3378 9681, for a complimentary first meeting.

Disclaimer: The information in this article is general and does not take into account your particular circumstances. We recommend specific tax or legal advice be sought before any action is taken and refer to the relevant Product Disclosure Statement before investing in any product. P3 Financial Planning Pty Ltd ABN 61 009 883 292 AFSL 464628