Early retirement sounds like a dream come true. Learn about the lengths people are going to in hopes of retiring in their 40s or even their 30s to decide if it’s something you want to pursue.
Image source: Getty Images.
Early retirement is one of those concepts that seems like a crazy fantasy. It sounds amazing to be free of work before you hit the traditional retirement age, until you think about how you’re going to pay your bills.
But in recent years, more and more people have started adjusting their lifestyles in pursuit of what’s referred to as FIRE, short for “financial independence, retire early.” If retiring earlier than the norm appeals to you, here’s all you need to know about this concept.
What is FIRE?
The FIRE concept focuses on saving enough that the annual return on your money is equal to or greater than your annual expenses.
How much will you need to save to achieve that? One popular recommendation is to save 25-times your annual expenses. So, if you spend $30,000 per year, you’d need to save $750,000. At $40,000 per year in expenses, you’d need to save $1 million.
That guideline works well because you’ll only need to use 4% of your savings every year to pay your bills, and if you have your money in the right investment vehicles, it can typically average at least 4% growth per year after accounting for inflation.
Although being able to retire early is one big perk, the FIRE concept is ultimately about having the flexibility to do what you want in life without being pressured by the need to earn money.
The road to financial independence
There’s no tricks to becoming financially independent, as getting there is just a matter of smart money habits taken up a notch. The general idea is that you need to:
-
Maximize your income.
-
Cut your spending and increase your savings rate.
-
Contribute as much as possible to index funds.
Even though financial independence is theoretically an option for anyone, the less-talked-about aspect is that it depends quite a bit on your income. The reality is that a high income makes it much easier to save money.
One change that almost anyone can make is to spend less money every month. You don’t need to completely alter your lifestyle, but finding a few areas where you can cut back makes a big difference in the long run.
Index funds are a favorite of those following a FIRE lifestyle, as they average a solid return, are low risk, and are easy to invest in with any of the best stock brokers. However, that doesn’t mean you should eschew other investment vehicles, such as a 401(k) or an individual retirement account (IRA).