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People usually associate retirement with old age. For many older Canadians, the Canadian dream involves landing a good job with health and retirement benefits and working hard until you're 65. In this scenario, retirees get to spend the autumn years of their lives travelling the world and pursuing their favourite hobbies.
But in reality, people's health and energy levels don't always allow them to live their best life in retirement. Why wait until age 65 or even later to start enjoying our lives fully? This is where the FIRE movement comes in.
What is the FIRE Movement?
Early retirement, sometimes known as the FIRE movement (Financial Independence, Retire Early) has gained a lot of attention as of late. This lifestyle movement is especially popular among millennials. It tends to involve hacking systems and making wise investments to save a high proportion of one's income and maximize returns on investments. The movement is also associated with extreme frugality.
The FIRE movement isn't about doing away with work altogether. In fact, successful adherents have gone on to make more money in "retirement" than they did while they were working. Some have done this through blogging about the movement and pursuing their passion projects.
Early retiree Pete Adeney (aka, Mr. Money Mustache) argues that FIRE isn't just about early retirement. Instead, FIRE provides people with "Complete freedom to be the best, most powerful, energetic, happiest and most generous version of you that you can possibly be."
From this perspective, the financial independence movement isn't about not working. It's about having the freedom to quit a job you might not find fulfilling.
How much money do you need to retire early?
To retire early, a person has to have enough money to live off of for the rest of their lives. Unlike the classic retirement model which involves living off of your retirement income until you die (think RRSPs and CPP benefits), being financially independent means having enough money to live off of the returns on your investments. If you play your cards right, this can happen at any age.
According to the Mad Fientist, if you save up 25 times your annual expenses, you should be able to live off of the fruits of your portfolio for the rest of your life. This means that if you need $40K per year to support yourself, you can retire once you have a million dollars. This is also known as the 4% rule.
What's the 4% rule?
4% rule is an investing concept used to determine how much a person can safely withdraw from their retirement account every year. It is based on a paper known as the Trinity Study, which first appeared in the Journal of the American Association of Individual Investors in 1998.
The Trinity Study shows that by withdrawing 4% from your investment accounts each year, the amounts you withdraw should only consist of interest and dividends. This allows your account balance to remain steady throughout your retirement - even if you retire early.
There are, of course, critics of the 4% rule. Namely, the Trinity Study is based on American stocks, meaning that its findings aren't universal. In addition, it has been shown that the 4% rule may only have a 95% success rate, with no guarantee that today's retirees will enjoy the same success rates. In other words, it may be safer to save up to 30 times your annual living expenditures, and withdraw less than 4% of your annual expenses per year.
From this perspective, early retirement is not risk-proof. And yet, some early retirees have written about their experiences navigating a recession. When you have no debt, own your home outright, and have a sizeable nest egg, a recession is far less likely to ruin you.
How to save for early retirement
The best way to achieve financial independence is to increase the amount of money you save by decreasing your spending or increasing your earnings. Ideally, you should aim to make more money and find ways to spend less at the same time.
There are many ways to make extra cash in the sharing economy. A lot of people who are hoping to retire early choose to become Uber drivers or rent rooms on Airbnb, for example. If you're looking for extra inspiration, check out Ramit Sethi's list of side hustle ideas.
Living below your means to save as much of your income as possible becomes very important within the FIRE movement. In fact, it usually involves living well below your means so that you can hit that 25 to 30 times your annual spending requirement figure that much sooner.
"FatFIRE" vs. "LeanFIRE"
The lower your income, the more frugal you will need to be. Listen Money Matters recently outlined the difference between retiring "fat" and retiring "lean." For example, if you make a lot of money as a doctor or software engineer, you might be able to save 50% of your income relatively easily and save $1M within ten years. You might even be able to do this by taking the odd vacation and eating out from time to time.
On the other hand, people who earn less will need to take a more extreme approach if they want to achieve FIRE. That's because the lower your income is, the more you will need to save.
For some, being frugal means never eating out or going on vacation, clipping coupons, and downsizing their homes. This would be on the more extreme end of the frugality spectrum. Many critics of the FIRE movement shun the idea of giving up their creature comforts in order to quit their jobs before long before they've reached the legal retirement age.
For others, investing in index funds and coming up with creative ways to save money becomes a game. You might even say that people who successfully achieve FIRE replace the thrill of trying new restaurants and buying fancy clothes and furniture with the thrill of making money, and the promise of having the freedom to do whatever they want in just a few years.
