String Theory on FIRE

For those of you who haven't heard of the FIRE movement yet, this title is probably very confusing...but it won't be for long! I've been planning this post for a while and I felt like it was a very appropriate time, since I just recently opened a solo 401k for my business.


In this blog post, I plan to highlight the pros and cons of the FIRE movement and why my wife and I are pursuing a "somewhat" FIRE life.


Disclaimer: All of the information stated is absolutely universally accessible! Please check out my favorite FI podcast and website Choose FI @ www.choosefi.com . They are by far the best FI resource that I've discovered through this journey.


First off, the acronym FIRE stands for, Financial Independence Retire Early. Let's start with that first half: Financial Independence. The financial independence concept has been around for a while, with many people initially pursuing it accidentally before it became a coined term. Financial independence is the idea that you live on less than you earn (an idea that many Americans have difficulty with thanks to our consumer culture), and invest the difference saved in low cost, broad based index funds or ETFs. Once one's investment portfolio reaches 25x their annual living expenses, they theoretically can live off of their investments for the rest of their life (yes, adjusted for inflation). This quantity is substantially less than most people believe they need to retire.


Let's play this out:

Say you feel like you need $40k / year to sustain an amazing quality of life. Sounds like a small amount? You can retire with a mortgage and factor it into your financial independence number (25x expenses), but if you were able to pay it off before retiring, that could be a difference of $12k-36k / year (or more depending on your home size). Now our living expenses are much lower and our $40k is a substantial sum of money.

Alright, back to the $40k / year. To get your financial independence number we will multiply our $40k / year x 25 (ends up being 4% of assets per year), and we get $1,000,000. Therefore, on a basic level, this person will need a $1,000,000 portfolio to retire forever on $40k / year, adjusted for inflation (over time amount per year increases by inflation rate). Dreading figuring out where $1M is going to come? Don't worry, enjoy this GIF, and scroll down.




So how do we build a $1M dollar portfolio? Sounds impossible. You know why? Most likely because the majority of us praise the "get rich quick" model. I'm about to give you the get rich slow model. Trust me, it's much less stressful.


Say you are 30 years old. Say you want to expedite your retirement because you just found the FI pathway, and decide to attempt to retire by 45? (Yes this even applies to a 50 yr old who wants to retire by 65). To start, I like to use the compound interest calculator @ investor.gov (yes the government actually made something that works great). So how much do we need to save to hit our goals?


Let's pretend we have $0 invested so far and we have $500 that we want to initially put into the market. We are going to invest in the Vanguard S&P500 ETF (VOO). This is a low-cost, rather safe investment. Historically, the S&P500 has returned over 8%, but for safety we will assume an annual return of 8%. Say we are a 2 income household with each individual making $40k / year, for a total of $80k / year. So we are taking home somewhere around maybe $5500-6000 / month post taxes. If we lower our cost of living to 50% or less of our income, still spending money on what we value, but cutting out those mindless expenses that don't bring much value to our lives ($5 coffees daily are a common issue), we have some wiggle room!


Say we've crushed our high interest rate consumer debt (another topic for another blog post), have a reasonable rent/mortgage payment (didn't buy a house we couldn't afford), and can save 60% of our income. Sounds difficult right? We'll once you cut out those habit spends that don't bring value to your life, you may be surprised that you may be closer to a 75% savings rate (depending on income of course).


So 60% of $5500 is $3300 a month that we can invest. I'll have to cover the specifics of investment vehicles in another post, but pre-tax vehicles are the most optimized for current and future tax savings the majority of the time. Let's keep it simple for now. So if you are able to consistently save and invest $3300 a month @ an 8% rate of return, we reach our $1M goal in 14-15 years. BOOM! Regardless of whether you enjoy your job, you have the ability to not work for money another day in your life if you'd like. Now that's pretty cool!


You can even play around with numbers if you'd like to retire later or sooner! For example, say we assume an awesome but very possible return rate of 10%. Now our retirement time has been decreased to around 13 years.


I hope this has opened everyone's eyes to the possibility of retiring early if you are just a little bit smarter with your money!


Lastly, this is by no means the "I hate work" theory. For those of you who know me, very well know that I love to work and provide value! This is the theory of "what would you do with your time if you didn't have to work for money another day in your life"?


Now it's time for me to ask you:


"How smart/hard would you work to buy your freedom?"


There's no better time than the present!


Peace out and have a wonderful day!


William




Contact

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​​(843) 834-5915​

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