In recent years, the “FIRE” movement has received a lot of attention from people of all ages and all walks of life. FIRE — which stands for, “Financial Independence/Retire Early” — adherents have been noted both for some unorthodox lifestyle decisions (like moving into a tiny house to eliminate most housing expenses) but also for their determination to escape the 9-to-5 grind without having to fear destitution or reliance on public assistance. For true believers in FIRE, it’s all about spending your time on the things that are important to you, rather than the things required by an employer or to maintain a certain lifestyle.
The basic principles are simple: to achieve financial independence and retire early, make the positive gap between your income and your expenses as wide as possible. As shown by this handy chart on the Four Pillar Freedom blog, the bigger the distance between what comes in and what goes out, the fewer years you’ll need to wait until FIRE.
For example, a person making $100,000 in after-tax annual income who is only spending $20,000 per year can achieve financial independence in only 5.6 years. On the other hand, someone with that same income who is spending $95,000 annually will have to wait almost 66 years to retire. The chart assumes that the difference between income and expenses (savings) is invested at an average rate of 5% annually and that the retiree will withdraw 4% of the savings annually in retirement.
“But wait,” you say, “I can achieve much higher returns than 5%.” In recent months and years, that was probably true. Equity returns of as much as 15% were achievable during the big bull market run-up. And indeed, such returns narrow the window: Someone earning $100,000 and spending $95,000 would only have to wait about 26 years for FIRE.
But here’s the important question: How likely do you believe it is that you can maintain an average 15% return for the next 26 years, given that the historical average annual return on equities is around 7%?
Instead, your number-one strategy for achieving FIRE is to concentrate on what you have the most control over: your income and expenses. If there is one thing I have learned from my thriving retiree clients over the years, it is that they are diligent about controlling costs, both in their businesses and in their personal lives. It makes sense: How many stories have you heard about the unassuming office worker or schoolteacher who left a fortune to charity upon their death?
One common denominator of all these individuals is that they lived solidly below their means. Next, they invested their savings over time, to capture the power of compounding interest. By focusing on what they could control, these “secret millionaires” built astounding estates, even though they were, by and large, people of modest means.
In 2010, Thomas Stanley and William Danko released their book The Millionaire Next Door, in which they revealed the results of years of research into those who make up the ranks of America’s estimated 11 million individuals or families with at least $1 million in assets. They learned that most of these people ran their own businesses, drove a car several model-years old, were dedicated savers and investors, and generally lived well below their means. In other words, they understood the most important principles of FIRE.
At Empyrion Wealth Management, we specialize in helping clients make solid plans to maximize their chances of financial success. If we can help you, please get in touch.
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