The followers of a new economy of savers have their income so that they can retire early. They live very sparingly for that.
Many people dream of early retirement. The community of the FIRE movement or frugalists who simply or modestly want to live – implement this idea with some elaborate plans.
What does FIRE mean?
The abbreviation stands for “Financial Independence, Retire Early”. Transferred means: financial independence to retire early. The idea is not new, but it is currently finding more and more followers who share their experience on their own blogs, for example.
Just like here where I am propagating the idea on frugalistFIREmovement.com for some time now. Frugalists rejects a life model where you work 40 years to have a bit on the high edge. Instead, he wants to quit the job at the age of 30, 40 or 50 already and spend the rest of their life with what and whom they want.
How to achieve financial independence?
The principle is simple. Who spends less than he makes monthly, and then invest the savings made, should at least lay the groundwork that he can replace part of his income with capital gains.
At present, 30 percent of households in the US do not have any noteworthy assets, according to several studies. At most, they can secure their current level of consumption from their financial assets for a few weeks or months. At this point ten percent of households can save at least just under 13 years and five percent even over 21 years to assure their current consumption from their assets.
How much do you have to save?
Blogs repeatedly talk about the four-percent rule. At the beginning of the withdrawal phase, one should be on the safe side who first withdraws four percent of the assets and adds the inflation rate in later years. And the desired retirement income to be multiplied by 25. So who wants to spend $20,000 a year, must save $500,000. I personally go for the 3% rule!
How do you get the needed wealth?
Decisive is the savings rate. Who saves half of his net annual income of $40,000, has reached this sum in about 17 years, once assuming a annual return of four percent and moderate costs such as expenditure premium on funds or custody fees.
So if you start saving in the mid-20, you will reach the goal in the early 40th. Those who save more can reach their destination faster, with a savings rate of 65 percent after around ten years. With a savings rate of 25 percent, it takes over 30 years.
In addition, modesty pays off. If you manage to live on $1,000 per month, you will need “only” $300,000 to retire. With an annual net of $30,000 and a saving of $18,000 per year corresponding to a savings rate of 60 percent, this sum should be reached in just over twelve years. With net income of $1,000 or $1,500 per month, a much earlier retirement is hardly achievable.
You should look for an additional income source for sure.
Where do they save?
Actually, everything. The housing costs must be very low. Holiday is hardly a go, as well as restaurant visits or theater. The extreme saver should do without a car and probably save on cigarettes and pay TV as well.
How do they invest?
Return clearly helps to achieve the savings goals. This is not so easy to achieve in the low interest rate environment. US FIRE supporters often rely on ETFs, low-fee index funds, as they often recommend in their blogs. Also real estate or real estate funds are recommended or quiet corporate investments. As an investor I am usually very cautious. Because high yield returns are usually not without risk.
How to spend?
Before retirement, the saver should take a close look at his assets. Try to predict what the markets will look like in ten or twenty years from now, but it is always hard to say today. There may also be new tax laws that one needs to take into consideration. Maybe the assets should be redeployed from riskier equity investments into more conservative investment assets.
Unpleasant is a weakness in the stock market at the beginning of retirement. Even a withdrawal of a constant four percent can shrink capital in times of market weakness, so that it does not cover the expected term. Therefore always be cautious and work out a plan B in any case.
Here at the Frugalist FIRE Movement blog I try to show you alternatives that will hopefully prevent you from unexpected disasters and keep you on track of financial independence and early retirement even during challenging times.
Share your thoughts on the subject in the comment box below and share the content from this website with family and friends too. All the best on your FIRE path.