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The FIRE or Financial Independence Retire Early movement is gaining momentum in Australia and across the globe. The goal of its adherents is simple. It is to save and shrewdly invest as much of their income as possible so they can sustainably live off the proceeds, allowing them to retire at an early age.
Across online communities, subscribers of the FIRE movement regularly discuss strategies to maximise their income. From eliminating expenses and making smart investments, to taking a second job or making a career change, there are no shortage of proposed methods to retire early.
But while the movement seems a positive one that promotes responsible financial practices, is the idea of retiring early actually realistic for most people? What are the drawbacks of focusing on early retirement above all else? And are the strategies proposed by FIRE adherents practical?
This last question is particularly relevant in Australia, where young people face significant financial hurdles thanks to unaffordable housing, rising rents and the cost-of-living crisis.
The reality of retirement in Australia
According to the latest figures from the Australian Bureau of Statistics, the average age of Australians who retired in 2020-21 was 56.3 years old. This average age has been steadily increasing over the last 25 years. In 2018-19 figures, it was 55.4 years old. In 1997, it was 50.5 years old. The average age that presently employed Australians intend to retire, however, is much older. In 2020-21, this was 65.5 years old.
The Financial Independence, Retire Early movement is therefore dramatically at odds with what most Australians regard as normal retirement age. Given that you can only access your superannuation once you are 55 to 50 years old, and that you must be 67 years old to receive the Age Pension (if you are eligible for it), retiring early typically means supporting yourself with your own funds.
Live to work, or work to live?
The fact that Australians are retiring later and later as the years go on, as well as the reality of accessing super and pension benefits, could be discouraging. But this depends on your perspective on work. Some people are content working into their late fifties, sixties and even their seventies and beyond.
Without work, they may feel like they simply have nothing else to do. Or they feel that their work gives their life meaning and structure. Or they simply just enjoy working and interacting with colleagues or customers.
Others, however, may dread that they will be forced to work day in and day out until an advanced age. Especially if their current vocation is not one that they are passionate about. Or if its demands are taking their toll on their mental and physical health. If that is the case, it is likely that these demands will only intensify as they age. Early retirement, for these people, would be a godsend.
What the FIRE movement is all about
People who have joined the Financial Independence, Retire Early movement do not necessarily fall into the bucket of those who dread working. Nor are they necessarily against the idea of work. They are typically more motivated by the many lifestyle benefits that come with financial freedom. And there is no shortage of online locations where the FIRE community congregates online.
With 2.1 million members, the FIRE subreddit is one of the most popular places where the movement’s adherents congregate online. Here, members discuss their strategies for accumulating and maximising wealth and post their progress on the road to early retirement. Some of these include:
- Curbing expenses
This means assessing your whole lifestyle and eliminating those spending habits that are preventing you from saving money. Minimising or foregoing overseas trips, eating out at high-priced restaurants, fancy clothes and expensive hobbies are all lifestyle choices that you will likely need to make if you want to retire early.
- Minimising debt
Interest payments are of course one of the biggest drains on personal wealth. FIRE adherents try their best to avoid high interest debt like that imposed by credit cards. This is typically the most urgent form of debt that needs to be paid off, as the compounded rate of interest can see your debt grow fast.
If you have a mortgage, this is the generally the second most urgent debt to pay off as the interest rate is likely lower than a credit card. Granted, many people with mortgages have debts that will take decades to pay off. But making extra repayments whenever you can ensures you pay less interest than you need to.
- Making sound investments
Making investments in low-cost, diversified investment products is one of the key strategies of FIRE adherents to build long-term wealth. Common investment vehicles include low-cost index funds, exchange-traded funds (ETFs) and individual stocks. ETFs are essentially a number of different stocks bundled into one product. They are popular due to their low cost and because they instantly diversify your share portfolio.
- Boosting your income
Many FIRE adherents explore side hustles, freelance work or other business ventures to supplement their primary income. Other tactics to boost income include simply asking your boss for a raise or finding a better paying position.
- Aggressive saving
All income and avoided expenses, if not better spent on investing or repaying debt, can be saved in high-interest savings accounts. With interest rates rising, such accounts are delivering the highest interest returns in many years. People who ascribe to FIRE will generally set a goal to save a large part of their income, which typically amounts to 50 per cent or greater.
- Calculating your FIRE number
This is the amount of savings needed to maintain your desired lifestyle once you achieve early retirement. There is no definite dollar figure to live comfortably post-retirement, as everyone will have different needs and wealth at their disposal. But FIRE adherents generally use the “4% Rule” to calculate a reasonable figure.
The 4% Rule helps determine a sustainable annual withdrawal rate from retirement savings. It proposes that that retirees can withdraw 4 per cent of their initial retirement portfolio balance each year, adjusted for inflation. And at that withdrawal rate, they will have a high probability of their savings lasting for a 30-year retirement period.
The pros of the FIRE movement
- You can live the ideal lifestyle
Once you reach the promised land of early retirement, you will (hopefully) be free of many of the stresses and pressures of working life and financial insecurity. With financial abundance that can sustainably meet your needs, you can dedicate your days to following your passion. Travel. Hobbies Spending time with friends and family.
It should be noted that you do not have to retire completely. You could use your financial security to switch careers and finally take up a job that you are truly passionate about. This could be on a casual or part-time basis. And because you will have funds to fall back on, you won’t have to worry about being dismissed or made redundant. This alone can make work more enjoyable and take an enormous weight off your shoulders.
- It promotes responsible financial practices
Avoiding debt, unnecessary purchases and growing your wealth through savvy investments are all admirable principles to live by. Even if you do not achieve retirement by your desired age, FIRE will help ensure you are more financially literate and responsible. You will therefore be more secure in your life generally and will experience less anxiety as a result. You will come to understand the financial and banking system more, and use it to your advantage.
- You learn to live within your means
Saving for early retirement means cutting back on discretional products and services. While you may initially miss such things as expensive dinners at fancy restaurants, you may also come to a realisation. Namely, that you do not really miss it all that much, and that you were really throwing away money on something that is overpriced.
You will live more of a minimalist lifestyle and be more sustainable as a result. This could help you realise that the pleasures of material possessions are not everything in life. And you might develop new interests and passions as a result.
- Positive byproducts for your life
Focusing your efforts on being wise amount financial decisions and saving money will inevitably help you build a sense of discipline. This can easily transfer to other areas of your life. And cutting down on certain expenses may lead to life changing results.
For instance, quitting alcohol not only saves you heaps of money, by also has countless health benefits. If you are constantly aiming to better your finances, it will be hard to avoid making other positive lifestyle changes.
The cons of the FIRE movement
- Extreme frugality while young
The promise of FIRE is that you will eventually reach an ideal state of living. At that stage, you will be free of all the stresses of working. And you will have the flexibility and savings to travel or pursue your passions. However, this ideal state comes at a cost.
Working towards retiring early means spending your twenties, thirties or even forties working extremely hard. It also means cutting down on all unnecessary expenses. Expensive holidays, eating out, nice clothes and purchasing costly items are all things you need to avoid. This could be seen as mortgaging your younger years so you can spend your fifties and onwards living your best life.
However, as the saying goes, tomorrow is never promised. If you are thinking of ascribing to FIRE, you need to really consider what it entails. Think about the dramatic lifestyle changes and sacrifices it requires. It will likely mean you will dedicate a lot of time to working extra hours or a second job. Also consider all the best parts of life that you will need to pass up on to save costs. And also some of the relationships – both with your family or friends – that might suffer due to your time investment in amassing wealth.
- It can take over your life
By having the goal of early retirement, you are constantly trying to find ways to maximise your wealth. Of course, thinking of methods to reduce your expenses and smartly invest your money is admirable. But if it is your main goal, it could become an obsessive force in your life. If you make FIRE a goal, make sure it is not your only one.
It is important to balance this goal with others so that you are not dedicating all your time to it, at the expense of everything else. And perhaps more important to any goal are your relationships with family and friends. FIRE can mean sacrificing the time you spend with them. You could lose friends as a result. And years later, you might realise that all that time you spent working extra hours could have been better spent with family.
- FIRE is challenging in Australia
Retiring early may be less realistic in certain parts of Australia than it is in other countries. It is no secret that housing in this country is among the most unaffordable in the world. This is particularly the case at this time, with rising interest rates and rental increases. And especially in capital cities like Sydney and Melbourne.
There are also less options for Australians to seek better economic circumstances domestically than compared to, for instance, Americans. If you move to another major Australian city, you generally face the same housing cost pressures relative to wages. And while moving to a regional city can open up the possibility of more affordable housing, the job markets in such cities can severely limit your career potential relative to living in a big city.
In the United States, for instance, there are far more cities and towns that you can move to and still have access to a flourishing job market, while also accessing affordable housing.
- Early retirement may not live up to expectations
While not having to work may sound ideal, in reality, it may not be all it is cracked up to be for some people. Some, quite frankly, might realise that retirement is really boring. Depending on your personality, you might miss the structure, sense of purpose and social interactions that come with having a job.
Having had the goal of achieving financial independence for so long, once you finally achieve it, it may feel like you are aimless. As the saying goes, sometimes it is the journey, rather than the destination, that is most enjoyable.
Another thing to consider is that as an early retiree, you may feel isolated from friends or family who are still working. Their daily commitments and struggles may seem foreign to you. And they might even resent you for not having to work.
- We can’t all retire early
The simple fact is that the goal of the FIRE movement is only attainable for a minority of people. The economy relies on a strong workforce, and if most of us were retiring in our thirties, it is hard to think that it could sustain itself.
Plus, a majority of us cannot all have the same financial success. We are not all going to reap the same returns from investments. Some of us will be hugely successful, while many more will experience much more meagre returns. And a few might even lose wealth, especially if a disaster hits. For instance, share prices plummet due to an unforeseen event.
Gaining financial independence and retiring early is difficult. And as with most difficult pursuits, the stark reality is that generally only a minority will succeed.
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