FIRE: Financial independence retire early

Have you heard about FIRE? It’s a financial movement that has been around since the nineties but is starting to take off here as more Australians embrace the concept.

Documentaries, blogs and media coverage are helping to drive the idea and as we are still experiencing the financial disruptions of the global pandemic, it is becoming increasingly appealing to many.

What is the FIRE movement?

What is the FIRE movement?

FIRE stands for ‘Financial Independence Retire Early’ and at its core it focuses on saving and investing as much money as you can while you are young so that you can retire far earlier than normal. In some instances, this is in your 30s or 40s!

Adopting the FIRE concept means that you live a very frugal life in your early career years and funnel a significant amount of your income into investments offering low risk but with relatively strong yields. Theoretically, this enables you to live comfortably off the passive income of your investments well before you could normally access your superannuation.

It certainly has its appeal… the idea of being free from the nine-to-five worklife in your 40s rather than mid to late 60s. But it requires an incredible level of dedication and planning.

You would have to build a thorough financial program that reviews exactly how much you need to live on and structure a highly detailed budget. All non-essential spending would be off limits so that you can save every spare cent.

It also often requires you to find opportunities to increase your income, so rather than just having one job, you might also have a few side hustles to boost your earnings. Paying off your high interest debts and focusing on investments is key to your FIRE success.

Budgeting and saving

Budgeting and saving

When you first start your FIRE plan, your ability to budget and save is critical, but it’s also important to acknowledge what is achievable. It’s not necessarily about how much money you earn, it’s more about how much you can realistically save. Your essential expenses such as rent or mortgage payments, education fees or utility bills must be paid, so this will impact the amount you can put away.

Thorough calculations of your expected annual requirements in retirement will determine how much you need to have in investments. And this calculated figure will indicate how long you will need to continue saving before you can retire early. The maths is crucial to make sure you don’t end up running out of money!

Seeking the services of a professional financial adviser can help you with the complex forecasting. The last thing you want is to have to return to the workforce after years of retirement because you don’t have enough left in the bank.

Potential problems

Potential problems

The principles of FIRE certainly have their merit – lower your expenses and boost your savings – we could all benefit from these habits. But there are potential issues you need to consider.

For some people, the money they earn right now is just enough for them to get by… they don’t have a significant disposable income to invest or the ability to reduce their spending. Limited financial capacity will directly influence whether you can adopt the FIRE strategy.

You also need to think about the lifestyle you want to live. FIRE will dramatically impact the way you socialise, your attitude towards shopping and even the food you eat. If you are used to living a certain way, you might find the adjustment challenging.

Plus, there’s always the risk of market fluctuation. What would happen if you lost value in your portfolio? Would you be able to manage a drop in passive income? Or what if you have an unexpected medical expense? Remember that if you aim to retire in your 30s or 40s, your money will probably need to last you up to 50 years.

Talk to a professional

Talk to a professional

Whenever you want to embark on a new wealth building strategy it is worthwhile reviewing your options with a professional financial adviser. They have the knowledge and experience to outline the pros and cons of the strategy and help you decide if it truly suits your lifestyle and your financial goals.

Here at First Financial, our team is always happy to discuss your personal situation and offer appropriate guidance. If you’d like to talk to one of our professionals, please contact us today.

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