Playing With F.I.R.E. – Catch F.I.R.E. By 50?
F.I.R.E. is the popular acronym for the movement to reach “Financial Independence Retire Early”. I like work, so I am more focused on the “FI” part, but some people are looking to sit on a beach for eternity. Whatever the goal, there are risks of playing with F.I.R.E. and it takes hardcore planning and discipline to achieve. Many financial bloggers that have achieved this still work quite a bit on their money making blogs. It is fun to fantasize about achieving financial independence by 30 or 35, and some are doing it. Yet, for the vast majority of us, this is not very realistic. Throw in an expensive cost of living area, a family to raise, rising costs in general, wages staying put and there are many factors working against us. There also may be some hidden risks in attempting early retirement at say 35. One could have another 65 years to live off their investments without one “bad” thing happening. The chances of getting through 65 years of life without one health scare or financial speed bump seem pretty low to me.
So, for guys like me in the middle, a more practical approach would be to strive for F.I.R.E at 50! Or again, at least the F.I. part! Not so much to retire, but to build a sense of security and to perhaps do part time work in a field of my choosing. For those of us fully engrossed in our careers and raising a family it can be very challenging to just “mix things up” and shift gears without major disruptions. Let’s say you have 5-9 years to reach your goal. Here are some strategies and risks to consider to reach for that F.I.R.E. goal by 50:
1. The Basic Magic Numbers
This is obviously all a numbers game and about building the initial critical mass. Critical mass being defined as the nest egg or your personal endowment you must build to live off the interest. Some financial advisors recommend budgeting to spend at least 70 percent of your annual pre-retirement income to keep your standard of living. If you live off of $60,000 a year while you’re working, that means you’ll need about $42,000 a year in income. So, if you live until age 80, you’ll need to have assets valued between $1.2 million and $1.4 million. Many people will increasingly live beyond 80, therefore to be on the safe side with an estimate of about $2 million in assets would be required.
This does not take into account any potential pensions or social security income that could help supplement and make up for any unknowns. These can act like a kind of income insurance.
2. Collecting Assets!
You will need to be socking away as much of your income as possible each and every month! Do this through automated systems, we are too fickle and present moment biased to be effective without the help of automated systems. If you make $80,000 per year and assume your employer matches 5%. If you boost your elective contributions to $10,000 per year, your account could be worth about $640,000 assuming an 8% annual return over 20 years. And if you contributed the $18,000 maximum, your account could grow to more than $1 million in just 20 years.
3. The 4% Rule
The most common method of finding your retirement savings target is using the 4% rule. This rule basically says you won’t run out of money if you only withdraw 4% of your savings and investments each year in retirement. Caution though! A 2013 study found there’s a 57% chance the 4% rule will leave a person broke at some point. To hedge against this, many experts advise starting with a rate of 2.5% to 3% instead. If that withdrawal rate looks like it would cover your expenses and keep you from going broke, then your nest egg is likely large enough to last!
4. Not Getting Burned By Healthcare
In my opinion healthcare is a huge unfortunate unknown for those seeking F.I.R.E. in America. There is no national system per se as in Canada for one to fall back on in a pinch. An Employee Benefit Research Institute recently estimated that a senior couple with Medicare might need around $370,000 extra to have a 90% chance of covering healthcare costs in retirement. That is downright scary! With the future of the Affordable Care Act in question, I am at a loss as to how one manages this. To me, this is a huge factor in staying in the workforce longer than some of the extreme early retirees. Experts advise having a health savings account or other source of healthcare-dedicated savings before making any kind of early F.I.R.E. moves.
If you’re under 65, your healthcare situation can be tricky. While you may be able to temporarily stay on your employer’s policy under COBRA, the price will likely be much higher once you retire and your employer stops paying premiums.
5. What Will You Do to Entertain Yourself?
Let’s say one gets all the above stuff figured out! Now comes another important aspect, what will you do? I would love to design a life where we work part time more on our own terms. For me, gaining time is the goal. But, many folks get to the end of a long career and then do not have a plan.
6. Lifestyle of Frugality and Simplicity
The greatest habit that needs to be developed in all this is frugality, and that must be a constant for most people. We all know how budgets can get wildly out of hand and how easy it is for our minds to justify almost any expense. I can always seem to be able to justify buying another comic book or toy for my child. We have to be able to tell ourselves and others no without feeling bad about it. Just keep in mind, when you are denying yourself from buying something, you are not hurting yourself, you are helping by taking care of yourself and your family in the future.
* Nothing in this article should be construed as individual advice. Consult a fiduciary financial professional.