Who doesn’t want to retire early? If you’re trapped in the 9-5 lifestyle, this could be a dream come true. However, while the premise is simple, there can be a lot of moving parts. Can you do FI/RE (Financial Independence/Retire Early)?
Fair warning. This isn’t for everyone, and it may not be for you. While there is always hope for a better financial future, there’s no room for romantic, pie-in-the-sky views when it comes to your money.
The Basics
For most people, it can take decades to accrue enough money to retire. However, simply setting aside money in a retirement account doesn’t adjust for whether their savings will be enough to live off of. Just ask anyone who thought their Social Security check was going to go a lot farther!
To begin, you need to understand the premise behind FI/RE.
Let’s start with breaking down what it means:
Financial Independence
You should know your financial situation better than anyone. Are you financially independent? As in do you have enough money in savings and investments to live off of without working for the rest of your life? Are you heavily in debt? Are you relying on friends, family, or other entities to support you?
Your first goal shouldn’t be FI/RE if you aren’t currently able to support yourself financially. If you’re living paycheck-to-paycheck, or if your personal situation is chaotic and you aren’t sure where your money will be coming from, then this isn’t for you, at least right now. Focus on creating a firm financial situation for yourself first. For most people, this involves having an emergency fund, being able to cover monthly bills and expenses without debt, and actively saving and investing for the future (aka retirement at some point). Many people never actually get to this point and it’s an accomplishment to do even this.
But don’t be fooled, you cannot FIRE without accomplishing a basic financial baseline first.
Retire Early
This entire lifestyle is predicated on you being able to stop working much earlier than most people. For most people, to accomplish this, you won’t just have to skip eating out, but make some pretty big lifestyle sacrifices. Ramen for dinner anyone?
The Math
There are a lot of numbers that go into this process. However, I’m going to keep this super simple. Let’s start by figuring out your FI/RE Number.
FIRE Number
Your FIRE Number can be roughly calculated by taking your annual expenses (this would be your monthly expenses x 12) and multiplying this by 25. If your annual expenses are $50,000, then your FIRE Number would be $1,250,000.
Why 25?
This allows you to invoke the 4% rule, which means that you can safely draw 4% of your savings.
However, some advisors say that 4% is too much to draw, and you should focus on a 3% draw instead
Whether you go for a 3% or 4% draw is up to you and depends on your personal level of caution.
Can you live off your FI/RE?
In the above example, we used 50,000. Think about what living off of 50k a year looks like now, in 2021. How do you think it’s going to look in a decade? Two decades? Inflation isn’t going to stop just because you decided to retire. Your mortgage or rent is still due on the first, and so is your electric bill, gas, cell phone, etc. Many of those expenses aren’t going to go away.
Your expectations of retirement probably don’t match the reality.
If you put in all this work for 50k a year, that’s not full-time traveling, thrill-seeking, perpetual entertainment lifestyle.
That’s sitting at home watching Netflix because you can’t afford to go do the fun stuff you thought you were saving up for.
Everyone wants to be a professional traveler posting pics to the ‘gram. Not everyone can afford it.
Do you make enough for FI/RE?
It doesn’t matter if you have a FI/RE number if you can’t feasibly reach it. If your reasonable retirement options involve you working for 20-30 years, then you need to keep that in mind. If you’re barely making it as is, then how are you suddenly going to pivot to saving most of your income?
Let’s keep the numbers simple: If your FI/RE Number is 1,000,000, and you’re planning on making that number in 10 years, then that’s saving 100,000 a year. Are you in such a position of affluence that you can save more than what 80% of Americans bring home in a year? You have to be realistic.
How old can I be for FI/RE?
If you’re middle-aged and considering FI/RE, unless you make six figures a year and are willing to drastically decrease your lifestyle forever, it’s too late.
If you’re a mature adult and you’re considering FI/RE, it’s too late. You’re a regular retiree at that point. Ask yourself: how are you retiring early at your age? Retiring in your 50s isn’t early. These days people even retire in their 40s. Some jobs (especially government jobs) will let you retire after 20 years.
Arguably, starting FI/RE in your thirties is pushing it.
TL;DR Are you worried about your cholesterol or fiber intake? Then you’re too old to start FI/RE.
Can I do FI/RE and invest?
I’m not your financial advisor (though I have money coaching available). To keep it brief, regardless of how you make it, you only have so much money coming in. You’re the one who needs to be on top of where that money goes, and how it grows.
Does Budget Girl do FI/RE?
I was interested in the concept. However, after doing my research, I realized that I was more interested in generating additional streams of income through real estate. I am currently house hacking and am looking to purchase my next property.
If you’ve watched my monthly budget videos, then you know that I save and invest a big part of my income, but I’m not planning on giving up my day job (or the health insurance and other benefits) any time soon.
I completely understand working a shitty job and wanting to get out so bad it hurts. I’m extremely fortunate that I currently have a job where I’m treated well, paid well, and enjoy the work. My day job makes it possible for me to build side hustles and purchase assets that may one day allow me to retire early, but that isn’t the goal for me.
I know a lot of people in this space that have “retired” but still work a lot. They claim to be “retired”, but realistically they all still put in some hours to keep the money rolling in. Be real here: work is work, even if it’s not going to an office from 9-5.
Many of them also tried full retirement and got bored. Work, especially in a field you’re interested in and good at, can be very fulfilling.
Does Budget Girl recommend FI/RE?
I can’t give FI/RE a blanket recommendation without knowing your personal situation. It’s a very specific method that won’t work for many people.
Can you do FI/RE?
Here are some of the considerations to keep in mind when really thinking about FI/RE:
- Are you willing to forgo luxury lifestyle options (cars, vacations, etc)
- Do you have children, and can you mitigate the associated costs? (kids are expensive)
- Is your spouse or partner on board? (this won’t work if they aren’t)
- Can you save a large portion of your income?
- Are you financially independent?
If you’re able to answer yes to all of these questions, then congratulations! FI/RE may be an option for you. If you’re a maybe on some of these, then you might want to do some more research. I recommend watching the Playing with FIRE documentary as it is a good source of information.
