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History of FIRE
Before the FIRE acronym was created, anyone wanting to become financially independent had to work it all out themselves. A few did, and mysteriously retired, or lived a life without financial worries. Since some of those smart cookies started sharing the knowledge accumulated, the FIRE community has begun to form.
In the US the FIRE community grew, with many blogs popping up, spruiking the benefits of developing a FIRE mindset.
Articles and forums share valuable information that helps people take smart financial shortcuts, and most importantly, save and invest consistently. Not having to work out all the potential hacks yourself makes it far easier to spend less, save more, and invest wisely. Savers gain confidence in ignoring societal norms and forging their own path when part of an online community of people doing similar (but varied) things. But the really specific US information wasn’t relevant to those in Australia.
FIRE is Spreading: Financial Independence Retire Early Australia
The FIRE movement has been gaining popularity in Australia since the Global financial crisis, with Aussie Firebug started ~2014. Australian blogs have been proliferating over the past 5 years.
Now individuals wanting to improve their financial situation have a wide selection of bloggers and podcasters doing the research and providing the information (mostly) for free.
As a result, the FIRE community in Australia is growing rapidly. Not just for hardcore savers, but for many who just want to improve their financial situation and make a life that bit easier.
Everyone can take advantage of the FIRE knowledge to improve their financial picture, not just those wanting to retire early.
What is FIRE?
The idea of FIRE is to utilize the incredible power of compound interest by aggressively investing (50%+ of income) as early as possible, in order to retire early and live off of their investments.
The 4% rule is a rough rule of thumb guiding FIREYs to accumulate enough to live off around 4% of it annually.
Many FIRE followers are depicted as individuals taking extreme steps to save early retirement.
But as more information is shared, and individuals take on the best way to adjust the FIRE idea to suit them, the financial movement is becoming more based around financial flexibility and optimizing resources.
How To Retire Early With FIRE?
The simplest scenario is for a person (of any age) who wishes to retire in 2-50 years. Based on the 4% rule, the saver needs to accumulate 25 x their required retirement income before declaring themselves as financially independent and retiring.
The maths means the percentage of your income you save and invest is far more important than your actual income. If you earn $50,000 or $200,000 and save 50% of your income, you will be financially independent in around 16 years (assuming 5% real returns).
Financial Independence Retire Early Australia: Withdrawal Rate Controversies
There are ongoing controversies around the 4% rule, and different people may advocate a withdrawal rate anywhere between 3.5-5% depending on the circumstances. Towards the end of the accumulation phase, you will have a better idea of where you sit on withdrawal strategies. Your ideal withdrawal rate depends on:
- Age at planned retirement
- Life expectancy (you may have more data than average life span, based on your own health)
- Flexibility in spending (if you can cut back during market crashes, or take on a part-time job you could manage a higher withdrawal rate the rest of the time.)
- Do you have a cash reserve to use (and reduce portfolio withdrawals) during market crashes
- Do you have back up options in case of running out of income (Aged pension, reverse mortgage, selling investment property you had planned to leave in your will)
- P/E ratio of your investments at retirement (check out Mad fientist’s incredible article and safe withdrawal rate calculator).
Time to Financial Independence
How do you save 25x retirement income? Thanks to Early retirement now, this graph shows how much of your income you need to save to reach financial independence.
If you are planning to retire before your superannuation preservation age, it still makes sense to calculate your FI number, and savings rate using amounts saved inside and outside super.
Once you have worked out how much you need in total, work out how much you will need outside superannuation to bridge the gap until you reach preservation age. Income from superannuation is generally tax-free, so will generally be more efficient
Financial Independence Retire Early Australia: Progress to FIRE
The aim is to become financially independent by the time you want to retire (any age that gives you a good chance of remaining healthy and happy enough to work).
Along the way there are many checkpoints.
It can seem like a long journey along the way, but the fantastic news is that each step you take provides more financial security, freedom, and options, should your circumstances or aspirations change.
I am a big fan of coast FI. For me, it has the best of both worlds. It involves frontloading investing to take maximum advantage of compound interest. Once you have done some short-term hustle to reach “coast” it’s possible to take your foot off the accelerator.
You will have reduced your cost of living to far less than take-home pay and are on track to retirement without any further savings. This allows flexibility in switching to part-time work or switching careers and taking a pay cut without stress.
How to Create a Gap Between Income and Outgoings
Most middle-class Australians can find a lot of wasted spending if they start tracking outgoings. Eliminating spending that brings you no value, and optimizing taxation is a good start with no hardship involved!
The financial independence community often tells us cutting the three big expenses is the most powerful way to increase your savings rate. These are often housing, transport, and food. Avoiding buying as much house as you can afford as a high-income earner is certainly a powerful lever in increasing your savings rate.
Setting a budget for discretionary spending, and separating this into a separate account helps you prioritize fun spending on things that bring you the most value, and reduce waste.
Cutting spending is often more efficient for high-income earners as you will pay so much tax on extra earnings. If you are not already on your top potential income, focussing on your career is likely to provide far higher returns than side hustling. In my opinion side hustles are helpful for high-income earners when they are a true passion of the hustler (it is an enjoyable hobby that happens to bring in some cash) or it is a short-term boost to help you reach the next stage of your financial plan (eg saving for a house deposit).
Financial Independence Retire Early Australia: How to Invest
My other advice is to keep it simple. We have a tendency to overcomplicate things (usually in the hope of outsized and quicker returns). It often results in lots of unnecessary stress and underperformance.
Over history, any investment that is very popular and hyped up eventually crashes. Plenty of people make huge gains in the run-up, but no one knows when the bubble will eventually burst. Fear of missing out is a massive danger to your investment outcome, particularly when everyone around you is bragging about gains (they always go quiet about the losses though).
I am a cautious investor but recognize I don’t need to take large risks. I just need to stick to the plan to reach my goals. Because my assumptions are pretty conservative, I will probably reach my goal ahead of schedule, but that is in the hands of the market Gods!
Avoiding getting scammed is also very important. Please don’t skip this bit thinking you are too smart for this. Intelligent people are regularly fooled by increasingly sophisticated scammers. Always be suspicious when money is involved, particularly if you are a high earner.
The main investment choices (and certainly where most of us should start) are passive stock market investing and residential property.
Passive investing in the stock market can occur inside or outside superannuation. It is the simplest and most reliable to get right. If you hold broadly diversified passive ETF, managed fund, or super with low fees for long enough it will go up. You just have to put enough money in to reach your goal in the desired time frame. Don’t overlook the almost guaranteed good return of passive funds because it is boring but effective!
The big issue with the stock market is, of course, volatility. You can lower volatility by investing in bonds (you will find some inside super) or alternative asset classes with low correlation with stocks (they tend to go up in value when stocks go down).
I have chosen residential property with the aim of rental income smoothing out the volatility of stock market returns. Buying individual properties diversifies nicely from the stock market (and is negatively correlated quite strongly with international stocks). But it is far easier to screw up than passive index investing.
Despite the huge bull market in Australian property leading up to 2016, everyone I personally knew regretted property during this period and ended up selling.
When people are generous enough to share their financial mistakes and regrets, take notes! These are some of the most useful lessons in investing you can receive – what to avoid. Lessons of regret are far more useful I find than stories of success (that may or may not be repeatable). If you can avoid the big errors, you will probably do ok.
I think a 20-year timeframe before retirement is ideal for buying Australian property (growth strategy) as this takes a while to pay off. To find out why I chose to invest in property despite all the horror stories read my 1st ever article.
Involving property in your investment strategy does make things a bit more complicated. You have concentration risk from putting a lot of money in one physical asset in one location. There are risks of unexpected major maintenance. You need to manage a property manager if you don’t want to be managing the property yourself.
Find out about wealth creation strategies here.
Don’t do F.I.R.E. Just to Escape a Job you Hate
Don’t spend 10 years trying to reach FIRE just to escape an unsatisfactory employment situation. But you can use the concepts, ideas, and community motivation to get a space between income and expenditures and build some savings before you take the leap to a better job (even if it pays less).
Lean FIRE/FAT FIRE
Lean FIRE is for those planning to live on less than $40,000 US per year. Those aiming for lean FIRE can reach it more quickly as it requires less of a lump sum accumulated.
But they have less flexibility if they have very little discretionary spending. If the stock market has a bad year, they are unlikely to be able to tighten belts much further to reduce their withdrawal rates (although they could still work part-time).
Lean FIRE can be treated as another stepping stone if you are aiming for traditional FIRE. Knowing that you can retire anytime (albeit on a tight budget) provides huge psychological freedom and confidence. Those aware that they are already lean FIRE are not likely to be scared to lose a little income by changing to a more enjoyable job.
Fat FIRE usually refers to those retiring and living off $100,000 or more per year. Which is traditional FIRE for many higher-income earners. Another way people sometimes refer to it is that they have more than 25x living expenses, as an extra buffer before retiring.
Financial Independence Retire Early Australia: Conclusion
There has been a proliferation of financial information online thanks to the popularity of the FIRE concept in Australia and overseas. This information needs to be checked for accuracy but is a great source of new ideas, concepts, and potentially useful financial shortcuts.
Anyone aiming for financial independence by retirement can make use of this information to educate themselves and improve their financial situation.
Whenever you plan to retire, the financial independence community has a lot of value to offer.
Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.