Financial Independence, Retire Early
Okay, okay…let’s be honest, we all know that we should be saving for retirement, but many of us have never stopped to consider the when’s, where’s, what’s and how’s. So many American couples have a dream of retiring someday; millions see their parents and grandparents struggling to make ends meet, living with minimal fixed income, working longer and harder trying to reach the “traditional retirement.”
Retirement refers to the time in our lives when we can say goodbye to the workforce – the closing of one chapter and opening of another. Suffice it to say, the word retirement sounds so, so sweet.
Well…before we jump into the chapter of retirement, let’s talk about financial independence and the necessary steps you and your partner can take to retire early.
Financial Independence, Retire Early (FIRE) was inspired by the 1992 book, Your Money Your Life, written by two financial gurus. FIRE is a movement of people devoted to a program of extreme saving and investing that aims to allow early retirement than the traditional age.
Many millennial couples are choosing to pursue financial independence and early retirement in return for more freedom. Ramit Sethi, founder of I Will Teach You to Be Rich and best-selling author, defines financial independence as the state of having enough income from your investments to cover all your living expenses for the rest of your life without having to depend on employment or other people. Revenue generated from those investments without working is passive income.
Everyone has a different financial independence number. The key to financial independence is how much money you spend. Simply put, the more you spend, the more you will need to save. The goal to attain enough wealth to retire early is the combination of very high savings and a frugal lifestyle.
Yup…you guessed correctly! Living frugally now; being very intentional about your savings, investing and saving a whole lot then retire early and travel the world, if you and your partner choose to…makes sense now?
With FIRE, you won’t have to work to make a living or worry about making rent payments on time. Your investments will pay for your living.
Here are a few techniques to beat inflation so that you and your partner can achieve Financial Independence to Retire Early.
Set your life and financial goals
Have you and your partner ever asked yourselves how much income you both need to sustain your lifestyle in early retirement and how soon will you both should retire?
Once you’ve answered these questions, then you can start working to determine if your goals are feasible.
According to research, the helpful rule of thumb to determine this is the 4% rule, which says your retirement savings will need to be large enough for you to withdraw 4% a year. FIRE practitioners aim to save 25% of their annual expenses.
Prioritize Savings for FIRE
First, determine what percentage of your income you can save. For FIRE to work, one must consider saving and investing 50% or more of their income. Savings can and should also include all retirement (401K) contributions, any employer matching contributions or any money set aside outside of retirement accounts.
Second, take a portion of your current income you spend and multiply that number by 25. For example, someone who spends $50,000 a year would need to accumulate 25 times this amount (or $1.25 million) to achieve FIRE.
Lastly, calculate how long it will take your FIRE number based on the amount you save each year.
Be more frugal
Do you need two or three cars or just one? Can either you or your partner work remotely, ride a bike to work or use other low–cost transportation to further cut travel expenses? Cut down and save…plus you’ll be helping the environment as well!
Consider buying secondhand furniture or clothing from apps like Facebook Market or Offer Up or maybe visit your nearest thrift store. You will be happily surprised!
Learn how to do your own household repairs instead of calling a handyman every time you need some work done. Maybe your honey can now work on his/her to do list. “YouTube University” will teach you a lesson or two!
Cut down on recurring expenses, such as, cellphone, cable, internet, and other services where possible. Cut back on splurging on lattes or avocado toast that will cost you a whopping $10 when you can make it yourself for just $1. Whatever it is, you know it best. Cut back and become more frugal.
Boost your Income
Learn a new skill or take on a side hustle that will increase your earnings. During times of high inflation, your skills become much more valuable because of a tight job market.
You can also demand for a raise from your current employer. Know your worth, switch jobs or get more training to make yourself indispensable. When prices are rising by 9%+, make sure your salary is keeping up, otherwise you’re losing money by working for the company.
Pay Off your Mortgage Faster
With interest rates rising, it’s time to payoff your debt. Don’t bother borrowing to invest if interest rates are spiking. In July 2021, 30-year fixed mortgage interest rates were only 2.87%. Today’s national 30-year fixed mortgage interest rates are anywhere between 5.36% and 5.5% (with speculations of this rising.) Let’s talk about INFLATION!
If you don’t have a fixed mortgage, throw in as much money as possible to avoid being screwed by rising interest rates. The common rule of thumb is to invest only if interest rates are less than 4%, otherwise, payoff your mortgage debt.
Only spend on what matters
The top 3 categories in any budget are housing, food, and transportation. Getting a handle on these three helps you and your partner only spend on what really matters to you. Create a monthly, weekly, or even daily budget and list what to spend on these 3 categories and eliminate what is not needed.
There are three types of FIRE. We’ve listed these below and don’t say we did not tell you so…smile:) ~ Choose what FIRE works best for you and your partner!
Barista FIRE – People who choose this aren’t necessarily trying to escape work, their goal is saving enough to retire but work less or part-time.
Fat FIRE – If you’re motto is “live a little” or “I’m living my best life” then fat FIRE might just work out for you. The goal is saving a large amount of money so you can live your best retirement life. For instance, if you live on $200,000 annually and would like to continue living on that amount in retirement, you will need to save and invest on a larger amount that someone who plans to live on $50,000.
Lean FIRE – Those who believe in living a minimalist lifestyle and can live off very little tend to be more comfortable with lean FIRE. They may save more than half of their income to achieve financial independence faster.
Financial Independence, Retire Early (FIRE) is not for everyone. The goal of FIRE isn’t to drink bottomless mimosas and take unlimited naps; but it is to achieve financial freedom so you can choose how you can spend your time.
You must know that FIRE, will require a lot of sacrifice and determination. This is not easily attained, and FOCUS will need to play a high priority. How much sacrifice FIRE requires you and your partner to make depends on your goals, your disposable income and what you are prepared to give up or cut back to get to your saving rate as high as possible.
How a Prenup Can Help
Curious about how you can protect your hard earned assets in the event of a divorce? Enter: Prenups! A prenuptial agreement is a contract that outlines how assets will be distributed if you and your partner do decide to part ways. If you’re looking to be or are engaged – check out HelloPrenup, the premier online platform for creating prenuptial agreements online. It’s easy to use, fast, and affordable (so you can stay in line with your FIRE techniques)! Curious to learn more about how it works?
Julia Rodgers is HelloPrenup’s CEO and Co-Founder. She is a Massachusetts family law attorney and true believer in the value of prenuptial agreements. HelloPrenup was created with the goal of automating the prenup process, making it more collaborative, time efficient and cost effective. Julia believes that a healthy marriage is one in which couples can openly communicate about finances and life goals. You can read more about us here 🤓 Questions? Reach out to Julia directly at [email protected]