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Is "Financial Independence, Retire Early" realistic — or a pipe dream?

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6 mins

Financial Independence Retire Early (FIRE) is a movement of people looking to accumulate enough wealth relatively early in life (30s or 40s) to have the financial means to retire early. And it's very appealing to many.

Would you like to be financially independent? Who doesn't dream of having enough money not to have to work if you don't want to, traveling to exotic locations you always wanted to experience or buying luxurious items without having to worry if there's enough money in your checking account to pay for them.

And would you like to retire early? Have you daydreamed about walking into the boss's office and telling them you won't be coming back after lunch...ever? Have you dreamed of throwing the alarm clock in the trash can and waking up when your eyes open, and not a moment before?

Both of these scenarios contain some facets of what is motivating people to join the FIRE movement. At first blush, you may feel a spark of excitement that this is something you'd like to do. And who could blame you?

But FIRE isn't for everyone. If it were, voluntary unemployment would be soaring, America's savings rates would be rapidly rising, and the money pouring into investment accounts would be growing exponentially.

Is FIRE realistic for you? Are you willing and able to live the lifestyle of someone committed to making the sacrifices today to live tomorrow as they dream of?

Let's go through a series of questions to help you determine if FIRE is something you can commit to and see through to completion.

Can you commit to saving 50% or more of your income?

This is a hard question to start with. If you have a retirement plan where you work, what percentage of your income are you contributing now? According to Vanguard, the average 401(k) contribution was 6.9% of pay in 2018, and only 21% of 401(k) participants save more than 10% of their salary for retirement.

401(k) 's have something called a "Catch Up Provision," which is in place because most people need to be doing some catching up as they get older to make up for the low percentage of their income they put towards retirement savings when they were younger.

The maximum allowable amount you can contribute to your 401(k) in 2020 is $19,500. If your income was $39,000 in 2020, would you be willing to commit to making the maximum contribution? You may not yet be able to do that yet, but are you willing?

Can you make the necessary spending sacrifices?

It takes some exceptional sacrifice to save 50% of your income. You might have to sell your car. Downsize your living space to something uncomfortably small. Eliminate frivolous spending, like eating out or going to the movies. Cut your grocery list back to the bare necessities.

These are all things we can do, but do you want to? Would you rather enjoy the creature comforts of life today and retire at the traditional retirement age, or would you rather live a simpler lifestyle today so you can retire early? If you're going to be financially independent, significant sacrifices must be made.

You may be willing to make these sacrifices, but is it feasible to make them? If you're raising children, you know many expenses just aren't avoidable that take a good chunk out of your cash flow.

Braces. Musical instruments. Registration fees for sports leagues. Transportation to and from school for extra-curricular activities. These are just a few of the things that can prohibit you from maximizing your savings rate while the kids are growing up. Not that they're not worth it.

Are you comfortable with the stock market?

There's a lot of math involved in FIRE. A lot of it comes down to percentages, like what percent of your income can you set aside each month?

Another big question pertains to the rate of return you need on your savings. The money you set aside has to grow at a rate much greater than you'll get from a regular savings account. It will take some healthy annual returns on your savings to allow you to retire early.

Once you've decided to pare back your living expenses and commit that savings to go towards early retirement, you'll need to find a vehicle that you can invest in that will let you withdraw money from it when you need it.

This leaves you with the stock market. Not bonds, since their rate of return is much lower than stocks unless you invest in the riskiest of bonds. It comes down to stocks because of their growth potential and liquidity. And you'll have to invest in growth stocks, not conservative value stocks.

According to data compiled by Goldman Sachs, the average stock market return for 10 years is 9.2% for the past 140 years. This is the type of return rate you'll need to earn on your savings for you to realistically retire early. It will not only allow you to retire early, it will enable you to outpace inflation when you're retired. It will make a significant difference in your lifestyle.

If you're not comfortable with investing in equities, it's going to take you quite a bit longer to retire early. You could invest in real estate or start your own business, but with both of those, you'll have to sell them to retrieve your investment and profits, and you may not be able to do that when you want to.

How bad do you want it?

This is the defining question. You may be willing to save significantly, reduce your expenses dramatically, and invest outside of your comfort zone. But are you ready to do it consistently for years? Can you stay committed to it while you see family and friends enjoying things you no longer are doing? Things you loved to do?

It will take incredible willpower and commitment to join the FIRE movement. You have to be willing to live today in a way unlike others so that you can live tomorrow in a way unlike others. This will take tremendous resolve on your part. But yes, it can be done.

Jack Wolstenholm is the head of content at Breeze.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published October 15, 2020
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