Started by Millennials about a decade ago, the FIRE Movement (meaning “financial independence, retire early”) has really taken off. Growing numbers of young people plan to work only as long as they have to and live off their assets and savings. Sounds nice, right? In this article, I’ll explore what it would really take to retire early.
How to Retire Early
My rule of thumb is that you need at least 25 times your current yearly expenses to comfortably retire and maintain your current standard of living. Meaning if you spend $100,000 per year, you’ll need to save over $2 million dollars. I like this formula because it allows for a comfortable withdrawal level in retirement while maintaining your invested assets.
I’m not saying saving that much is easy, but it can be done. It requires a Spartan lifestyle while you save a large portion of your income. For some, this can be as much as 50% of after-tax income put into savings and investments. This may mean cooking more at home and seeing your friends vacation photos on Facebook instead of being there with them. However, it can be worth it for the years of stress-free retirement.
Investing for FIRE
Sorry to say, you can’t just put your paycheck in your piggie bank and hope to retire early. You’ll need to make smart investments. Most rely on the power of compound interest and the cooperation of the stock market. Most expect it to grow at a 7-8% rate per year, but not to rain on their parade, I wouldn’t be so sure about that.
It might seem obvious that there is a potential for a rocky road ahead as the stock market is at all-time highs after a ten-year run. No one really knows if the market will deliver this rate over time. If you look history squarely in the eye, you’d have to accept that doesn’t always perform as expected. I worry for those who’ve already quit their jobs and are relying solely on the stock market.
Diversifying your Portfolio with Real Estate
For both those looking into FIRE and early retirees looking to diversify their portfolio, I recommend investing in real estate. Real estate is a great complement to the stock market and other asset classes because the real estate market and the stock market aren’t directly related. If the stock market takes a hit, people will still need places to live. Moreover, it offers an excellent return that can be better than the stock market.
“Diversification” may sound like a buzzword, but it can mean the difference between going back to work and lounging at home. I’d recommend a first-time real estate investor buy a 2-3 unit building and live in one unit and rent out the other.
A lot to unpack here, I know, but if anyone would like more information you are welcome to contact me at firstname.lastname@example.org.