You Don’t Need To Work To Age 65 To Retire
Discover the alternate pathway to retire early and financially independent.
The Standard Path
The conventional wisdom of following the ‘standard path’ by going to school, getting a good job, buying a house, and working hard until we retire well into our sixties is rarely questioned. And yet, for most people, they will retire on a lower quality lifestyle after all their years of working servitude.
It doesn’t make sense that we spend most of our life working and then retiring to live out the remaining years until we die. We blindly accept that the ‘standard path’ is the only path and never question whether there is a better way that will give us a better lifestyle and freedom of choice without committing ourselves to five decades of working in a job we don’t like.
Following the 'standard path' is an almost certain imprisonment to 45 years or more working servitude.
The FIRE Path (Financially Independent Retire Early)
The good news is that there is a better way that enables you to not only retire financially independent, but also to retire earlier than in your sixties. It is called the FIRE (Financially Independent Retire Early) path.
The FIRE path requires taking a different approach to what everyone else usually does, which is follow the ‘standard path.’ The FIRE path focuses on saving and investing a percentage of your income to build an investment portfolio that can cover your annual living expenses. It works by using the power of compounding to build an asset portfolio over say 10 to 20 years that enables you the choice to retire or to cut back working without being dependent upon an employment work income.
The amount of time it takes to build an investment portfolio big enough to achieve FIRE will depend on:
o How much you can save from your working income
o What investment return you achieve on your investment portfolio
o Your desired lifestyle and living costs
Each person is different and so there is not a specific number of years or investment portfolio amount that suits everyone.
How to determine your FIRE target and timeframe
A simple rule of thumb to calculate what investment portfolio size you need to build to retire is: 25 times your annual living costs. That is, work out how much you spend annually on your total living costs and multiply it by 25.
For example, if a household spends $96,000 annually ($8,000 per month) on living costs then they will need an investment portfolio of: $96,000 x 25 = $2,400,000.
The concept is based on drawing down 4% of the investment portfolio each year once it reaches the target of $2,400,000 to pay for the living costs of $96,000. The portfolio should hopefully continue to earn an investment return after tax and inflation greater than 4% which means the investment capital remains the same and continues to fund the living costs.
Why your savings rate is important
Your savings rate not only determines how much you save to invest but also indicates how much your expenditure is. This will also determine how much in assets and passive income you will need to generate to become financially independent.
The mainstream financial advice is to save 10% of your income. The problem with this advice is that 10% is generally not enough and will take several decades to reach financial independence for most people.
A better approach is to evaluate and prioritise your spending so that you optimise your savings rate. Every dollar you spend is one less dollar you save and can invest to multiply it. To achieve financial independence within 20-30 years you need to save at least 30% of your income and invest it.
Looking at the table below, you will see that the higher the savings rate, the lower the number of years to achieve financial independence.
| Savings Rate | Years to FI |
| 10% | 51 |
| 15% | 43 |
| 20% | 37 |
| 25% | 32 |
| 30% | 28 |
| 35% | 25 |
| 40% | 22 |
| 45% | 19 |
| 50% | 17 |
| 55% | 14 |
| 60% | 12 |
If you save only 10% of your income and invest it, it will take approximately 50 years to reach FIRE status. However, if you can increase your savings rate to 30% it drops down to about 28 years and for a 40% savings rate it drops to 22 years.
The key to reaching FIRE is about maximising your savings rate so that your living costs are sufficiently low enough that your surplus income can be invested to grow and compound. An important point to note here is that it is not just about how much you earn, but how much you save and invest from what you earn. You can earn a low income and still achieve FIRE provided you have a high savings rate.
Having a higher income does not get you to FIRE faster if you don’t have a high savings rate. If your savings rate is low, your high income will be consumed by high living costs, and you will have little surplus income to invest. This is why people on high incomes still have to work to 65.
The following table helps to illustrate the effect of savings rate has on FIRE:
| Annual Income | 100,000 | 100,000 | 100,000 | 100,000 |
| Living Expenses | 90,000 | 80,000 | 70,000 | 60,000 |
| Savings Rate | 10% | 20% | 30% | 40% |
| Annual Savings | 10,000 | 20,000 | 30,000 | 40,000 |
| Investment Capital Required (4% Rule) | 2,250,000 | 2,000,000 | 1,750,000 | 1,500,000 |
| # years to reach investment capital | 51 | 37 | 28 | 22 |
If we take an average income earner of $100,000 p.a., and if they save 10% of their salary it equates to $10,000 and takes them 51 years to reach FIRE. You will also note they require investment assets of $2,250,000. However, if they increase their savings rate to 30% their living expenses drop to $70,000 p.a. and it takes only 28 years to reach FIRE. The investment assets required also drops significantly to $1,750,000.
So, the important takeaway from this is that you need to reduce your living costs to accelerate your ability to build your investment assets, and to also reduce the amount of investment assets required to achieve FIRE. That is, it is not how you earn in income but how much spend and save. The lower your expenses, the more you can save and invest. Also, the lower your living expenses, the lower the asset portfolio you require to retire.
Key Points:
ü Build a passive income stream from your investments to replace your working income
ü Determine your FIRE target and timeframe and set a plan to achieve it
ü Maximise your savings rate – aim for at least 30% and try to increase it each year
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Disclaimer: This page contains general information only. It has been provided without taking into account your objectives, financial situation or needs. Please seek financial advice before taking any action.