On FIRE: Why And How We Plan To Retire In 10 Years
Five years ago when my husband and I were first married, I was financially illiterate. Honestly, I was intimidated by personal finance. Paying off student loans and saving for retirement seemed like such a big and scary thing. I didn’t feel like I would ever be able to understand all of the complicated terms and overwhelming concepts. Since then, we have come a long way. We have paid off our student loans, learned to live on a budget, and started the process of investing. In the process of teaching ourselves about finance, we have been inspired by the idea of FIRE.
What is FIRE? You aren’t planning on committing arson, are you?
FIRE stands for financial independence, retire early. If you have done any reading in the personal finance community, this is probably a term that you have come across. It can mean different things to different people. We are more focused on the financial independence part, which means that we want to have sufficient savings to cover our basic needs and living expenses so that we can work and live on our own terms instead of relying upon working income. We don’t imagine ourselves retiring early and lounging on a beach the entire day, but we want to have the financial security to take risks and pursue our goals and dreams.
Why on earth would you want to “retire early”?
I feel like the answer to this is obvious when you frame it in terms of the result. Who WOULDN’T want to achieve financial independence and be able to chase their dreams and goals on their own terms? But when you frame this question in terms of the sacrifices required to get there, the answer to that changes. We have a solid income and a low cost of living. Why not get a second car, buy a home, or get ourselves a TV? The answer is that we choose to give up those things because we have done the math and know how each of those things would impact our ultimate goal. That isn’t to say that any of those things are wrong, but they don’t fit into the picture of what we want our life to look like 10 years from now and we are focused on that vision.
But Abby, how on earth are you going to save enough money to retire in 10 years? Retirement is expensive!
This is where this post is going to get a little more complicated. One basic way to determine your path to retirement is to look at your savings rate. Your savings rate matters not only because it is the cash you will be using in retirement but because the higher you can make your savings rate, the lower your cost of living will be. Ultimately, the exact amount of money you put away only matters in the ratio of savings to expenses.
If person A is making 100,000 (after tax) and person B is making 50,000 (after tax) and they are both saving 60% of their income, they can both retire in 12.5 years assuming they both plan on living on 40% of their current income once they retire. Obviously, the higher your income is the easier it is to decrease the percentage of your income you live on, but the basic principle is the same regardless of income. You can see how this works using this super handy retirement calculator.
Right now we are on a very tight budget (around 17% of our income) and have an average monthly savings rate of 83% which means that we could, in theory, retire in 5 years. However, this number is artificially inflated by our cheap subleased apartment (which is temporary) and a very specific savings goal we are trying to reach. We know that our expenses will fluctuate and increase as we add other goals into the mix. Because of that, a consistent savings rate closer to 65%-70% is more realistic in the long term. Based on that savings rate and our current portfolio value we can retire in 10 years. I know that life plans can get thrown wildly off track and if we DON'T achieve financial independence in 10 years, that's okay. This is just a glimpse at our current goal and pacing but it is subject to change.
For added detail, this calculator functions off of average rates of return and a withdrawal rate of 4% annually which according to many financial experts is the magical number you can withdraw consistently with minimal risk. As I explained above, financial independence to us means that we only need enough money to live on and cover basic expenses because we probably still be working. We may just be pursuing jobs that pay less and that we find to be more rewarding, and therefore we can get by on a relatively low "retirement" income.
I am not a financial expert, as I stated at the start of this, I used to be absolutely clueless when it came to money. The more I have learned, I have felt the pull to share the things I am learning because I know how intimidating personal finance can be. They say that knowledge is power and coming to the realization that early retirement is a realistic possibility for us has been empowering. In the span of 5 years, we went from having $30,000 in student loans to be on the path to retirement in just 10 years (even less if we really push ourselves). I recognize the amount of privilege and luck that have put us into the position we are in and I don’t want to discount that. We have also made conscious decisions along our journey, tried to learn everything that we can, and made sacrifices to make this a possibility. I just want people to know that even if it feels impossible, chances are if you are reading this, financial independence is within reach.
What do you want your retirement to look like? Tell me about your retirement goals in the comments down below. I also welcome any and all questions about our crazy 10-year plan.