What is FIRE?
FIRE is an acronym for Financial Independence, Retire Early thus to Get Fired is not to suggest that you go abuse your boss so that you find yourself on the unemployment line.
Rather Get Fired is reaching a destination in life where you are entirely financially independent and you can choose to continue to work full time, part-time or retire early.
You have enough investments to support your lifestyle that you don’t need to work for an ongoing income because your investments generate more than you spend each year.
What is the Safe Withdrawal Rate?
The Safe Withdrawl Rate determines the amount of savings you will need in order for your financial independence goals to be successful.
For example, if you wish to withdrawal 4% per year you will need more savings than if you withdrawal 3.5%
In reverse, this figure may be used to determine how much savings you will need. Generally, a safe withdrawal rate of 4% is used for most retirees however I encourage you to do more research to determine what works best for you.
With a safe withdrawal rate of 4% per year, you will need 25x your annual expenses in savings investments.
This 4% figure stems from a 1994 study which used historical data to determine what the highest safe withdrawal rate is that would hold up for 30 years over any period.
This means if you are lucky enough to retire at a very young age you may need to adjust this figure to take into account more savings.
Keep in mind this study was based purely on the US stock market which isn’t entirely applicable here in Australia. While we can easily invest in the same stock market, currency fluctuations will determine the outcome.
A Morningstar Report suggests a rate closer to 2.5% for Australia, however, this also included active management fees of approximately 1% which is quite high.
Other third-party research by bloggers suggests a rate of around 3.5% is a relatively safe compromise.
What is compound interest?
Compound interest is the addition of interest to the principal sum. In other words, it is interest on interest.
It is the result of reinvesting interest or earnings automatically. This is the single most important factor in saving for FIRE.
For example, if you invest $10,000 per year for 10 years with a return of 5% you will have $125,779 instead of $100,000 at the end of 10 years compounding annually.
This is important because what it means is you don’t need to actually save the total goal amount. Reinvesting returns will compound and get you there quicker.
For example, if my FIRE goal is $1,500,000 which will provide a safe withdrawal amount of $50,000 – $60,000, over a 20 year period you will directly invest approximately $650,000 and compound returns will take care of the rest.
How much do I need to save?
How much you save is completely dependent on your goals using the information above as a basis for figuring out what will work best for you emotionally and financially.
Remember it doesn’t matter if you’re making $150,000 a year or $50,000 a year — saving something is better than saving nothing and the more you save, the faster you will reach FIRE and freedom.
There is great discipline in living the pre-FIRE life too. Not only do you get to learn about investing and saving but you also get to learn about your own personality and emotions.
Living an extravagant lifestyle may bring temporary highs but it may also sacrifice your goal of financial independence.
But each individual journey and destination is different so only you can create a plan that suits your needs and desires.