Young Corporate Professionals Getting All F.I.R.E.(ed) up to Retire Early
What is F.I.R.E?
There is a movement called F.I.R.E which stands for Financial Independence Retire Early. This movement, born out of the Great Recession of 2008, inspired millennials to have the option of retiring early from their jobs at a relatively young age; perhaps in their 40s.
The idea is that you’ll never have to work if you don’t want to. The first part of the FIRE movement is financial independence. This is very appealing to many corporate professionals.
The goal is to save and invest very aggressively somewhere between 50–75% of your income so you can retire early. The movement was inspired to retire young enough so you can enjoy life when you are younger rather than wait until you are 65 or older.
This blog will discuss some of the top ways you can practice F.I.R.E as a corporate professional, and I propose some of my own suggestions as well.
Survey Says
A recent Vanguard survey shows that younger generations plan to retire earlier.1 Although most Americans plan to retire around age 65, a growing number of those under 40 are targeting an earlier retirement. The survey shows that most of Gen Z (67%) and millennials (61%) plan to retire before age 65, and nearly a third of Gen Z (31%) and nearly a quarter of millennials (22%) plan to retire before 60.
But according to a Wells Fargo/Gallup Investor and Retirement Optimism survey, only 1% of U.S. investors who are in the workforce say they are saving 50% of their take-home pay to even retire early.2
The 4% rule
One of the most important concepts to understand in the retire early movement is to have at least 25 times your annual expenses in investments as a benchmark for retirement. This comes from the 4% rule.
The idea is that you could withdraw 4% of your assets in the first year of retirement. Then, in each subsequent year, you could increase your withdrawal by inflation. If you do this, you have good odds of not running out of money before the end of a typical 30-year retirement.
But the problem is that the target withdrawal rate is 4% for a traditional retiree age 65. But with F.I.R.E. you are retiring much earlier perhaps at 50 (or even 40!). So your withdrawal rate should be lower in the 2-3% range. For example, $50,000 annual expenses at a 2% withdrawal rate might mean you need $2.5 million to retire at 50!
How do you F.I.R.E?3
No debt
The first and most important thing you can do to practice financial independence is to reduce or eliminate your debt. Paying down any student loan debt is a top priority. The movement emphasizes having positive net cash flow so you can save most of your income for retirement. Credit cards are not a good option or raking up other debt.
Max out your 401(k)
The movement also encourages maxing out your 401(k) plan at work. There is plenty of room to save up to $19,500 in 2020 into a 401(k), this is not including your company match. Opening a Roth IRA is also encouraged since you pay taxes now and it provides tax-free distribution. Be aware that if you're under 59½, you won't be able to take money out from an account like a 401(k) without paying an early withdrawal penalty. And for those withdrawals, a Roth IRA has the initial contributions can be withdrawn anytime, tax-free, but there will be a 10% penalty on withdrawing any earnings before age 59½.
Investing Aggressively
Being more aggressive with your investments is also encouraged by the F.I.R.E. movement. There is an emphasis on having more small-cap stocks in your portfolio since they potentially have the greatest return, but the most risk. The emphasis is on investing in low-cost index funds to keep expenses low. Learning about investing is also encouraged with the retire early movement. The idea is to educate yourself so you can make more informed choices. Understanding changes in the tax laws are encouraged as well.
Paying in Cash
Paying for everything in cash is encouraged by the F.I.R.E. movement. To save 50% of your salary you need to eliminate debt. Paying in cash for everyday purchases will eliminate the need for using credit cards. Paying off your mortgage early is a top priority.
Calculate how much you need to retire early
To retire early you need to be able to calculate how much you need to live on. Use the base number of 25 times your living expenses gives you an idea of how much you need to save. This number can be daunting for many folks perhaps in the millions of dollars.
What are some of the problems with F.I.R.E?
1. It assumes that you will have a high enough income in your corporate careers so you can sock away half of your paycheck. This may not be very feasible for many corporate professionals since they are new to their careers and may have a lot of student loan debt to pay off.
2. Health insurance is a big consideration. You won't be eligible to register for Medicare until age 65, so if you leave your corporate job, you may need to purchase insurance in the private marketplace, which can be much more expensive than a plan you get through your employer.
3. One of the greatest issues with F.I.R.E. is that you will be sacrificing many of the joys you have in your youth since you are saving most of your paycheck and not being able to enjoy life. Things like more expensive family vacations or having nice meals at fancy restaurants are not encouraged.
My Take
The idea of financial independence is smart. Having options on when you can retire is laudable. But if the goal is to retire that early is this simply because you don’t like your current job? Perhaps a better solution is to retire from your current job and take on another job that you enjoy more. You could save enough money to be a career-changing, knowing that you will make less in the early years of a new job. Having options is definitely a good idea for financial independence, but perhaps having more flexible goals that can change over time would be even better. Talk to a financial planner to get help with matching your retirement goals.
1. https://pressroom.vanguard.com/nonindexed/DigitalAdvisorSurveyExecutiveSummary08262020.pdf
2. https://news.gallup.com/poll/248096/few-investors-awake-super-saving-early-retirement.aspx
3. https://www.cbsnews.com/news/early-retirement-financial-
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
