There are no shortcuts to saving money for retirement. But some people find ways to get the hard work done faster.
Instead of planning to retire at age 60, they build up their savings, cut expenses and optimize investments to become financially independent and retire early, a process known as FIRE.
For Justin McCurry, retirement came more than 30 years early. McCurry saved $1.3 million and retired nine years ago when he was 33 so he could spend more time traveling with his wife and his three children. But it took him years of careful planning and saving to get there.
McCurry, who writes about the FIRE strategy and offers advice on early retirement on his Root of Good website, focused on reducing his debt and started saving money in college. By attending an affordable public school and graduating early while working at the same time, he was able to finish college with a good amount of savings. He also bought a condo that he rented and eventually sold for a profit.
“It’s a long-term mindset,” McCurry said. “It will take a decade or two to get to FIRE.”
While some people seek high salaries in technology, finance or medicine that will propel them toward financial independence, McCurry, a former civil engineer, says he earned more than $70,000 before he retired.
“Financial independence is within reach of the average college graduate,” he said. “If you’re only making double the minimum wage, it’s much more difficult. But for the vast majority of college grads it’s possible, even those making less than $100,000.”
Being financially independent means that the income from your investments alone is enough to cover all your expenses. While there are fundamental principles to get there, they will all have their own variables based on your income, lifestyle, and risk tolerance.
“One of the most important principles is to start saving. The sooner the better,” McCurry said. “Even if you don’t have all the math figured out. Start saving now instead of next month or next year.”
Here’s how to start working toward your financial independence.
Find your ‘FIRE number’
The path to early retirement begins with your “FIRE number”: the amount of money you need to have saved to live the lifestyle you want after you stop working.
To find it, first determine the annual budget you plan to live on in retirement, McCurry said.
“Maybe you want to live on the same amount you live on now,” he said. “Maybe it’s more because you’re going to travel. Maybe it’s less because you’re planning to move from an expensive city or even abroad to a cheaper place.”
Next, you need to determine your withdrawal rate, or how much you’ll withdraw each year from your portfolio to live on in retirement.
“The 4% rule is great if you’re retiring at age 65,” McCurry said. “But if you retire early, you should think about 3.5% and if you retire in your 30s or 40s, you can take an even more conservative number.”
Do I pay taxes if I bring my retirement to the US?Then, he says, take your retirement budget and divide it by your 3% or 4% retirement rate to get your magic number.
“That will tell you what your savings goal should be,” he said.
For example, if you plan to live on $40,000 a year in retirement with a 3.5% withdrawal rate, you’ll need to save $1.142 million, that’s your FIRE number. You can explore and adjust all the variables with an online calculator like this one on Networthify.
For those looking to earn more in retirement, the number will be higher. Rita-Soledad Fernández Paulino, 35, founder of financial advisory firm Wealth Para Todos, has a magic number of $4 million. That’s enough for her, her husband and her children to live on about $120,000 a year when they retire early.
“My number is higher because my husband has this idea that the people who are on FIRE just ate beans and didn’t go out to eat,” Paulino said in an interview with Delyanne Barros on podcast Diversifying. “And my husband says, we’re not going to retire early if we’re going to have to sacrifice, like stop eating at restaurants and be foodies.”
The powerful accelerator that gets you to your magic number is your savings rate, as most FIRE seekers live far below their means and save more than half of their income.
The sooner you start, the better, because the sun that makes your savings grow is compound interest.
“Contribute to your 401(k) and increase your withholding to 8% or 10% from 6% or 7%,” McCurry said. “Your paycheck doesn’t go down much when you do it, but it will add up a lot in the future because of the compound interest.”
The first year out of college can be important in establishing your savings habits, McCurry said. Even though you may be on the lower end of your income, you may have the most available at that time, before obligations like higher education, car payments, a house, or a family take up more of it. of your salary.
“If you put a lot of focus on your savings goals early on, you can get ahead of your savings and retirement planning.”
There are decisions to be made along the way about what you want to prioritize and also perhaps sacrifice to achieve your savings goals. For example, Paulino and her husband have decided not to put money into a 529 plan to save for their children’s college expenses. Instead, they are investing in real estate that the children will inherit.
“It’s a decision we’ve made that some people would say, ‘Oh my God, aren’t you paying for your kids’ college? Instead, are you focusing on retiring early?'” he told Barros. “Ultimately, kids learn more from our actions. So if they see you being assertive with your money, they’ll learn to be assertive with their money, too.”
Eliminate expenses and raise your profits
The goal of saving half or more of your salary will often require sacrifices.
“Ideally, a college graduate would continue to live like a college student for three to four years after graduation,” McCurry said.
But it doesn’t have to be a life of austerity, he said, just one where you make thoughtful decisions about where your money goes. Live at home or with roommates longer than you’d like to save on housing costs. Cook instead of order. Budget your main purchases and vacations. The main thing is to eliminate unnecessary expenses and save the rest.
Regardless of your income, having a high savings rate will only be possible for those who have virtually no debt. That’s why many people who work for FIRE start out paying their debts first or live a life without cars.
Part of what you need to have more money to save is to continue receiving raises. McCurry said you may even need to get another degree, certificate or skill to move to the next pay level.
Tips to not waste and take advantage of a ‘black Friday’“The people I’ve seen succeed and come to FIRE at a young age get raises or change jobs on a regular basis,” McCurry said. “A $50,000-a-year job is good to start with, but if you don’t get a raise or promotion within two years, find a new job.”
Skipping a few dinners and using the promotions alone won’t get you to FIRE. The money you save also needs to grow. When you have significant savings, the adjustments you make to your investments will have more impact than any changes in your spending or saving habits.
Frankly, investments targeting FIRE should be boring, McCurry said. Avoid individual stocks or volatile investments and instead focus on index funds: diversified stock funds that track the major indices.
“You shouldn’t see your portfolio go wildly up and down. Your goal is to get consistent returns of 8% or 10% per year, not a risky 50% or 100% return per year that may disappear next year” .
The temptation to bet big on potential windfalls, like cryptocurrencies or real estate investments, can be great. But McCurry says that if something promises to double your money, it has a lot of risk built into it. Perhaps more than you would be willing to put up with as you work towards your goal.