If you’ve found this blog you probably already know about the FIRE movement. But if not, FIRE stands for Financial Independence/Retire Early. The basic premise is to accumulate savings or investments as quickly as possible. Once you’ve reached “your number” you then have the option to retire and live off 4 percent of your investments annually. The 4 percent rate is often referred to as the “safe withdrawal rate” as detailed in the controversial “Trinity Study” by three Trinity University professors in 1998 (and a 2009 update) who studied mixes of stocks and bonds based on published stock market data from 1925 to 1995. Essentially, with a 4 percent withdrawal rate the theoretical retiree would not exhaust their funds during retirement through almost any market conditions. In a nutshell, (FI) is achieved when your investment portfolio = 25 x Your Annual Spending. Retiring Early (RE) before the conventional retirement age requires increasing your savings rate and maximizing the efficiency and performance of your investments. If you are in a habit of saving monthly then retirement can be forecasted roughly* using the following simple equation:
25AS(1+i)n= PV(1+(r/k))nk + PMT[(1+r/k)nk-1)/(r/k)]*(1+r/k)
Where:
AS = annual Spending
PV = present value of savings
PMT = monthly savings
k = payment frequency (i.e. months per year of savings payments
r = annual growth rate
i = annual inflation
n = number of years
Easy Right! I’m sure you’ve wiggled you finger in the air like Russel Crowe in A Beautiful Mind and found your year of FI.
You can unroll your eyes now.
Thankfully, there are numerous online calculators that can do the math for you. Or, you can try my Retirement Calculator
Ok, now that we’ve been blinded by math, how do we reduce the years until FI? Well… we can see the factors we can control are annual spending, monthly savings amount and annual growth rate. So, we can reduce our time to FI by decreasing spending; thereby lowering the required portfolio value, or increasing the portfolio value by additional monthly savings or achieving a higher growth rate. Well duh! Where this gets interesting is when you begin to vary these values and see how much impact these can changes make. Does one factor outshine the others in the quest for FI?
As an example, let’s look at a case with the following assumptions:
| Annual Retirement Spending (Current Dollars) | $ 80,000.00 |
| Present Value of Investment Portfolio | $ 80,000.00 |
| Monthly Investment Contributions | $ 4,000.00 |
| Annual Growth Rate | 6% |
| Annual Inflation | 2% |
This poor sucker has 26.8 years to FI. Yuck.
Factors to Consider
Varying Spending – A decrease in the annual required spending in retirement of 1% ($800) shaves 0.2 years off your timeframe
Increasing Investment Contributions – An increase in investment contributions of the same amount per year cuts off 0.3 years. Almost apples to apples with varying spending.
Combination – Instead let’s do both, reducing what you need in retirement and increasing your investment contributions leads to a reduction of 0.5 years.
Varying Growth Rate – Increasing the annual growth rate of an investment account with a starting balance of $80,000 by 1% equates to approximately 2.8 years off the time to FI.
Ideally, though we pour gas on this fire and we combine all 3 strategies to really make some headway.
When this data is converted to percentages it looks like this:
| Measure Achieved | % Time Reduction to FI | Years Closer to FI |
| 1% reduced spending | 1% | 0.2 |
| 1% increased monthly investment contributions | 1% | 0.3 |
| 1% reduced spending which is added to investment contributions | 2% | 0.5 |
| 1% growth rate increase | 11% | 2.8 |
| All Three Measures Combined | 12% | 3.1 |
Based on the info above, clearly, driving a higher growth rate is a quicker path to FI. But how can you get a higher growth rate? It might be simpler than it seems. Let’s flip this around at look at what may be dragging down your growth rate.
Perhaps you have an actively managed investment account that charges a percentage of assets under management (AUM)? It is quite common for the management fees to be more than 1%. Consider rolling these funds over into an account with low cost index funds, such as Vanguard, and that makes most of that 1% go away. Of course, you must be a believer that low-cost index funds will perform as well as, if not better than actively managed funds, which I am. Look to Jlcollinsnh’s “A Simple Path to Wealth” for a great read on why this may be case.
Then there are taxes… review your investment strategy to make sure you are taking full advantage of tax-advantaged accounts such as your employers 401k, your Roth or Traditional IRA.
Additionally, you could add some complexity, and potentially more risk, to your investment portfolio and try your hand at any number of other investment strategies, such as peer to peer lending, operating a rental property, flipping a house, etc.
While reducing spending doesn’t compete pound for pound with increasing your growth rate, it should not be discounted. We can control this side of the equation more readily and it we can take on less risk than jumping into a more volatile investment to command the higher growth rate. Other benefits include a higher margin of safety in the event of financial emergencies, and possibly more time to focus on maximizing the potential and efficiency of your investments.
Putting This Into Action
So, based on the what we’ve seen above, what actions are we planning? First, we plan to max out our contributions to our employer’s 401k plans. Additionally, one of our investment accounts is subject to 1% AUM fees and we are working to roll this over into Vanguard low-cost index mutual funds. I will touch on measures to reduce spending and other investment strategies in future posts.
*Real life often doesn’t play out as a neat mathematical equation. Volatility in the market or life changing circumstances can and do occur which can skew this equation. But at least using a mathematical forecast can give an us a goal to chase and a measuring stick for performance.