Financial Freedom

I recently had a conversation with a co-worker about retirement.  In 10 years, he will be eligible for early retirement, but it’s not necessarily something he wants to do.  It’s not about the money, necessarily, but rather this idea of what you’re going to do after you retire.  I, on the other hand, have 20 years before I can retire “early” with a full pension, and all I can say is I can’t wait.  When you think of your retirement age, you probably think about some in their late 50s or 60s and well, that’s kind of the norm.  What we’re going to talk about today is how to achieve the goal of Financial Independence/Retire Early (FIRE).  Meaning – how can we get to a position where we have the money and we want to retire?

The Social Security Administration allows you to start taking benefits at age 62, for example, and you can start withdrawing money from your Individual Retirement Account without a penalty at age 59 ½. While this is the standard age in which most people start thinking about retirement, people who strive for FIRE retire much earlier than this, usually in their 40s, 30s, and sometimes even in their 20s.  I literally cannot imagine being retired right now, but that’s because I work for someone else.

But when it comes to FIRE, it’s not necessarily about retiring early, but more about the freedom to pursue your dreams and ambitions.  Thus having the freedom to choose whether or not you’re going to work. In fact, the FIRE community seems to focus less on the “retire early” aspect of the movement and more on the financial independence component.

Who is FIRE for?  If you have a high-paying, but a soul-depleting job, then FIRE probably sounds pretty good right now.  But, this isn’t really a good reason to retire early.  It will inevitably lead to being bored and wandering aimlessly while you try to find your next thing.  Further, early retirement is more for people who have a clear idea of a different lifestyle or goal that they might want to pursue.

But how do you get there?  It’s actually really simple.  Spend less than you earn and save the difference in low-fee investments like index funds.  That definitely sounds easy enough on paper.  But how many people can spend less than they earn?  Further, how many people could delay the gratification of spending the money that they make?  Another way to do this is to have passive income streams – like rental properties.  But then so is being frugal.  The less money that you need to live on, the less money you need to save for the rest of your life.

Jonathan Mendonsa, co-host of the ChooseFI podcast, suggests the following:

  1. Lowering your housing costs
  2. Driving used cars
  3. Cutting the cable
  4. Lowering your tax liability by maxing out your tax-deferred vehicles such as your 401k, 457, 403b, IRA, HSA, etc.
  5. Using cheaper cell phone service
  6. Use credit card rewards and smart financial habits to help fund your travel
  7. Cut your grocery bills
  8. Increase your income and consider adding multiple income streams
  9. Low-cost index fund investments
  10. The 4% rule: The ultimate equation behind achieving financial independence. (The 4% rule involves how much you can safely withdraw from your nest egg each year in order to make sure you still have enough money down the road.)
Would you be able to do this? I feel like I’ve done quite a few things on this list, but I could sit down and really understand where my money is going and if I could cut back in some of the areas that he’s mentioned.