The three steps to building a (FIRE)

Financial Independence, Retire Early

The FIRE movement has gained traction over the years and seems to be particularly popular in the physician community. Between FIRE and Burn Out stories, I think there may be a trend.

If you haven’t heard of this before, people are saving and investing as much as possible in their 30s and 40s to retire early. These stories revolved around three major financial planning topics that are optimized for their lifestyle.

• Tracking Expenses

• Investing Wisely

• Safe Spending in Retirement

Tracking your expenses is key to any healthy financial plan but it is especially important if you are trying to limit excess spending. There is an old saying that if you can see someone’s calendar and their spending, you can find out what really matters to them. For those looking to retire early, their spending is usually very concentrated on limited things that matter the most to them.

Investing wisely frequently focuses on fees, particularly in FIRE discussions. It is vital to know exactly what you’re paying for, both when tracking your expenses and investing. Since you cannot control the outcome of your investments, it is important to be aware of any expenses that may lessen your return. If you are living off 4% of your capital and 2% of that is going towards fees, you’ve already spent half your income. In other words, you will need twice the capital to earn the same retirement income.

Safe spending in retirement is the foundation on which you build upon. Once you step over the finish line and decide to retire, that is it. The amount of money you’ve set aside for your retirement is fixed at that moment. The only way you can increase it is by taking some level of investment risk. The only way to keep it there longer is to reduce your spending.

So, how do you start? Backwards.

Figure out how much money you want to spend in your retirement and add tax. Let’s say that number comes out to be $8,000/mo. This is your safe spending amount.

Now let’s multiply that $8,000/mo by 12 to get an annual income of $96,000. If we multiply this annual income by 25, it gives you a safe spending amount. Is $2,400,000 enough? This is known as the 4% rule. It is considered a safe drawdown on a wisely invested portfolio where you should not have to worry about running out of money.

Next, it is important to track your expenses. Inevitably, there will be months where you are under budget and others when you will have some financial emergency that causes you to be over budget. This is okay as long as you stay within budget over the long term.

What is the real trick to retiring early? Start early. 

We know the power of compounding returns can help your portfolio grow, so give it as much time as you can to work for you BEFORE you retire. This will give you a higher probability of success.