The dream of financial independence and early retirement has gained a lot of steam in recent months. But despite the popularity of the movement, there are some important points that need to be understood and which I would like to point out.
It’s easy – and it’s not
Frugal living, saving as much as possible, investing. The concept is simple and easy to understand, easy to copy. In theory. Putting in practice, there is a lot of sacrifice along the way and even after all the hard work, chances are that you won’t be living like a king, but will need to maintain a frugal mindset for the rest of your life.
Here is some overview on how to get started: Let’s say you purchase stocks or ETFs that will generate a yield of 5% annually after tax. You might do better. You might do worse. But from my investing experience so far it’s a pretty realistic expectation to have.
Let’s do the math then, which means that for every 1000 Euro invested, a 5% annual return will generate 50 Euros each year. Let’s put that in lines:
- 1.000 Euros invested = 50 Euros / year
- 10.000 Euros invested = 500 Euros / year
- 100.000 Euros invested = 5.000 Euros / year
- 200.000 Euros invested = 10.000 Euros / year
- 500.000 Euros invested = 25.000 Euros / year
- 1.000.000 Euros invested = 50.000 Euros / year
You can play around with the numbers, the %, and your saving targets, but I think this pretty much explains the whole challenge: You need to save and invest a lot to get to a point that you could seriously relax. And even if you get to the point that you have a Million Euros on your account, a return of 50.000 per year is hardly an amount to live on to consider oneself rich. Comfortable? Yes. Rich? No.
If your target is really to completely retire early, not only would you need to save up a lot, but you would also need to maintain a frugal and simple lifestyle to make sure your income and your wealth don’t get drained too early on. The last thing you would want is to turn 70 and see how others retire on their hard-earned social security while you start to worry about your funds and income. Because if you retire at 35 or 40 and didn’t pay much into the system, then it would be blatantly wrong to expect the system to cover for you later on.
Most who achieve FIRE keep working
Given the staggering amount of money required to really and fully retire early, most people don’t go all the way. Because it’s too hard and it takes a too long time. BUT what many do is to turn to their passions and their actual idea of looking for a purpose once they reach a point of feeling secure enough to do so without going broke.
Say you have saved and invested 200.000 Euros and receive a 5% annual return after tax, 10.000 Euros a year. That’s not enough to retire. But living in the right place, it may be enough to pay your rent. Having “shelter” secured, you might not feel the pressure anymore to chase for a high paying job that would be required to protect you and your family. You could choose another profession or challenge that may suit your personal goals much better, and even if you would bring only another 25.000 Euros a year back home, that could be already enough for a decent living with the good feeling of doing something that you actually really appreciate.
I am also not sure if the actual goal of a “real” retirement would fit with the character of any FIRE aspirant. Because to get to the point that you could actually retire on your savings and investments is really hard work. It requires dedication, patience, and real commitment. Something that you see mostly in career and goal-oriented personalities. Now they might not be always the corporate types, but considering how much work and effort they put into reaching their goal, it’s hard to imagine that they would be able to stay idle right after hitting their target. There are simply too many exciting and interesting things to do in the world to waste time on doing nothing.
It’s really about time and independence
In reality, investing and generating passive income, escaping the rat race… it’s a mind game. Because with every step along the way, with every additional income you create for yourself and with every day you get closer to become financially independent, you are reducing the burden on your shoulders. The burden and the responsibility to yourself, to your loved ones, to society.
Financial independence empowers you to make conscious and responsible decisions, without the seductive element of money attached to it. When you live frugally and have a minimalistic mindset, when you know that you have “enough” and don’t need to compromise your values, your convictions and your personal goals for profits and gains, then you can act true to yourself at all times.
You can also take the time to think things through. To consult with people who matter and you will have more opportunities to do “the right thing”, which more than often goes not well along with the profit and benefit-oriented thinking of many corporations and individuals out there.
I am not sure how many other people out there see it this way. For me, this should be the ultimate outcome. I intend to keep working until I die, but not in the traditional sense and not on other people’s terms. I don’t want to deal with CRAP any longer than necessary and this is why I follow the FIRE movement.
Having said all that one thing should also be very clear: Without those companies which are striving for profits, without all those people who prefer to have a regular working life and who actually appreciate going to an office every single day, FIRE wouldn’t be a thing at all. Otherwise, how would we expect a 5% annual return after tax on our investments?