Ask many people and they’ll tell you that their dream is to retire early. To have enough money to spend decades relaxing, enjoying their freedom and fulfilling their dreams.
Did you know that there is a huge and growing group in America who are proponents of that very idea? They are members of an increasingly large number of millennials who advocate FIRE – Financial Independence Retire Early. Blogs, youtube videos, and all manner of traditional and social media share tips and inspire people to view retiring early –as early as in their thirties and forties – as the perfect ambition and manageable one too.
The bottom line of almost all these informative sites is that if you are very serious about retiring early, and you haven’t recently won the lottery, you need to:
- Get used to living frugally, decommercializing your life and prioritizing your expenditure, and
- Generate passive income streams that can support your standard of living. This passive income can be generated by investing in the stock and/or bond markets, real estate or even a business (all with different advantages and disadvantages).
For example, there are those who are convinced that with an after-tax million dollars in savings, you can retire early if you are prepared to live off a 4% withdrawal rate, giving you approximately $40,000 a year in income, or at today’s dollar/shekel rate approximately 145,000 nis annually or 12,000 nis a month. But is that really enough to fund your lifestyle for another approximately 30-40 years? And what happens if it isn’t enough and you don’t discover this till you are out of the workforce for a few decades? What next?
The practicalities
Obviously everyone’s personal circumstances are unique and you need to think through your circumstances to create your own plan. But when considering early retirement there are several common denominators that are crucial to all who are seriously contemplating the option.
Determining your needs: Be honest about what is realistic. Some people can live on less and some can’t. What about future expenditures like helping your kids get started in their adult lives, or helping your parents in the event they need extra assistance? In many cases you might need to pare down your budget to the barest minimum. And this is something that should be started while you are still employed in order to accumulate greater savings and let you get used to a more basic lifestyle. Living on a clearly defined budget before you take the jump is critical to understanding whether this dream is possible.
Insurance: ensuring that you are not over-insured is important at every stage in life. But when you are cutting back on your expenses, make sure that you don’t leave yourself underinsured, so that you will be able to deal with any health or material issues that occur.
Savings: As soon as you stop earning money you will also stop your payments into employee savings plans, which means your pension, when you reach retirement age, will be far smaller. Ensure your plan has accurate projections about future income sources.
Realistic expectations: check your assumptions multiple times to ensure you are being realistic. Just because the stock market averages 8% a year over a long period of time, does not mean it always produces those returns from every starting point. Are you beginning your plan at the height of the market? Consider what other risks you need to be thinking about and then ensure you are monitoring them as you go forward.
The ideal state?
Despite the FIRE movement gaining momentum in the USA, the very frugal lifestyle does not suit a lot of people. But the concept of freeing up your time to do something you enjoy, while accumulating more savings before retiring is definitely something that appeals to many.
So instead of either adopting or nixing the FIRE idea, why not take and adapt the fundamentals that can improve your quality of life while setting yourself up for a more comfortable retirement. Unless you can comfortably finance a several decades-long retirement, it is a very good idea to start cutting back where possible so that more funds can be channeled into your retirement savings plan or long term investments. And if you think that that’s impossible, it’s time to consider seriously if you are saving sufficiently to fund your retirement. You don’t want to ever be in the situation where you retired with insufficient finances. Far better to make cutbacks while you are younger and healthier and have income coming in …
Apart from the very major financial element, retirement (early or otherwise) introduces the question of what to do with what will become an inordinate amount of free time. Whereas the concept of “being free to do whatever you want whenever you want” sounds appealing in theory, the practice is slightly different. Many retirees, regardless of age, will talk about the need to fill their time meaningfully once the initial excitement about their freedom has worn off. Depending on your financial wellbeing and desires, you could consider a part-time job, becoming a volunteer, or learning full time. Research proves that being productive – whether it is for money or as a volunteer keeps people mentally fit.
And while the FIRE movement works well for individuals or couples with small families who do not need to fit into a community, its principles are harder to integrate into our community lives here in Israel. Not only do our kids need to integrate into school systems, but often many of them will need their parents’ help in setting up a home and getting started in life. These expenses can often be considerable.
Retirement, whenever it will be, requires proper planning. Even if you don’t envisage taking early retirement, it’s worth expending energy and setting things up so you maximize your retirement options.
Ensure that you have a proper budget and savings plan in place.
Maximize the amount you save every month.
Plan how you would like to spend your time when retired.
There’s no ‘one size fits all’ retirement plan. It could be that the FIRE plan doesn’t speak to you at all. Maybe you have absolutely no desire to retire early. But leaving the timing aside – make sure that you personalize your retirement plan to match your lifestyle, stage in life, and time until you anticipate retiring. And that way you’ll be doing everything possible so that your retirement offers you everything you dream of.