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Financial Planning, Retirement

Retire By 45: 5 Tips to Achieve Early Financial Freedom from The FIRE Movement

9/3/21 9:00 AM

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Could you retire early? There are many who believe the age for retirement is most appropriately post-age 45. Surely, it’s possible with proper planning from the very beginning. But how?

The FIRE (Financial Independence, Retire Early) movement is a philosophy that just may help. Let’s better understand whether or not this would be a realistic option for you.

Pioneered by Vicki Robin and Joe Dominguez in their book, Your Money or Your Life, the FIRE movement is based on saving as much as possible - up to 70 percent of your annual income - and aggressively investing to save enough money to eventually lead a self-sufficient life. Once they have saved approximately $1 million, roughly 30 times their yearly salary, they stop working and live off smaller withdrawals from their portfolio.

Solid investment decisions combined with disciplined lifestyle choices determine whether or not early retirement is an attainable goal. Here are five tips taken from those successful at the FIRE lifestyle that can be applied to anyone at any income level.

1. Start Saving and Investing Early

Suppose you start saving now rather than later. In that case, you will not only have more saved up throughout your lifespan but also enjoy the benefits of compounding interest. On the other hand, beginning much later will cost you significantly when you finally decide to finance your retirement.

If you don't have a lot of money to invest, it can be hard to reach retirement early. So one of the core principles of FIRE is to divert finances away from unnecessary purchases and into investments.

When you have plans to retire early, it's essential to be conscious of your finances. You might want to downgrade the type of lifestyle you live and avoid any frivolous spending now so you can reach your retirement goals sooner.

2. Don't Be Too Conservative When Investing

The key to retirement is saving the most at a young age and investing wisely. When assessing your risk threshold, younger investors tend to have a more aggressive portfolio mix with a longer-term outlook. This is different from the risk profile of someone who is at or nearing retirement and might have a more conservative approach.

Investors are often surprised to learn that while short-term investments, like CDs or Treasury bills, maybe safer on a long-run basis, stocks have outperformed and will do better for your FIRE portfolio.

3. Maximize Your 401(k) Contributions and Company Match

One of the best ways to secure your retirement is a company-sponsored 401(k) plan. Many companies offer a retirement savings plan that includes employer match benefits. This means that your employer will match a percentage of your 401(k) contributions.

Maxing out retirement account contributions means that you've reached the limit determined by the Internal Revenue Service (IRS). The limit can change year-to-year, but in 2021 it is $19,500 for account holders under the age of 50.

These contributions are tax-deferred and maximize potential earnings for individuals looking for financial independence. You can learn more about 401(k) contributions and company match on our blog.

4. Use a Health Savings Account

If you have a high deductible health plan, it is worth looking into establishing a health savings account - or HSA. An HSA is a tax-advantaged savings account for qualifying medical expenses. Contributions are deductible, earnings grow tax-free, and withdrawals are tax-free if used to pay for qualified medical expenses.

Another bonus is the money in your health savings account can also be invested. If you are careful not to spend it all, the balance (as mentioned above) can also grow tax-free.

One way to think of HSA is a tax-free, long-term savings account. To learn more about HSAs and how they work, read our blog post: Using A Health Savings Account: What You Need to Know.

5. Multiple Sources of Income Are a Must

Many people hope to retire early using investments. But it might be just as tricky without multiple sources of income. If you lose your job, having a backup source of revenue will make it easier. Having various sources of income is an excellent financial strategy—not just for those who want to retire early but as a general rule of thumb.

Multiple sources of income are a critical aspect of securing financial stability. In addition, other sources such as investment portfolio and rental income can help you generate a bigger monthly paycheck - allowing you to save more.

You can also supplement your income into retirement by continuing or establishing a side gig. For example, suppose you're planning on retirement in your 40's. In that case, it's the perfect time to pursue a passion project - like opening an Etsy shop to sell your handmade items or collectibles - for additional income!

It is never too early to start working towards your FIRE goals. If you've always wanted to retire early or think financial independence is the key to your happiness, start by following these tips, and you will be on the right path!

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