How to retire in 10 years
While most Australians soldier on working, earning – and spending – well into their 60s, a growing number are deciding that there's more to life. By saving hard and investing wisely they are retiring early, even in their 30s, and following their interests
If you believe retirement only happens when you reach your 60s – and you want to retire earlier – then read on. There is a growing band of retirees in Australia and overseas who are hitting retirement in their 30s or 40s. No, they aren’t rich kids living on an inheritance or technology whizzes who have sold an app. They are followers of the FIRE movement – that stands for “financial independence, retire early” – who rigorously save, invest sensibly and enjoy a modest, agreeable life.
It is the opposite of working flat out throughout your life, piling on debt, living beyond your means and consuming voraciously.
While most Australians rely on compulsory superannuation and its 9.5% contribution rate (capped at $25,000 a year) to fund their retirement, FIREs don’t want to wait until they are in their mid to late 60s. They want to pursue interests, have a more balanced life and enjoy more family time.
For example, Pat Seyrak has an ambitious plan: he wants to have $1 million in 10 years. At 30 he is half way there and aims to reach his goal in the next five years.
Our other case studies include:
• Kate Campbell, 19, plans to save $1 million over the next 20 years and live on $40,000pa;
• Alisha and Leo want to retire at 32 and 34 with $2 million, giving them $80,000pa;
• Tom is 32 and aims to retire at 42 to 48;
• Serina Bird, 45, plans to retire at 50 on $40,000pa;
• Jason, 45, wants to retire in the next few years, generating income of $58,000pa rising to $80,000pa in later years; and
• Joanna Jones, 60, retired at 51 with $1 million in super and lives on $18,000pa.
The FIRE trend is still in its infancy in Australia but it has taken off in the US and Canada thanks to its most high-profile supporter, Peter Adeney. He and his partner, now his wife, worked as software engineers in their 20s, and by living a frugal life and saving they had enough money to leave the workforce at 30. They have one son and the family spends around $US25,000 ($32,000) to $US27,000 a year.
Keep it simple
Adeney, a Canadian expatriate who lives in Longmont, Colorado, started blogging about his life in 2011 at mrmoneymustache.com.
His message is straightforward: reject consumerism, pare down your life to live simply with fewer possessions, save as much as you can and live a frugal "badass" life of leisure. Adeney says it delivers greater financial freedom and happiness as well as a smaller environmental footprint. It resonates with many people and Mr Money Mustache now has a cult following,
reaching 23 million people and attracting 300 million page views. Adeney has posted 400 wide-ranging articles and there are 37,000 members on the Mr Money Mustache forum with 1.7 million posts.
“Our situation was a bit unusual by today's standards, because it was driven by within rather than inspired by an existing movement like this financial independence thing is becoming,” Adeney told Money from Longmont. “I just had a natural love for solving problems efficiently, and to me I just figured having a super fun life could be another one of these problems. So I found ways to spend money on creating a joyful life, while seeing less of it go to waste.”
He calls his approach “mustachianism,” an idea he put into practice by living “a lifestyle about 50% less expensive than most of our peers and investing the surplus in very boring, conservative Vanguard index funds and a rental house or two”.
Mr Money Mustache has inspired many of our case studies, who are working towards an extreme early retirement and sharing their journey. Some were well on their way before they found him and others started after reading his articles. One has already retired.
“Nowadays, all the same options are open to everyone but there is more awareness and community support for this type of joyful, efficient living,” says Adeney. “So you don't have to be as much as a stubborn weirdo as I was to make these big jumps ahead to financial independence while you're still young.
Mustachianism is the belief that “consumer insanity has taken over people's minds”, Adeney told Tim Ferriss, the American self-improvement guru, on his radio show. “It is causing people to act in an irrational way. It has sabotaged people's own ability to have a good life. For example, they are working way longer than they have to because they are consuming way more crap than they have to without getting any life benefit from it. Everyone is very inefficiently going about their lives. It affects their health. They are not getting fun out of their lives.”
Adeney says that if you save 50% of your take-home pay from the age of 20, you can retire at 37. If you can save 75% of your salary, you can retire in seven years.
Just as heavy spending means low saving, frugal living means high saving. The more extravagant your lifestyle, the more you'll need in retirement and it will take a longer time to accumulate your required wealth because your savings rate is low. But if you can live simply, you will need less to retire on and you will acquire it more quickly.
How can you save that much? The people who responded to a call-out from Money and are working towards early financial independence typically save 60% to 80% of their salary. Over the next eight pages they share their strategies, including their investments.
While there are plenty of people who scoff that FIREs are living miserable, deprived lives, our case studies suggest it is quite the opposite. They are having fun and they feel empowered by their savings and plans.
“I decided that I could easily live a great life, and in many ways an even better life than I was before I had this goal, all the while reducing my expenses, consumption and waste and doing more things for myself,” says Seyrak, who is on track to retire at 35 (see page 39).
Experiences come first
“I see high consumption as an unconscious habit. Most of the time it is completely automatic and so it is rarely thought about critically,” he says. “Much of it is also keeping up with the Joneses. One should not base their self-esteem on how wealthy they can appear to be. By eliminating this habit, a large amount of money can be saved.”
People like Pat value their time much more than they value their possessions. FIREs have a long list of experience-based activities and interests, including family time, that they want to pursue. They usually don't rule out part-time work either.
Most of our case studies are well-qualified people with good jobs that pay well. This does make it easier to save but people with lower salaries will also see great benefits from frugal
living although it will take longer. Leo, who plans to retire in three years at 34, describes early retiring as spending your money and buying back time.
Travel is at the top of the list for most early retirees. Not a short trip to fit in with corporate holidays but long, slow explorations of continents. When you aren't working you can take advantage of special deals and offers. Joanna drove an RV from Seattle to Anchorage for a quarter of the usual price as part of the owner's relocation move.
These are some of the key FIRE savings strategies:
• Get out of debt. Make paying down any credit card debt a No. 1 priority.
• Live close to where you work. Walk, cycle or take public transport. For example, if you live a long way from your work, car costs can really add up. If you are driving 20 kilometres, you could be easily spending $120,000 over a decade and if you drive a family sedan it's probably $150,000.
• Become a great cook. A $100 per week restaurant habit is $52,000 every 10 years. A $12 lunch, bought twice a week, adds up to $12,480.
• Stop buying stuff. Don't spend your weekend browsing the shops or searching online.
• If you have a mortgage, make extra payments.
• Cut your grocery bills. Buy whole ingredients instead of packaged meals. Stock up at the cheaper supermarkets.
“So I found ways to spend money on creating a joyful life, while seeing less of it go to waste,” says Adeney.
“My usual example is that by choosing to live closer to work and biking there (which also allowed us to live with just one older car), we saved $US10,000 per year on car expenses while also getting the fun and health benefits of year-round cycling. It was already a win-win situation, so there was no need for a support group or a community. But very few of my co-workers were able to understand how big this win was, so I was often still the only one on a bike.”
Retirement formula
Instead of paying a financial planner to help you work out how much they need in retirement, FIREs have a formula: take your annual expenditure and multiply it by 25. “This will keep you going for the rest of your life, even if you retire young,” says Adeney. This assumes a conservative return or income of 4% a year.
FIREs aren't spending down their capital. They're simply living off their investment income. If you can live off a third of your income, and devote the other two-thirds to saving, you would reach 25 times in 12 to 13 years. Then if you continued to live that way, 4%pa investment income on your nest egg would provide your living expenses for the rest of your life.
For example, if a couple earn $121,700 a year after tax and live on $40,000, they can save $81,700pa. The savings earn a real rate of return of 4% after inflation. In 10 years they will have $1 million, which can be invested earning 4%, generating $40,000pa to live on for the rest of their lives.
Most FIREs don't pursue “super kickass” investments such as hedge funds, private equity or the hottest active fund managers. These sorts of investments need constant monitoring and, as Adeney told Ferriss: “There's so much more to concentrate on in your life. If you retire early you are most probably wanting to be a great parent or aiming for physical fitness.” You are better off using basic, plain-vanilla index funds.
Where to invest
Each of Money’s case studies has its own investment strategy but it's certainly not to be taken as a failsafe plan for retirement. (And of course, if you retire early you won't be able to access your super until you reach your preservation age.)
Most have some Vanguard funds and Jason, for example, has made them the lion's share of his investments. Some strategies involve owning an affordable home while others are put off by high real estate prices, a housing market under pressure and a fear of rising interest rates. They prefer to rent and watch the market.
The Australian approach of negatively geared property investment is very dependent on where we are in the property cycle. Certainly, real estate prices in Adeney's hometown of Longmont, where he has bought, aren't as expensive as properties in Sydney or Melbourne. He paid $US200,000 for his house.
“Accommodation in some form has to be part of any plan to retire early. Ultimately, you have to live somewhere,” says our case study Serina, who has bought her own home and likes investing in property. “Maybe you can use your home and be a grey nomad and rent it out while you travel in a caravan while blogging or Instagramming away, but most people at some stage want a roof over their head for a period of time.”
Saving is not easy in this world of rampant consumerism but it helps if you have a support network of other FIREs via websites, blogs, podcasts and calculators. There are meticulous websites with details of financial aims, savings patterns and portfolios. Four of our case studies run their own websites.
While some FIREs such as Kate Campbell, Pat Seyrak and Serina Bird are happy to reveal their identities, many who lay out their financial details for all to see don't want to use their real names. They are cautious about their employers finding out about their plans.
Pat says he was a bit nervous going public because he thought he may appear to be less committed to his job. “In the end it turns out my fears were unfounded,” he says. “My boss and colleagues have responded positively to my early retirement journey. I'm now happy to continue to talk about my plans to retire early as it has brought some attention to this movement in Australia, which has grown by leaps and bounds in recent years.”
Jason, who runs the thefiexplorer.com website, didn't want his real name used and says he is apprehensive about talking to his work colleagues about his plans to retire early so he avoids it. “Life and markets can throw a lot at people, so sometimes it feels like tempting fate to talk too much in advance about my plans.”