Speaking of retirement planning, have you heard of the F.I.R.E. movement? That’s an acronym for Financial Independence, Retire Early. The movement is mostly about earning your financial independence and retiring early, too, often as early as 30 or 40 years.
Is it possible, yes, depending on your financial situation and your need to kiss working life goodbye in your prime. But the movement’s strategies for achieving this goal is not everyone’s cup of tea. Some have left the movement citing high levels of unhappiness even with the increased net worth.
But that does not mean there are no lessons to learn from the movement. In fact, I think most aspects of the movement’s strategy should be a part of everyone’s personal finance planning, even if you are not planning on taking early retirement. Here are a few lessons to borrow from the movement:
Lesson on Planning
The first lesson to borrow from the movement is early retirement planning, even if you are not planning on retiring early. As much as I would want to retire in my thirties, I know it is not possible with my current savings.
But I am certain of where I want to be in my forties and probably hit retirement by the early fifties. I am all for knowing how I want my life to look like in my fifties and trying to save enough money that covers these costs so I don’t have to work full time for it.
With this outlook, I have a better chance of planning on achieving these goals than if I’d sit it out and wait to see what happens when I get to that age.
When planning your retirement, think about when you want to retire, manage your debts, so you are debt-free during retirement, and build an emergency fund kitty to cater to any unexpected costs during your working years.
Lessons on Saving and Investing
The movement is quite aggressive when it comes to saving, with members saving 50% to about 75% of their income. With only a handful of Kenyans earning a 6-figure salary and above, plus the increased costs of living, saving more than half of monthly income could be a farfetched dream for some of us.
However, you can start with the little that you have. There is the 50/30/20 budgeting rule, where you save 20% of your income, 30% is for your wants, that’s personal stuff, and the 50% is for your needs, like rent, food, and transport. In this sense, if you were making a net of Kes. 50,000.00, here’s how you will split the money:
Needs: 0.5 * 50,000.00 = 25,000.00
Wants: 0.3 * 50,000.00 = 15,000.00
Savings: 0.2 * 50,000.00 = 10,000.00
You do not have to follow this rule 100%, but you can use it as a guide. Depending on your financial needs, you might require more money for necessities or needs so that you can reduce the portion for wants. Or you might reduce your personal wants and save that money. The bottom line is, a part of your monthly income must always go into savings.
Then, there are some benefits to reap from early retirement savings. First, if you can start saving for retirement in your twenties, you will benefit from the power of compounding. The longer you have to save, the more interest your savings earn. Second, your retirement contributions are tax-deductible, saving you some tax money in the present.
Individuals in the F.I.R.E. movement are quite strict about their spending habits. They work with tight budgets, fine-tuning it often, cutting on the unnecessary wants, and saving that money.
This could be the possible root of unhappiness for most of the people that leave the movement. Look, we might emphasize saving money every time, but I think there is a limit to how much you can cut in expenses. Enjoying a take-out meal once in a while is allowed, but don’t make it a habit of eating out every day.
The bottom line is to get a budget that reflects your needs and wants. It will help you find any loose ends on your spending habits to fix and save more money.
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Boosting Your Income
How many income streams do you have? Are you relying on just your monthly paycheck, or do you have a side hustle that brings in some extra cash?
Here’s what I know from the movement: retiring early means you have more time to burn through your retirement savings. Let’s say you live up to 80 (maybe over this, but let’s work with 80), and you have an option to retire at 40 or 60. If you retire at 40, you have 40 years to rely on your savings, even if you found some work to do for income during retirement (I will get into this in a few). However, if you retire at 60, you only have 20 years, giving you a more extended period to keep saving for retirement and a shorter period to use your retirement savings.
So, apart from saving what you have, some extra income could help boost your retirement savings. If possible, find ways to monetize your hobbies or get a side gig to do after work.
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Earning During Retirement
For a few months now, I have been having some back and forth conversations with my mum about retirement. From how long she wants to keep working before taking early retirement to what she thinks of doing during retirement, other than farming, her goals for the few years before retirement, and any possible sources of income during retirement.
I will focus on the sources of income during retirement. Although individuals are taking early retirement, it doesn’t mean they are not earning during this period or working. Early retirement is mostly about leaving the corporate world and spending your retirement years working on a part-time basis, while others stop working altogether.
Some earn through blogging, podcasting, vlogging, or their hobbies. This is where I believe that a side hustle during your working years can be part of your retirement earning plan. Even if it is a small business, at least, it will have grown by the time you take your retirement. Besides, you will probably be doing something that you love and enjoy.
If you are not planning on doing any work during retirement, circle back to the previous point – save more!
Whether you are planning on joining the F.I.R.E. movement or not, there is something you can learn from it that you can incorporate into your retirement planning. The best part is that these strategies allow you to concentrate on what you can control regarding your retirement plans, like time horizon, the required amount, and saving and investment strategies to achieve your goals. It gives one some sense of fulfillment knowing and the motivation you need to keep going. So, start planning your retirement using these five key steps, and where possible, consult a financial advisor.