If the Financial Independence, Retire Early (FIRE) movement appeals to you, than chances are high you’re chomping at the bit to reach that ultimate goal of being able to quit your job and have time to do what you really want to do – or what you feel called to do, if it isn’t your present position and isn’t feasible to accomplish while you’re holding down a job.
But you also may be wondering if your desire isn’t a pie-in-the-sky dream. Or one that you can’t realistically achieve for at least fifteen years.
As long as we’re talking about being realistic, let’s do that for a moment: if you’re a parent and have more than four children, and/or live in one of the most expensive areas in your nation, and/or someone in your immediate family has a health problem that’s constantly resulting in more medical bills than you insurance will cover (I’m talking a congenital issue, or a problem that can’t be reconciled with a lifestyle change, such as ongoing rehabilitation from a terrible accident), and/or you refuse to make temporary sacrifices to achieve your goals more quickly, you probably will need at least fifteen years to reach your goal of early retirement.
Or, it may simply not be possible.
Understand, as well, that this eight-year goal assumes that you have no debt beyond a mortgage. It doesn’t include the time it might take for you to pay off all your debt.
If you’re single and not making more than the average annual income, it’s possible, but will take a lot more work than if you were married. Not that you should marry for monetary reasons. Just sayin’. 😉
That disappointing disclaimer out of the way, you accumulate half a million dollars in under ten years the same way you work toward any big financial goal: by living beneath your means, and investing every single cent you save every single month. It’s just that, with a goal as big as the one I’m talking about, you need to save a nice chunk of change on a monthly basis, and be sure to invest the right way.
“But is $500,000 enough?”
That depends on your household expenses, and the level of luxury you want once you “retire.” Economists estimate that the general cost of living will have doubled thirty years from now. That means that you need to take out an annual amount that will ensure that the nest egg will continue to grow such that it will have doubled in thirty years.
If you’re planning to withdraw the same percentage of that sum every year that it grows – say, ten percent – you’re going to find yourself in the poorhouse within three decades.
For most people, especially parents raising children, $500,000 won’t be enough. That is, unless you’re planning to live in a shack in the middle of a national forest and live off the land.
However, half a million is enough to allow you to get out of the rat race. With an automatic $25,000 flowing from your investments every year, you have more work options. You can find a less stressful part-time job to fill in the gap. Or you can start your own micro-business.
How much money do you need to save?
WARNING: At first glance, the figure I’m about to throw at you will likely make you balk. And/or laugh. Convinced that there’s no possible way you could go from zero to half a million dollars in eight years.
I ask you to hang with me. Because after I provide the figure, I’m going to tell you how it’s possible.
A quick visit to the Money Chimp website and a few minutes messing around with the compound interest calculator, and I discovered that if you can invest $40,000 per year for eight years, making an average of ten percent interest, you’ll have over $500,000 at the end of those eight years.
“Forty thousand dollars a year!! Where in the %#$@ am I supposed to get an extra forty thousand dollars every single blasted year??!!”
See, I knew you were going to get upset. Sit down, take a deep breath, and let me walk you through a couple of scenarios. Actually, three scenarios.
The first scenario is one in which you have a job with a $60,000+ take-home pay. Depending on whether you have a spouse or children, and where you live, you may be able to keep your expenditures down to around $20,000 per year. If you’re making that much money, your company probably provides decent health insurance coverage.
If you have a mortgage? You’ll need to be bringing home over $70,000 per year in order to stash away $40K every twelve months.
Are you married and you both have jobs? Depending on your respective salaries and you’re willing to live frugally for a few years, saving that jaw-dropping amount should be a relative piece of cake. This can even work if you have a small handful of children.
Scenario #3: A job, and an online business.
Among some couples, one goes off to a job while the other homeschools the children and works an online business. Or both couples have an online business and take turns caring for the children. It takes a year or two of really buckling down to start making serious money from an online business model, but it can be done.
Click here for a really awesome and thorough post about how to set up a blog, and begin to make money from it.
How to invest wisely and safely
You don’t want to invest the F.I.R.E. way.
Yep, that’s what I said. Investing only in a total stock market index fund is not much safer than Dave Ramsey’s pet investment strategy of mutual funds – though I know from experience that some are more stable than others during a stock market shake-up.
If you want to be sure not to lose a third of your nest egg during a global pandemic, housing crisis, or Presidential election, you want to invest in a portfolio that has proven itself consistently strong while bringing consistently high returns over the past few decades.
Since the Ivy Portfolio brings higher returns than the Permanent Portfolio (three to four percent more per year on average), but the Permanent Portfolio is less reliant on the stock market, you might want to invest, say, two-thirds of your money the Ivy Portfolio way, and the remaining third the Permanent Portfolio way.
No guarantees, but…
Understand that this post is not intended as financial advice, and if it were, it certainly wouldn’t be professional. I can’t guarantee any particular outcome, no matter how conscientious you are about making the wisest decisions possible and taking consistent action.
Whatever actions you take as a result of reading this article, you and you alone shall be held responsible for the consequences of such actions. I hope the consequences have you ultimately shouting for joy and wanting to hug me for writing this post.
But I can’t guarantee anything. After all, life does happen. And will.
Still, even if you can’t save up $500,000 in eight years, I hope you now realize that with some thrift and wisdom, you can still be much better off financially by that time than most of the people you know.