- I was talking to a friend the other day
and we got on the topic of financial independence
and early retirement.
The acronym is FIRE, just so you know.
Now he's not completely sold on it,
but had a few questions for me.
I've been at this thing for a few years,
so I was more than happy to fill him in
on whatever he wanted to know.
Not to mention, my ultimate goal is to secretly incept
everyone's mind with the thought of pursuing FIRE.
I'm just kidding, I would never do that to you or am I,
but anyways, I figured it would make sense
to put some of those topics that we talked about
into a video.
So in this one, I'm gonna go through some things
to know about financial independence and early retirement
that I've picked up along the way.
Hey, I'm Jarrad with an a, and on this channel,
we talk about all things, personal finance, investing,
and of course, financial independence.
I know on the surface, this looks to be true,
but financial independence and early retirement
isn't only for young people.
It's easy to assume that's the case though,
since most of the headlines that we see mention
how she retired in her early twenties,
or he retired early with $3 million at the age of 32,
we have to remember that headlines
are there to catch our attention.
So of course, they're gonna go with the one that says,
she retired at the age of 27,
as opposed to, he retired early at the age of 50,
because that's not as sexy.
Yes, it's easier to make it happen
the younger you get started,
but I'd argue that the vast majority of people
who are pursuing this type of lifestyle,
aren't actually going to achieve it
at an extremely young age.
Let's face it, consumer debt has been on the rise
over the past 15 years.
Most people are starting in the hole,
and trying to work through that mess
is a tough road as it is.
Yeah, if I hadn't racked up $82,000 in debt
that I had to clean up first,
then of course, I'd be further ahead than I am right now,
but you can't change the dumb decisions
that we all made in the past.
So all we can really do is focus on
what we're doing going forward.
Here's the two ways that I look at it.
Number one, if you can afford to leave work
before the age of 59 and a half,
then you can retire early
based on the traditional retirement age.
And number two, if you're someone who is older
and based on your current trajectory,
you can't actually retire until you're 70,
then as long as you're able to do so before the age of 70,
then you're technically pursuing FIRE
but it's based on a different age.
Facing whether or not you can retire early
on your current age and current situation
is a better way to think about this whole thing.
We all start out at different spots
with different circumstances.
So don't let that stop you from improving your finances
and pursuing your financial independence journey
going forward.
No matter which early retirement age you're targeting,
your savings rate is everything.
This is the number that will make
or break your chances of ever achieving FIRE.
Yes, it's even more important than the returns
you're receiving on your investments.
If you were pursuing financial independence,
then we're assuming you're trying to stockpile
as much money as possible as quickly as possible.
We are going to have some help with the growth
with returns received by having the money invested.
But the more money that we can shove into the bag,
the faster it's gonna grow,
would you rather have a stack of $30,000
giving you a 7% return or a stack of $60,000
giving you that same 7% return?
Of course, you're gonna choose the $60,000.
The only difference is that lump sum amount.
And the only way to get that lump sum amount
is through your savings rate,
how much you have left over after your normal expenses.
Here's an example of how much faster
you can retire by increasing your savings rate.
Let's say you're taking home 100,000 dollars per year,
and you're setting aside $50,000 per year,
which is a 50% savings rate.
When you retire early, you've determined
that you want to continue living off the same amount
that you are living off of right now.
For this example, since your income
is a 100,000 dollars and your savings rate is 50%,
then you are good with this $50,000 per year income
in early retirement.
At a 7% investment return, and keeping that 50% savings rate
you'd be able to achieve
your early retirement goal in 15 years.
If you're able to increase that savings rate to 54%,
which means that you'd live off of $46,000 per year
in early retirement, then you can retire
a year and a half sooner.
If you're able to increase your savings rate from 50 to 60%,
which means that you live off of $40,000 per year
in early retirement, then you'll be there in 11.4 years.
Just by increasing your savings rate by 10%,
you're able to quit work, if you choose to,
three and a half year sooner.
It's easy to think that you cannot increase
your savings rate until you're forced to,
but we've recently seen a real life example
of what happens when you do.
In April of 2020, we saw the national savings rate spike,
since most people were stuck inside and forced to cut back
on things that they'd normally spend money on.
It went from hovering around seven to 8%
to hitting as high as 32%.
We didn't even see it get that high
back during the 2008 financial crisis.
To increase your savings rate
doesn't mean that you have to lock yourself up
like there's another health crisis.
It just means spending more time
doing other low cost or even free activities,
and really thinking about
what you're actually spending your money on.
If you're getting some value from this video,
do me a huge favor and Hulk smash that thumbs button.
You kind of have to shift around the way
that you think of things a little bit.
You have to want a sense of freedom
by being financially independent,
more than you want to spend money
on things that'll bring you more short term happiness.
When someone asks me what they can do
to achieve financial independence or early retirement,
I tell them that they can't live the same way
that they are living right now.
What got you here will not get you there.
It's usually at that point where I get one of two responses.
Number one, they are absolutely intrigued
and want to know more, they're super excited.
Or number two, they're completely turned off by the idea
because making a change
can be really, really uncomfortable at first.
The level of change is going to be different
for everyone based on what their life is like right now.
If someone who just graduated college
asks me that same question,
then I just tell them to continue living
like a broke college student for as long as possible.
On the other hand, the more someone is settled in
to a certain lifestyle, the more difficult it might be.
If Sally is making $200,000 per year
and has been living based on that amount,
then her lifestyle might be pretty inflated.
That would make her change even more uncomfortable.
Even though that higher income would afford her the ability
to achieve financial independence faster
since she's doing well in that income category.
Because the FIRE path is a little unconventional,
the normal retirement investing rules don't 100% apply
to someone headed in that direction.
The average person is investing
so that they can withdraw their money
after the age of 59 and a half,
the person who is pursuing FIRE
and plans on leaving work before that age
is going to need to access their investments
earlier than that.
To be able to access the money early,
you need to know about things like a backdoor Roth IRA,
a Roth conversion ladder, the pro-rata rule,
a mega backdoor Roth, an HSA,
why you'd want to invest in a Roth IRA
over a traditional IRA depending on your income
and why it makes more sense to invest in something
like a traditional 401k over a Roth 401k.
If your head is spinning after I rattled off
all of those words,
then don't feel bad because mine was the first time
that I learned about each of them as well.
I honestly had to go over each of them a few times
until it finally stuck.
I do have a plan to release videos
breaking down each one of these
and how they'll work together
to help you access retirement money
before the age of 59 and a half.
So keep an eye out for those videos.
Once those videos are released,
I'll have them in my financial independence playlist
and linked up down in the description of all of my videos.
If you were someone who doesn't know about
all of these things yet,
then continue investing in the same accounts
that you are right now until you learn more about
the what, why and how.
Being able to access retirement investment accounts early
sounds weird in and of itself, but you should get used to it
because people are gonna think that you are a super weirdo
by pursuing financial independence or early retirement.
If you're like me and people already think
that you're a little strange,
then this should be a pretty easy transition for you.
They're gonna look at you
like you are somewhat of an outcast
when you're building up your nest egg,
since you are doing very unconventional things,
packing lunches as opposed to eating out at work,
maybe having one drink as opposed to three.
Saying you can't afford something,
even though you technically can.
And they're going to think that you are even weirder
when you do end up leaving work
while they have to continue working
for another 20 or 30 years
since they didn't pursue the financial independence path.
I don't say this to put down the normal path of retirement
because that way suits a lot of people perfectly fine,
but it seems to me like the people who are pursuing FIRE
have kind of unlocked a little life cheat code
that not many people know about.
I like to compare it to seeing someone do a magic trick,
then learning how that trick is actually done.
Once you know, you can never look at that trick
the same way that you did before,
you cannot unsee what you just saw.
Another thing that I've found to be super helpful,
that you might as well, is reviewing my numbers every month
to make sure that I'm on track
and just to see the progress.
Since reaching financial independence
or early retirement might take a little while,
it can be easy to lose sight and forget why you're doing it.
This is a super easy way to help you
stay motivated along the way.
I kind of compare it to the motivation
that I got from tracking the balance of my debts
while I was paying those annoying things off for years.
You probably don't have to do this every month,
but I'd say to do it at least every few months.
There's net worth trackers out there like Personal Capital,
but I prefer to log into a spreadsheet
that I created for myself.
For some, this manual process might be a little annoying,
but it doesn't take that long to do
if you're someone like me
who wants to keep a closer eye on all of his accounts,
make sure to Hulk smash that thumbs up button before you go.
Also check out the description for more resources
and playlists to help you out
with all of your personal finance, investing
and financial independence needs.
And of course, to get your two free stocks
from Webull as well.
Watch these FIRE videos to your left next.
I'll see you, in the next one, friends, adios.