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Is it possible to retire in your 30s or 40s?

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Retiring early is a dream for many Australians. But there’s a group of young people who’ve taken the concept of early retirement to a whole new level. They’re known as the FIRE movement, and they believe that retiring in your thirties and forties is perfectly doable. So what’s their secret?

The FIRE movement

FIRE stands for ‘financial independence, retire early’. And their strategy to achieve this dream is, at first glance, straightforward: spend less than you earn and invest the surplus.

While that might sound like standard financial advice, in practice FIRE is anything but.

Retiring early the FIRE Way

According to the ABS, the average retirement age in Australia is 55.4 years. So, knocking a few decades off that target requires a more aggressive approach than the norm.

Firstly, you’ll need to save as much as 70% of your income – which typically means living an extremely frugal lifestyle. At the same time, you’ll need to look for other ways to boost your income, such as side hustles and working several jobs at once.

You’ll then need to invest your savings in long-term investments such as property and low-risk shares. Once your nest egg hits approximately 25 to 30 times your annual living expenses – not salary – you can retire.

The trick is to keep living frugally so your retirement savings last. Many FIRE advocates follow the ‘4% rule’ when they make withdrawals from their retirement savings.

According to this rule of thumb, you can safely withdraw 4% of your retirement funds each year without your money running out. That’s because the return you get on your investments should match the amount you lose in withdrawals and inflation. 

Playing with FIRE

While being free from the stresses of working life at 40 might sound fantastic, there are potential pitfalls in your path to early retirement.

Firstly, FIRE requires you to trade-off your current lifestyle for the future promise of freedom. That often means giving up life’s little pleasures as well as the big stuff like expensive holidays.

But, there’s the risk that these sacrifices may not be worth it

The 4% rule assumes an average investment return of 7% and annual inflation of 3% – which is in no way guaranteed. So, your investments may not do as well as expected, leaving you short of funds.

If that happened, you could always return to the daily grind. But your employability may have suffered during your time away.

Finally, all your carefully laid plans and budgets could quickly come undone if life throws an unexpected spanner in the works.

FIRE takeaways

FIRE is not suitable for everyone. So, it’s a good idea to do your research first to understand if FIRE is right for you before taking it up. 

That said, it’s never too early to start planning and saving towards your retirement. And, the underlying principles behind the FIRE movement can be a good way to start:

  • Live below your means
  • Look to increase your income through other sources
  • Build your wealth by saving and investing as much as possible
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