The National - How people save and invest the 'Fire' way to retire early

Jacob Aldridge, 40, a business adviser who currently lives in Australia with his wife and daughter, 3, is planning to retire at the age of 42. He is a proponent of the Financial Independence, Retire Early (Fire) movement.

“Depending on how my investments perform, I am on track to retire at 42 with approximately $4 million invested and around $1.5m of debt,” says Mr Aldridge.

“Some people who chose to retire early have very strict spending limits, while my plan is to travel the world and continue to mentor small business consultants and find fun SMEs to invest in and help grow.”

The Fire movement involves a programme of extreme saving and investment that helps people to retire far earlier than traditional budgets and other financial plans would permit.

The movement was born out of the 1992 best-selling book, Your Money or Your Life by Vicki Robin and Joe Dominguez.

Proponents remain in the workforce for several years, saving up to 70 per cent of their annual income. When their savings reach about 30 times their annual expenses, or about $1m, they quit their day jobs or retire from work altogether, Investopedia says.

The Fire movement’s objective is to save enough money so that people can retire in their 30s, 40s or 50s — before the traditional retirement age, says Vijay Valecha, chief investment officer at Dubai-based Century Financial.

However, the definition of retirement can differ from person to person. Thus, the Fire movement focuses on the ability to pay all living expenses for the rest of one’s life without having to be employed and acquiring the freedom to build a life one aspires to have, he says.

Some of the actions required for one to follow the Fire movement include having a high savings rate (more than 50 per cent), a minimalist lifestyle/conscious spending, a determination to pay off debt and a simple investing plan, Mr Valecha says.

“To gain financial independence and retire early, Fire adherents follow a low-cost investing strategy based on index funds and exchange-traded funds. The portfolios hold a combination of exposure to the US and international equities in large and small cap funds, along with some proportion allocated to US bonds,” he says.

Mr Aldridge began researching about more advanced investment and tax strategies in 2013 and came across the Fire concept.

“Understanding financial independence requires grade school math and university-level psychology,” he says.

He bought his first investment property at the age of 21 and started his consulting business at 24, which allowed him to quickly double his income.

“Debt and leverage can be wonderful servants for accelerating the journey to financial independence. I was mindful to never spend more than I earned and at the same time I focused on increasing my earning potential,” he says.

Mr Aldridge’s investments are primarily in property in Australia, an international mix of shares through Vanguard ETFs and in a number of small businesses.

He currently holds extra cash due to the global economic uncertainty and the “opportunities it creates for cashed up investors”.

“For shares, I prefer a passive approach through ETFs. I choose not to invest the time or training in finding an edge for the share market, so these broad-based index funds are a much more sensible opportunity,” he says.

Mr Aldridge has never adopted the strategy to dollar-cost average (the practice of systematically investing equal amounts of money at regular intervals) a fixed investment every month.

“Some months, I might earn $40,000, while others I might only earn $10,000, so a specific savings rate never worked for our budget,” he says.

“Early in our journey, we set a target to grow our net worth by 1 per cent each month, through a combination of new investments and asset returns. We don’t achieve that every month, but have far exceeded it on average over the years.”

There is a common misconception that the only way to retire early is to make enormous sacrifices, according to Mr Aldridge.

Budgeting is an exercise in choosing where you want to spend money, not deciding where not to spend, he says. Mr Aldridge and his family spend a lot on travel, but less in other areas.

“We don’t have as big a house or as nice a car as some of our friends. Nor do we spend as much money on takeaway food or some other consumer products,” he says.

“But we’ve spent more than $100,000 on holidays, and a similar amount on fertility treatment to start a family, and still invested wisely to create early retirement choices.”

His current “retirement” plan is to continue travelling and focus his energy on business ideas that excite him.

There are several levels to the Fire movement that empower people to choose the intensity that matches their goals and targets, says Mr Valecha.

“Lean Fire, a more severe form of the movement, requires many sacrifices and a willingness to live a frugal lifestyle, even into retirement,” he says.

“On the other hand, Fat Fire represents the opposite and is suitable for people who don’t want to live frugally yet want to retire early. These people like to spend money at will and have sufficient savings to fulfil their wishes.”

The consensus among the Fire movement community is to save at least half of their income.

If your goal is to retire at age 30, you will have to save more aggressively, such as 70 per cent of your income, than if you were to retire at age 50, Mr Valecha says.

Alternatively, people who don’t want to retire fully and seek financial freedom to quit their job, work part-time, start a business or take an extended holiday can save less than half of their income.

“To calculate how much money is needed to save for one’s retirement, the 'Rule of 25' must be applied,” he says.

If your annual expenditure is $50,000 a year, multiply that amount by 25 and you will come up with a figure of $1.25m, which indicates the minimum savings required.

The other rule to remember is the 4 per cent rule, which estimates the amount from one’s portfolio that can be spent without eroding the principal, Mr Valecha says.

“The rule assumes that the market on average grows at 7 per cent; therefore, if one limits spending to 4 per cent of the portfolio and leaves the remaining 3 per cent on account of inflation, then theoretically one can avoid ever running out of money,” he says.

Meanwhile, Alison Soltani, founder of personal finance website Leap Savvy Savers, embarked on a no-spending challenge in 2021, when she stripped back her financial outlays to the bare essentials for an entire year.

She used a visual tracker and coloured whether she had a “no spend” day (spending nothing or only on essentials) or a “spend” day (purchased anything outside of the parameters set up for the challenge). After the challenge ended, she slowly started to add back expenses.

“After about a year of my financial independence journey, I noticed that I started succumbing to lifestyle inflation. So, I decided to do a no-spend challenge,” says Ms Soltani, also a proponent of the Fire movement.

“Little did I know that it would be a life-changing decision. It teaches you what you truly value, helps you to save a lot of money and challenges you to think creatively.”

However, she continued spending on activities for her children so that they didn’t feel any type of sacrifice. But she thought twice before buying toys and received all their clothes from friends and family.

Ms Soltani continued to spend on essentials such as utilities, insurance, petrol and groceries, although she maintained a very strict grocery budget. She cut spending on restaurants, Netflix, clothes and brunches, although she kept her Audible subscription.

“It was hard seeing other people spending and resisting the urge … meanwhile, my net worth doubled,” she says.

“I learnt resilience, self-discipline and the power of saying no to yourself. I am confident that I can be fulfilled with very little money. Once you realise that, inflation doesn’t worry you as much.”

Top five tips to retire early

Be mindful about where you want to spend money. Don’t waste it accidentally.

Focus on earning, not only spending. Even when you are young and starting with nothing, if you double your income and reduce spending, you can be financially free in less than 15 years.

In many countries, income tax is a person’s largest expense. Most people don’t even realise that, which means they miss opportunities to pay less or no tax and therefore have more money to invest.

Understand that you will resemble the people you spend the most time with, so if you want to create something different for your family then you need to spend time with like-minded people.

Start investing now. It doesn’t matter how small your first investments are, because it is the habit and compounding returns that will give you financial independence.