Transcripts
On FIRE:
Speaker:Achieve Financial Independence (even with kids)
Speaker:Take Early Retirement Using this Money Secret Written by
Speaker:Tom Cromwell , narrated by russell newton.
Speaker:What Does Your American Dream Look Like?|.
Speaker:There are probably millions of answers to that question,
Speaker:many of them being a variant of the idealized classic of a self-sufficient life.
Speaker:For James Truslow Adams,
Speaker:the American Dream is the belief that “life should be better and richer and
Speaker:fuller for everyone,
Speaker:with opportunity for each according to ability or achievement."
Speaker:Back in the 1800s,
Speaker:that might have meant having the opportunity to start a smallholding to live
Speaker:off the land in Libertarian tradition,
Speaker:but modern Americans dream more frequently about a life of comfort and
Speaker:consumerism.
Speaker:When we dedicate so much of our lives to working,
Speaker:it often seems like the comfort (and fun)
Speaker:won’t begin until we can leave our work life behind and enter
Speaker:retirement—but even then,
Speaker:it’s not guaranteed.
Speaker:Too many Americans find themselves with far too little in savings to live in
Speaker:comfort without the crutch of regular income,
Speaker:and that’s reflected by the 63% of Americans who don’t think their savings
Speaker:are on track.
Speaker:If you find yourself in the same camp as that 63% of Americans,
Speaker:then you might be dismissive of the idea that you could retire as a millionaire.
Speaker:I cannot promise you that you will,
Speaker:but you certainly can.
Speaker:People often look to the ‘millionaire club’ as hyper exclusive,
Speaker:but that’s just not accurate.
Speaker:If you’re earning a decent average salary,
Speaker:or if you have the significant financial commitment that comes with having
Speaker:children,
Speaker:then it will no doubt be harder.
Speaker:But you can do it,
Speaker:and you already have all the tools you’ll need—a solid work ethic,
Speaker:self- restraint,
Speaker:and a whole truckload of vision.
Speaker:You see,
Speaker:the secret to accumulating a million dollars isn’t a secret after all.
Speaker:Through a combination of frugal living,
Speaker:saving,
Speaker:and investing,
Speaker:you could very well build up a seven-figure nest egg by the time you retire.
Speaker:We’re not looking at the 1% here,
Speaker:but instead the nearly 7% of U. S. households that can claim to have hit the
Speaker:mark.
Speaker:There will be sacrifices along the way,
Speaker:and you’ll need to make difficult choices.
Speaker:This is especially true if you want (or already have)
Speaker:children.
Speaker:Raising a family is rewarding,
Speaker:but there are so many extra expenses that come with it.
Speaker:You need to be realistic about what you can achieve in a relatively short time
Speaker:when you also have to think about putting dinner on the table and keeping a
Speaker:roof over everyone’s heads.
Speaker:It’s much easier for people who earn six figures or who don’t have children
Speaker:to save and invest money—but the millionaire club is not reserved for them
Speaker:alone.
Speaker:What I hope you’ll see is that you can join them and become a millionaire
Speaker:too,
Speaker:but you’ll need to start now.
Speaker:As I said,
Speaker:the tools that you need to save and invest effectively are right in front of
Speaker:you.
Speaker:Pick them up and get to work.
Speaker:How To Retire A Millionaire.
Speaker:You don’t need to be a millionaire to retire;
Speaker:indeed,
Speaker:most retirees aren’t.
Speaker:The thing about most retirees,
Speaker:though,
Speaker:is that they’re in their late sixties and don’t need to stretch out their
Speaker:financial stockpiles over many decades.
Speaker:If you retire in your mid-fifties (instead of 67),
Speaker:your retirement funds need to last twice as long.
Speaker:As it happens,
Speaker:even those who follow a fairly traditional path to retirement frequently find
Speaker:themselves short on cash—and that’s without wanting to retire early.
Speaker:A study conducted by the Transamerica Center for Retirement Studies showed that
Speaker:only 47% of retired Americans believe that they have enough money to last them
Speaker:for the rest of their lives.
Speaker:That’s a pretty troubling thought,
Speaker:and I defy anyone to find somebody who wants to grow old with money problems
Speaker:weighing on their mind.
Speaker:It strikes me that people underestimate just how much money they need and how
Speaker:long they will live.
Speaker:People have a natural fear of dying earlier than is statistically the case,
Speaker:so they don’t pace their spending appropriately.
Speaker:A medical emergency or a few significant purchases can rapidly eat away at
Speaker:small retirement funds.
Speaker:You can’t assume you will die at 79.
Speaker:How will you feel as that approaches and you find your funds dwindling—just
Speaker:when you are most vulnerable?
Speaker:To cut to the chase,
Speaker:the key to all of this is time.
Speaker:The earlier you want to retire,
Speaker:the more money you’ll need to accumulate.
Speaker:The earlier you start working towards your financial goals,
Speaker:the easier you will be able to acquire and accumulate the wealth you seek.
Speaker:If you’re saving $500 per month,
Speaker:you could be a millionaire in 33 years’ time.
Speaker:This is obviously a far more acceptable time horizon to somebody in their
Speaker:twenties who can wait 33 years,
Speaker:but if you’ve just hit 50,
Speaker:you’d probably prefer to only have an 11-year waiting time to reach the
Speaker:seven-figure mark—even if that does mean stashing $60,000 each year.
Speaker:In a nutshell,
Speaker:the sooner you want to reach your goal,
Speaker:the more you’ll have to commit.
Speaker:To give a sense of how (and when)
Speaker:you could retire a millionaire,
Speaker:I’ve set out the figures in a grid below.
Speaker:Here you’ll find out at what age you can become a millionaire based on your
Speaker:monthly savings and your age.
Speaker:For the sake of argument,
Speaker:I’ve assumed that you’re starting from scratch with $0 to your name,
Speaker:with a (modest)
Speaker:9% annual return on your investments.
Speaker:We’ll get to how you can achieve higher returns in good time,
Speaker:but for now,
Speaker:this gives a good indication of what it’ll take for you to reach this rounded
Speaker:goal.
Speaker:Not many people are going to be able to save $2,000 per month,
Speaker:but if you can save even $1,000 per month,
Speaker:then you can see that by starting early enough,
Speaker:you can retire a millionaire by 48 (assuming modestly good returns).
Speaker:However,
Speaker:too many people are leaving it too late to start investing for retirement,
Speaker:and that’s a problem.
Speaker:To avoid becoming part of that statistic,
Speaker:you need to start saving and investing now because the sooner you start,
Speaker:the easier your path to wealth and security will be.
Speaker:When Can You Retire?
Speaker:The truth about F. I. R. E. is that you don’t necessarily Need a million
Speaker:dollars to retire.
Speaker:It’s safe to say that you could probably eke out a comfortable if basic life
Speaker:on less than that—no matter what age you want to retire at—but it naturally
Speaker:follows that the earlier you retire the more money you’re going to need to
Speaker:carry you through life.
Speaker:Giving up the relative comfort and security of a regular paycheck is not
Speaker:something to take lightly,
Speaker:and likewise deciding to retire should not be a spur of the moment decision
Speaker:(unless you win the lottery or come into some serious wealth from a long-lost
Speaker:aunt).
Speaker:If you want to retire early (and for those who follow the F. I. R. E. movement
Speaker:religiously,
Speaker:the goal is often to retire by 40 or around there),
Speaker:you’re going to need to exercise some seriously proficient financial
Speaker:management.
Speaker:People often imagine a wealthy retirement without taking any action to achieve
Speaker:it.
Speaker:They put off starting a 401(k)
Speaker:account,
Speaker:they don’t make investments,
Speaker:and they save these things as something to do “when I have more money."
Speaker:The unfortunate truth is,
Speaker:however,
Speaker:that without positive and sustained action,
Speaker:you will never “have more money,” and will have harmed your chances of
Speaker:retiring in relative comfort let alone riches.
Speaker:There are lots of factors to consider when deciding whether you can retire
Speaker:early,
Speaker:but it all ultimately boils down to two questions - What Do You Want Your
Speaker:Retirement To Look Like?
Speaker:And How much money will you need to get there?
Speaker:Naturally,
Speaker:the first step to take is deciding what you want from life and retirement.
Speaker:Focusing on finances is all well and good,
Speaker:but if you predicate your decision to retire on having a certain amount of
Speaker:financial firepower,
Speaker:your retirement ‘figure’ should be grounded in the reality of how you want
Speaker:to live.
Speaker:Retirement doesn’t have to be all golf courses and bridge afternoons (unless
Speaker:that’s what you want)
Speaker:and charting a course for your future will help you navigate the route in the
Speaker:present.
Speaker:To followers of the F. I. R. E. movement,
Speaker:deciding how much money retirement will cost is an essential step as this
Speaker:figure will help them to determine when they can hang up their work boots.
Speaker:Summed up,
Speaker:their theory is that you should have enough money upon retirement to meet your
Speaker:regular expenditure.
Speaker:This entails not only accumulating a serious amount of money at an early stage
Speaker:but also requires those practicing the theory to plot out and stick to a
Speaker:meticulous budget that ensures their money goes the distance into later life.
Speaker:By this logic,
Speaker:how much you need to save for retirement is highly dependent on your
Speaker:circumstances.
Speaker:Of course,
Speaker:it always helps to have more,
Speaker:but perhaps the most grounded way of approaching this is to take a calculated
Speaker:look at how much it costs for you to sustain yourself and consider how much
Speaker:money you would need to live in this way for ten,
Speaker:twenty,
Speaker:or thirty years.
Speaker:As you’ll now already know,
Speaker:one of the most significant factors influencing when and how much you’ll need
Speaker:to take into retirement is time.
Speaker:How old you are,
Speaker:along with when you want to quit working will determine how long you have to
Speaker:accumulate assets and savings.
Speaker:It’s also the case that the earlier you retire,
Speaker:the more money you’ll need to support yourself through a period that’s
Speaker:usually limited to the final decade of a person’s life.
Speaker:Nobody can tell you the exact amount of money you need to retire comfortably,
Speaker:and this is what makes it so important to define what you want your retirement
Speaker:to look like.
Speaker:Even with a residual income,
Speaker:leaving the working world won’t suddenly make the cost of living irrelevant
Speaker:to you and the chances are that you’ll need more money to pay for things like
Speaker:healthcare than you did during your youth.
Speaker:Suppose you find it too difficult to set an exact figure and budget your life
Speaker:down to the penny for the next few decades.
Speaker:Instead,
Speaker:aim to have enough income to pay living expenses for the rest of your life
Speaker:without having to resort to employment or a dependency on other people.
Speaker:In other words,
Speaker:you should be aiming for financial independence.
Speaker:Financial independence is portrayed as something you achieve when you get rich,
Speaker:but this simply isn’t the case.
Speaker:There are plenty of people living modestly who are independent of the need for
Speaker:gainful employment or the support of others.
Speaker:For me,
Speaker:financial independence goes beyond just having enough money to carry you
Speaker:through the rest of your days.
Speaker:Of course,
Speaker:that’s the practical side of things,
Speaker:but it’s also about freedom—the chance to do what you want,
Speaker:when you want,
Speaker:without having to worry about the rat race or where your next meal is coming
Speaker:from.
Speaker:To my mind,
Speaker:that’s better than plain old retirement—and it could come a lot earlier too.
Speaker:If your passions can generate some form of income,
Speaker:you can fund your lifestyle with a combination of investing and doing work that
Speaker:you love.
Speaker:When you wake up each morning,
Speaker:pull on your work clothes and start the commute,
Speaker:are you spending your time how you’d like?
Speaker:Is your working schedule flexible enough to allow you some precious family
Speaker:time,
Speaker:or to take a trip once every so often?
Speaker:If the answer to these questions is no,
Speaker:it isn’t too late.
Speaker:You can achieve financial independence and all the trappings that go with it,
Speaker:but you need to start planning your life and finances sooner rather than later.
Speaker:The key thing to remember is that while financial independence offers an
Speaker:alternative to traditional retirement,
Speaker:it isn’t any easier to put into action.
Speaker:Whatever it is you want to do with your retirement,
Speaker:it’s important to taper your expectations.
Speaker:This is especially true if you have children and are earning a reasonably
Speaker:average salary.
Speaker:Perhaps the most significant barrier to successfully meeting retirement goals
Speaker:is that wannabe retirees move the goalposts as they go.
Speaker:By this,
Speaker:I mean they let their spending get ahead of them and lose sight of their goals.
Speaker:As they start to make more money,
Speaker:they feel that they should be incrementally increasing their standard of living
Speaker:instead of putting the extra money towards their original goals.
Speaker:I’ve known people who got a pay raise and started taking a series of
Speaker:elaborate and exuberant holidays to celebrate—which of course,
Speaker:became more of an annual tradition than a one-off thing.
Speaker:This meant that rather than putting their extra income to work for them,
Speaker:they were spending it.
Speaker:To those in the know,
Speaker:this is called “lifestyle creep,” but in layman’s terms,
Speaker:it’s the practice of spending more money as your income (or savings)
Speaker:goes up.
Speaker:It’s a good thing if you want to live a luxury lifestyle,
Speaker:but it’s dangerous if you want to make your money last.
Speaker:This is all the more important if you have a lower income because it’s hard
Speaker:to make the jump from that position to a wealthy later life.
Speaker:It’s essential to recognize that financial independence does not necessarily
Speaker:equate to riches,
Speaker:and a dose of realism about how you can realistically afford to live your life
Speaker:is always healthy.
Speaker:Many early retirement plans have been ruined by a slow yet constant growth in
Speaker:living standards— which bring with them more expensive lifestyle choices.
Speaker:It’s buying that flashy car,
Speaker:climbing the property ladder,
Speaker:and going on ever more exotic holidays in that pointless and harmful game of
Speaker:keeping up with the Joneses next door.
Speaker:The “I deserve it because I worked hard” mindset will keep you in debt that
Speaker:grows with every passing year— pushing you further and further away from
Speaker:financial independence.
Speaker:If you allow lifestyle creep to work its way into your finances,
Speaker:you’ll get trapped.
Speaker:Remember,
Speaker:the fancy cars,
Speaker:the big house and the frequent holidays cost money—which could keep you
Speaker:working in a job that you don’t want.
Speaker:This is especially true if you’re paying for all of this on credit,
Speaker:leaving you with an even bigger bill and not much actual substance to justify
Speaker:it.
Speaker:If you’re not in debt,
Speaker:don’t be tempted by consumer credit—and if you are,
Speaker:work damn hard to get out of it.
Speaker:Your (early)
Speaker:retirement depends on it.
Speaker:Money frittered away in the present is gone,
Speaker:but money invested now could be worth many times more in 20 years.
Speaker:When that hits home,
Speaker:and you get the financial independence bug,
Speaker:you’ll never look at spending in the same way again.
Speaker:Planning Your Retirement.
Speaker:Retirement is not binary—even though it can seem like it when you look at the
Speaker:traditional way of doing things.
Speaker:For most Americans,
Speaker:retirement is like hitting a switch that sees you transition from the world of
Speaker:work into a slower-paced lifestyle.
Speaker:The thing is,
Speaker:no rulebook dictates how retirement should look.
Speaker:There are many permutations of the status - what one person might consider a
Speaker:full-on working week might look like a laid-back part-time affair to another.
Speaker:I can’t describe every possible path through retirement as that would fill
Speaker:the pages of War and Peace many times over,
Speaker:but I think it’s useful to get an appreciation of the different approaches
Speaker:commonly taken.
Speaker:Traditional retirement sees people work hard for around forty years before
Speaker:enjoying the last few decades of their life by living off their savings,
Speaker:pension,
Speaker:and maybe even some government support.
Speaker:The vast majority of people will be familiar with this approach,
Speaker:and it’s probably the route taken by your parents and grandparents.
Speaker:Now there’s nothing wrong with living your life to the normal rhythm,
Speaker:but naturally,
Speaker:the question many people ask is “Why should we wait?"
Speaker:If you want to enjoy your life in the here and now without having to stick it
Speaker:out at work when you’re at your most mobile and energetic,
Speaker:early retirement could offer a way out.
Speaker:You might come across this as people decide to throw in the work towel at age
Speaker:fifty-five or even during their forties.
Speaker:It might not sound all that different from a traditional retirement,
Speaker:but to forgo your primary income for an extra decade or two before most people
Speaker:leave the workplace means making sacrifices.
Speaker:Early retirees keep their costs low and drive their income higher—and the
Speaker:earlier they want to retire,
Speaker:the harder they need to work to get their finances in order.
Speaker:These routes are quite different,
Speaker:but they have one central point of commonality—that they lead to permanent
Speaker:retirement.
Speaker:This is a retirement in which you don’t go back to work,
Speaker:start a side-hustle,
Speaker:or pursue a more relaxed course of employment.
Speaker:It’s easy to think that these are your only options,
Speaker:too,
Speaker:but they aren’t.
Speaker:Take,
Speaker:for instance,
Speaker:the theory of ‘temporary retirement’ proposed by Paul Terhorst in his book
Speaker:Cashing in on the American Dream.
Speaker:As an alternative to early retirement,
Speaker:Terhorst suggested that people use their ‘middle years’ during their
Speaker:thirties to fifties to enjoy life.
Speaker:Without a 9–5,
Speaker:these people can raise a family and enjoy time with them,
Speaker:they can travel,
Speaker:and have the choice to go back to work at any point.
Speaker:The selling point here is that you get to enjoy the money you’ve earned and
Speaker:the time you’ve freed up when you’re still able to be active and when your
Speaker:physical and mental capacities are pretty high.
Speaker:To my mind,
Speaker:this is something of an extended sabbatical,
Speaker:and there’s nothing wrong with that,
Speaker:but it does mean that if you run out of money,
Speaker:you’ll have to re-enter the world of work.
Speaker:The trouble is,
Speaker:the older you are,
Speaker:the harder it is to keep skills current and to find and engage in employment.
Speaker:Perhaps the best alternative is another middle ground,
Speaker:that of semi-retirement.
Speaker:Popularized by Bob Clyatt in his 2005 book Work Less,
Speaker:Live More,
Speaker:semi-retirement is all about finding a pace of life that suits you.
Speaker:You can get the income benefits of work,
Speaker:but with the free time of retirement.
Speaker:This might mean working in a reduced capacity,
Speaker:changing jobs to something that offers you a sense of satisfaction,
Speaker:or supplementing your investment income with a care-free,
Speaker:low-stress job.
Speaker:Either way,
Speaker:you’ll be able to deviate from the conventional way of doing things without
Speaker:the financial burden of leaving the working world altogether.
Speaker:You can approach retirement in any way you choose.
Speaker:The formats I’ve set out are little more than theories,
Speaker:and there is nothing to stop you from forging your way forward.
Speaker:Retirement is all about having choices and the flexibility to do more or less
Speaker:as you please.
Speaker:One thing’s for certain though,
Speaker:and that’s that you should only look to retire for the right reasons.
Speaker:When you’re working in a dead-end job,
Speaker:or under a manager that you just can’t get along with,
Speaker:or if you desperately need a break,
Speaker:retirement probably isn’t the answer.
Speaker:There are other solutions like finding a new job or taking a sabbatical to
Speaker:remedy these issues without cutting out your direct source of income.
Speaker:Think carefully about your motivations for seeking out retirement,
Speaker:whether early or otherwise,
Speaker:and only act on them if you’re doing it for yourself and not to escape
Speaker:something else.
Speaker:The Path To Retirement.
Speaker:With goals and aspirations for retirement in mind,
Speaker:you’ll probably be eager to start making some headway.
Speaker:Although it’s easy to categorize these comments as purely retirement advice,
Speaker:you need to remember that we’re talking about your future here—in the very
Speaker:broadest sense.
Speaker:This isn’t just about what your final years will look like,
Speaker:but also about how you’ll get to them,
Speaker:what you’ll be able to enjoy in the meantime,
Speaker:and the hard work you’ll need to put in.
Speaker:Despite the grand scale of the task ahead,
Speaker:you don’t need a plan that maps out every single action you’ll take—and
Speaker:you needn’t even account for each dollar you earn or spend.
Speaker:Living frugally and other such lifestyle factors are undoubtedly a vital part
Speaker:of achieving financial independence,
Speaker:but there are also some firmer concepts that you’ll need to keep close to
Speaker:your heart.
Speaker:These are the tools that will help you retire early,
Speaker:leave work with a million bucks,
Speaker:or both.
Speaker:Debt – Don’T Do It.
Speaker:You might know what it takes to accumulate a million dollars,
Speaker:but money in the bank is not how millionaires are made.
Speaker:That coveted financial status is about net worth,
Speaker:a goal that’s thankfully easier to reach than just having $1 million of
Speaker:liquid cash sitting in a checking account.
Speaker:You can calculate how much you’re worth by subtracting your debt from all
Speaker:your assets—and it’s no secret that the less debt you have the better.
Speaker:Wealthy people generally take an identical approach to debt—namely that it
Speaker:shouldn’t be messed with.
Speaker:You might dismiss their argument that they don’t need to get into debt as
Speaker:they can just pay for things outright.
Speaker:However,
Speaker:it can also be refuted since they got rich somehow,
Speaker:which can probably be partially attributed to an aversion to debt.
Speaker:In a world where opportunities to get into consumer debt are everywhere,
Speaker:it’s much harder to altogether avoid debt than it perhaps might have been
Speaker:when your only reliable source of borrowing was from the local branch manager.
Speaker:You no longer need to look somebody in the eye to borrow money,
Speaker:and there are services that allow you to spread the cost of everything from
Speaker:clothes to white goods over an extended period whilst racking up additional
Speaker:charges in interest payments and fees.
Speaker:With so much credit on offer,
Speaker:it’s no surprise that many people fall into the mindset that it’s okay to
Speaker:borrow liberally.
Speaker:With the nicest things within reach and only a credit agreement checkbox away,
Speaker:it’s easy to lull yourself into a false sense of security but the reality is
Speaker:that few people are using debt wisely.
Speaker:Before I can give any advice on the subject of debt in the context of
Speaker:retirement,
Speaker:it’s important to understand that debt is a more complex topic than you could
Speaker:ever imagine.
Speaker:It’s so often the case that financial advisers and advice columns divide
Speaker:borrowing into ‘good’ debt—used to pay for things that help to create
Speaker:wealth such as a student or business loan—and ‘bad’ debt—used to
Speaker:describe things like credit cards and other consumer liabilities.
Speaker:This binary classification just isn’t helpful,
Speaker:however,
Speaker:since even so-called ‘good’ debt is only useful in certain circumstances.
Speaker:A college degree is often billed as a solid gold promise of higher future
Speaker:earnings and a bright professional future,
Speaker:but there is no actual guarantee that you’ll earn more money with a degree
Speaker:than without one.
Speaker:Some reports even suggest that almost half of college graduates take positions
Speaker:out of school that do not require a degree,
Speaker:but the scarier figure is the 20% who are still in the same position a decade
Speaker:later.
Speaker:For even unnerving reading,
Speaker:you need only to look at the millions of borrowers who lost their homes to
Speaker:foreclosure during the subprime mortgage crisis that took place between 2007
Speaker:and 2010.
Speaker:As property prices went into freefall,
Speaker:the sting in the tail of adjustable-rate mortgages came into its own and
Speaker:claimed the life savings of far too many Americans.
Speaker:In short,
Speaker:their coveted property ‘investment’—the one they put so much on the line
Speaker:for in terms of mortgage borrowing—was gone.
Speaker:This shows that success is not assured,
Speaker:and that debt should be used very sparingly and only when you have a plan for
Speaker:it.
Speaker:Of course,
Speaker:it’s impossible for a matriculating freshman to know what their job prospects
Speaker:will look like at the point of graduation,
Speaker:but actively limiting and reducing your debt while you’re in school can only
Speaker:be a good thing.
Speaker:The same is true of mortgage debt too—and any sensible adviser should really
Speaker:be telling you to find a payment level that works for you over the long-
Speaker:term—taking into account the possibility of redundancy,
Speaker:a larger family,
Speaker:and any other wealth- draining circumstances that might crop up to limit your
Speaker:future income.
Speaker:Overall,
Speaker:debt can never really be risk-free.
Speaker:Whatever it is you’re borrowing for,
Speaker:and however good it seems,
Speaker:you have to look critically at what you’re getting yourself into.
Speaker:Ask yourself whether the debt will pay you back more than what you put in.
Speaker:If,
Speaker:after factoring in the principal repayment,
Speaker:interest,
Speaker:and other potential uses of the money that you’ve forgone,
Speaker:you still end up with more than you would otherwise have had,
Speaker:your debt is probably worthwhile.
Speaker:Good debt will always do more for you than you do for it—and sticking to that
Speaker:mantra will help you to stay on track.
Speaker:If you do find yourself in debt,
Speaker:it’s important to acknowledge just how damaging your situation could be to
Speaker:any hopes of early retirement.
Speaker:Leaving active income behind will almost certainly be out of the question if
Speaker:you are struggling to beat down a high debt figure,
Speaker:and ongoing repayments may significantly limit the amount of residual and
Speaker:passive income that reaches your pocket to cover the costs of living.
Speaker:With these risks in mind,
Speaker:it’s necessary to consider how you can pave the way towards retirement by
Speaker:reducing your exposure to debt—both good and bad.
Speaker:If you’ve spent even a moment researching ways to deal with debt,
Speaker:you may well have come across what is known as the ‘debt snowball’ method.
Speaker:With a great many proponents,
Speaker:the debt snowball method is a debt reduction strategy that entails paying off
Speaker:debts in order from the smallest to the largest,
Speaker:with the repayment amounts for each rung of the ladder increasing as you pay
Speaker:off your smaller liabilities.
Speaker:It means making minimum payments for all of your debts except the smallest,
Speaker:towards which you pay as much as you possibly can.
Speaker:By repeating this process until all of your debts are settled,
Speaker:the method acts like a snowball as your repayment sums substantially increase
Speaker:as you eliminate each credit card debt,
Speaker:car loan or student finance liability like a snowball getting larger as it
Speaker:rolls down a hill.
Speaker:That’s great of course,
Speaker:but what if you want to pay off your debt even faster?
Speaker:If you want to retire early or achieve financial independence quickly,
Speaker:you’ll need something altogether more effective to haul yourself out of
Speaker:debt—and that’s where the ‘debt avalanche’ method comes into play.
Speaker:If the F. I. R. E. movement’s saving and investing strategies are extreme in
Speaker:scope and success,
Speaker:then the avalanche method is the debt repayment equivalent that’s used by the
Speaker:fiscally savvy to regain their feet and march onwards towards financial
Speaker:independence quickly.
Speaker:The debt avalanche approach requires you to make minimum monthly payments
Speaker:towards all of your debts (so far,
Speaker:so good)
Speaker:but then pay as much as you reasonably can towards the debt with the highest
Speaker:interest rate until it’s settled.
Speaker:Thereafter you keep this up but add the minimum payment from your most costly
Speaker:debt to the one with the next highest interest rate until all of your debt is
Speaker:gone.
Speaker:The beauty of this method is that you’re paying down your debt total just as
Speaker:you would with the snowball approach,
Speaker:but you’re also limiting the amount you pay in interest,
Speaker:meaning that you can save money while paying off debt.
Speaker:When you pay off debts using the avalanche method,
Speaker:you halt the growth of compound interest in its tracks but you can miss out on
Speaker:the psychological support of quick wins.
Speaker:Instead,
Speaker:it will give you a faster timeline towards the repayment of your debts.
Speaker:The Long View Of Wealth Building.
Speaker:Retirement plans should always incorporate timescales and withdrawal sums,
Speaker:but these are metrics by which you can measure the use of your money.
Speaker:You also need to work out how you’ll generate money to create a residual
Speaker:income that covers your living costs and allows you to achieve financial
Speaker:independence.
Speaker:More often than not,
Speaker:this will mean investing in stocks,
Speaker:bonds,
Speaker:funds,
Speaker:and other assets in the hope of securing an income stream.
Speaker:Saving alone won’t cut it and sticking to cash will see you lose money to
Speaker:inflation as you won’t be earning enough interest to cover the increasing
Speaker:cost of living.
Speaker:Investing,
Speaker:without equal,
Speaker:is the best and most consistent way to make money—but getting involved with
Speaker:investments means you’ll need to get comfortable with risk,
Speaker:which can be particularly hard for people who don’t have a lot of money to
Speaker:lose.
Speaker:Risk is synonymous with market volatility—the rise and fall (and deeper fall
Speaker:still)
Speaker:of the investment markets.
Speaker:As the measure of price change over time,
Speaker:the volatility of any given investment should be of particular interest to
Speaker:anybody who wants to generate wealth,
Speaker:and it’s important on two levels.
Speaker:Firstly,
Speaker:you should generally only involve yourself with investments that are within
Speaker:your level of risk tolerance.
Speaker:That is to say that regardless of how much you think you need for retirement,
Speaker:putting all of your money into a high risk,
Speaker:potentially high reward venture is not a good idea.
Speaker:That being said,
Speaker:risk is also an important indicator of an investment’s potential.
Speaker:More volatile investments are riskier because their prices are unstable,
Speaker:but they will generally also offer higher potential returns.
Speaker:It’s a balance that you need to tread carefully,
Speaker:and one that you’ll need to become familiar with if you’re to follow the F.
Speaker:I. R. E. route into later life.
Speaker:You can get a good feel for volatility by watching the markets after making
Speaker:your first investments.
Speaker:It can get stressful when the first market drop comes along,
Speaker:and your first instinct might be to cut your losses and sell—but remember
Speaker:that doing so will make your losses real.
Speaker:If you can tough it out and remain invested during the more difficult times,
Speaker:all you can expect to happen is the value of your portfolio falling.
Speaker:In the future,
Speaker:as the markets change and bounce back you could well see that figure climb up
Speaker:again,
Speaker:but not if you’ve already taken your money out and made a loss.
Speaker:This is why it’s so important to take a long view of wealth building.
Speaker:Market volatility is a common phenomenon,
Speaker:and if you’re investing money into any common assets you might be familiar
Speaker:with the phrase “capital at risk."
Speaker:Most investments can go either way and so the money you put into stocks,
Speaker:bonds and other assets isn’t totally secure.
Speaker:For some people,
Speaker:the way around this is to try to time the market.
Speaker:They think that they can guess when the market will turn—investing and
Speaker:withdrawing money accordingly in the hope that they do it at the opportune time.
Speaker:Unfortunately,
Speaker:this rarely works.
Speaker:Timing the market is incredibly difficult and very risky,
Speaker:with more skill required than you would need to reliably and discreetly count
Speaker:cards in a Vegas casino.
Speaker:Time in the market beats timing the market,
Speaker:whichever way you look at it.
Speaker:The alternative is to invest long term.
Speaker:When you’re in with an investment for the long term,
Speaker:short-term fluctuations present much less of an issue to you than would
Speaker:otherwise be the case.
Speaker:This is because there’s plenty of time for the market to correct itself and
Speaker:for your particular investments to bounce back potentially even higher than
Speaker:they were before.
Speaker:Simply put,
Speaker:the longer you invest for,
Speaker:the more likely it is that your assets will weather the storm of low market
Speaker:periods.
Speaker:To top this all off,
Speaker:the longer you remain invested,
Speaker:the more time your money has to grow if you’re practicing income reinvestment.
Speaker:By choosing to reinvest any dividends or profits generated by your portfolio,
Speaker:you can benefit from the power of compound returns which act like a
Speaker:snowball—growing in size as your returns get reinvested over time.
Speaker:As you continually invest your profits,
Speaker:you’ll be earning returns on interest which above all will help your
Speaker:investment to grow at a much faster rate.
Speaker:The more that is reinvested back into your portfolio,
Speaker:the greater chance you have of earning even greater sums in the future in a
Speaker:virtuous circle.
Speaker:This is something that you can’t hope to do in the short term,
Speaker:and it’s why long-term investing is a good idea whether you want to retire in
Speaker:the next five years or the next thirty.
Speaker:Look to the example of the S&P 500 stock index and you’ll see this in action.
Speaker:In the decade between January 2010 and January 2020,
Speaker:there were annualized returns of over 9 percent.
Speaker:This is pretty good on its own,
Speaker:but the picture looks even better when you look at the 11.5 percent annualized
Speaker:return over the same period for those who reinvested their dividend income.
Speaker:In short,
Speaker:invest for the long term and don’t miss out on the magic of compounding.
Speaker:Your kids’ college money is better off as a money maker than a stagnant pool
Speaker:of wealth,
Speaker:and you won’t have to worry about losing it all—provided that you do your
Speaker:research and keep your composure during periods of decline.
Speaker:Retirement Spending Unwrapped.
Speaker:Even once you hit retirement,
Speaker:the planning and discipline can’t stop if you want to continue being
Speaker:financially independent.
Speaker:With or without the F. I. R. E. movement,
Speaker:there are certain financial rules that just make plain sense when trying to
Speaker:make your money go as far as possible—two of those are the 25 times rule and
Speaker:the 4 percent rule.
Speaker:The 25 times rule is perhaps the easiest to figure out since it entails saving
Speaker:up 25 times your annual expenses (not your yearly income)
Speaker:to retire.
Speaker:This is the figure that some F. I. R. E. followers believe you’ll need to be
Speaker:considered as truly financially independent.
Speaker:Thinking about the lifestyle that you want for yourself,
Speaker:if your expenses are likely to be around the $40,000 per year mark,
Speaker:you’ll need to save $1,000,000 to retire according to this rule.
Speaker:However,
Speaker:if you can live frugally on $20,000 per year,
Speaker:you only need to acquire investments of $500,000.
Speaker:Once you’ve got your money,
Speaker:you’ll also need to work out the rate at which you can afford to spend it.
Speaker:Remember that the F. I. R. E. followers who abide by these rules leave the
Speaker:world of regular paychecks behind,
Speaker:so spending too quickly could deplete their coffers and leave them high and dry.
Speaker:Often attributed to three Trinity University Professors,
Speaker:the 4 percent rule is effectively a formula for withdrawing money during
Speaker:retirement without draining your reserves too quickly.
Speaker:The framework allows you to withdraw 4% of your retirement savings in the first
Speaker:year,
Speaker:with the same percentage of withdrawal in each subsequent year.
Speaker:The most observant readers might by now have pieced together that 4% equates to
Speaker:1/25—and so it’s easy to see how the two calculations interact to provide a
Speaker:rock-solid retirement formula.
Speaker:If nothing else,
Speaker:the 4 percent rule acts as a benchmark against which retirees can decide how
Speaker:much of their portfolio to withdraw on an annual basis to see them through
Speaker:retirement.
Speaker:By withdrawing a percentage of your portfolio’s total value instead of a flat
Speaker:figure,
Speaker:you can benefit from the reinvestment of your residual income which stretches
Speaker:out the money you have available.
Speaker:It also provides a hedge against inflation.
Speaker:The 4% rule assumes that historic returns on the S&P have averaged just around
Speaker:8% - 9%.
Speaker:If you assume you need to deduct historically average levels of inflation of
Speaker:around 2-3% from this return you are left with 5-6%.
Speaker:However,
Speaker:there are number of other factors such as market volatility (producing lower
Speaker:returns),
Speaker:plus the need to sell investments in falling markets,
Speaker:and a margin of safety that make 4% a realistic baseline The problem for those
Speaker:who wish to retire early,
Speaker:however,
Speaker:is that this rule does not reliably guarantee that your portfolio will last for
Speaker:the duration of your life after work.
Speaker:It also becomes fairly useless once you tick over the 701⁄2 mark,
Speaker:as U. S. tax law then requires you to take withdrawals from your IRAs.
Speaker:When other withdrawals start coming into play,
Speaker:continuing with such a formulaic approach to using your portfolio doesn’t
Speaker:only leave you at the mercy of inflation but could also open you up to
Speaker:increased tax liability.
Speaker:On the whole,
Speaker:the 4 percent rule is a reasonable place to start—but it doesn’t
Speaker:necessarily work for those who want to retire early.
Speaker:For one thing,
Speaker:the rule was modeled on a hypothetical portfolio that was split equally between
Speaker:stocks and bonds.
Speaker:In all likelihood,
Speaker:your own portfolio will be composed differently than that model,
Speaker:and your investments might also change throughout your lifetime meaning that
Speaker:the balance will shift.
Speaker:Perhaps most significantly,
Speaker:however,
Speaker:the 4 percent rule works to a 30-year time horizon.
Speaker:This means that the rule probably isn’t suitable for those who have already
Speaker:reached retirement and are aged over 65,
Speaker:but it also makes it potentially unsuitable for those who want to retire
Speaker:earlier than 50.
Speaker:Many adherents of F. I. R. E. that want to retire very early,
Speaker:in their thirties,
Speaker:use 3% as a prudent rate.
Speaker:I cannot state enough how important it is to manage the risk of running out of
Speaker:money when you want to retire early.
Speaker:And so even if 4 percent is your starting point,
Speaker:you should seek out a more bespoke solution that reflects your circumstances,
Speaker:the composition of your portfolio,
Speaker:and your definition of retirement.
Speaker:For example,
Speaker:I aim to live off the income generated from my portfolio without ever touching
Speaker:the capital.
Speaker:This means that I do not damage my long-term prospects if there is a market
Speaker:crash by eating into large parts of my portfolio to provide current income.
Speaker:This is a real danger to people who retire very early who are relying on a
Speaker:whole stock portfolio.
Speaker:For them taking out $30k or $40k following a crash such as in 2000–2002 (the
Speaker:market lost around 50% of value)
Speaker:would seriously dent their capital.
Speaker:These are the types of scenarios when the 4% rule fails to make the funds last.
Speaker:Make It Your Own.
Speaker:It’s not always easy to live life as an average American with dreams but also
Speaker:two kids and a dog,
Speaker:and there’s no getting away from the challenges you’ll face on your way to
Speaker:realize those.
Speaker:It can be done,
Speaker:though.
Speaker:With the right approach and dedication to your own cause,
Speaker:almost any financial hurdle can be crossed.
Speaker:In the rest of this book,
Speaker:we will be setting out to provide answers on how to realize those dreams and
Speaker:overcome those challenges.
Speaker:Chapter Summary And Conclusions.
Speaker:• You and everyone can retire a millionaire,but you may not need that much to
Speaker:do so.Start investing early to make the power of compounding work for you.
Speaker:• Decide what your retirement will look like?Will it be part-time or
Speaker:volunteering work?Maybe a frugal existence in a low-cost location filled with
Speaker:cheap outdoor pursuits more expensive hobbies and pass times.This determines
Speaker:how much money you will need.
Speaker:• How much do you need to retire?Conventionally in retirement,
Speaker:you need an income between half and a third of your working annual income.
Speaker:The F. I. R. E. movement usually considers that you should have 25x your
Speaker:annual expenditure as retirement pot.
Speaker:• How to get there - invest carefully and assiduously.
Speaker:In all cases,
Speaker:eschew consumer debt.
Speaker:• How can I make funds last through retirement?
Speaker:A withdrawal rate of 4% for people retiring in their late forties or fifties is
Speaker:likely to be prudent and protect you against inflation.
Speaker:This has been
Speaker:On FIRE:
Speaker:Achieve Financial Independence (even with kids) Take Early Retirement Using this Money Secret Written by
Speaker:Tom Cromwell , narrated by russell newton.
