Who hasn’t dreamed of at least once in their life stop working living on an annuity when you are still young to enjoy the best of life? A wonderful thing, but you have to be able to afford it. Yet it is not necessary to be born a millionaire: with great willpower, saving skills and careful financial planning, one can join the FIRE movement. Here’s how.
What is the FIRE movement
The FIRE movement is a lifestyle which consists in realizing what is summarized precisely in the acronym. FI sta per Financial Independence; RE, per Retire Early. In short: achieve financial independence and stop working to live on income.
It must be said that this philosophy undoubtedly requires a great effort, both of will and financially, but it does not preach living in luxury, nor necessarily being super rich. On the contrary, it is a very frugal and highly planned lifestyle, focused on the ultimate goal which is not to spend life working, but to live it until there is time.
How to become financially independent
The idea was born in the 90s with the release of the book “Either the stock exchange or life” by Vicki Robin and Joe Dominguez, and spread globally after 2011, with the Canadian software engineer’s blog Peter Adeney said “Mr. Money Mustache,” which tells the story of how he managed to retire at age 30.
The fundamental step is that of economic independence, which is achieved on the one hand by reducing expenses to the bone (a concept that goes hand in hand with that of downshifting), on the other by accumulating sources of passive income that cover them, and that allow you to set aside as many savings as possible, even up to 70 percent of your salary. With a careful financial planningafter a certain number of years you can be sure that your savings will generate sufficient passive income to cover your expenses, freeing you from the need to collect a monthly salary.
One way to achieve this, according to the FIRE movement, is the 4 percent rule.
The 4 percent rule
The 4 percent rule and the formula that allows you to become financially independent and live on income. In an ideal world, this rule says that in order to live on income, one must invest 25 times one’s annual expenses in assets that generate income, possibly in the form of a well-balanced portfolio. This means on the one hand having a great ability to save, on the other a great ability to manage it (or the availability of a good consultant help us in this regard).
Obviously this is a model: not all people are the same and can apply it in the same way. In fact, it is necessary to take into account the age from which you start saving, the actual annual expenses and savings capacity, which goes hand in hand with the income received. The lower the expenses, the higher the saving capacity and the more time one has available, the more one will be able to exploit the investments – and the revaluation of the same over time thanks to the compound interest – and the higher the probability of reaching economic independence soon and start enjoying life.
Live on the fat of the land
Living on an income, according to the FIRE principle, does not mean living in unbridled luxury, because once you have created a passive income you obviously need to stay within its limits if you don’t want to erode the accumulated capital. The downside of a situation that might seem like a prison is that, by not having to work, you free up an enormous amount of time to invest exactly as you want (even in profitable activities that supplement your income); which is then the meaning of “retire early”, i.e. not living just to work but, while there is still time, do even a little bit of what we feel like doing.
How much money do you need to live on an annuity
Materially, applying the 4 percent rule, how much money does it take to live off an income? It depends on what expenses you expect to have. For example, if, once you stop working, you expect expenses for 30 thousand euros per year, it will be necessary to accumulate 25 times as much, or 750 thousand euros, to be invested to generate passive income to cover expenses. Which becomes sustainable if, in fact, from year to year no more than 4 percent of one’s capital is withdrawn, which in the meantime continues to be invested and to generate interest.
It goes without saying that the rate of income must remain constant if not growing compared to what was planned, and that expenses must never exceed what was budgeted, to avoid shocks in the model. That’s why one solid financial education is required for this step.