This article explores the concept of FIRE (Financial Independence, Retire Early) and why aiming for financial freedom before the age of 45 might be a more realistic and beneficial goal than traditional retirement at 65. It discusses the challenges of working until traditional retirement age, the importance of early preparation, and practical steps for ordinary people to achieve FIRE.
The Unsustainability of the Traditional 65-Year-Old Retirement Model
The traditional model of working until 65 and then retiring is becoming increasingly unsustainable due to several factors.
Increasing Frequency of Financial Crises
Financial crises are becoming more frequent and can significantly impact income, particularly for older workers. Data suggests that professionals over 35 have experienced substantial income losses during recent financial downturns, especially in sectors like IT, technology, and finance.
Age Discrimination in the Job Market
Age discrimination remains a significant problem, making it difficult for older workers to find new employment. Companies often prefer to hire younger, less expensive employees, even if older workers possess more experience. Statistics show that job searches take significantly longer for individuals over 40 compared to those in their 30s.
Pressure on Pension Systems
Pension systems are facing unprecedented pressure due to global aging. The number of pensioners is increasing while the working-age population supporting them is shrinking, creating a structural problem for many countries. Governments are responding by postponing the retirement age, making it less certain that people can retire at 65 as originally planned.
The Advantages of FIRE and Early Preparation
Achieving FIRE earlier in life offers greater security and freedom of choice. The younger you are when you start preparing, the easier it is to reach your financial goals due to the power of compounding and the time value of money.
The Power of Time Value
Starting early allows you to leverage the time value of money. Saving even small amounts in your 20s can have a much greater impact than saving larger amounts later in life. For example, saving 30,000 yuan per year starting at 25 is significantly less burdensome than saving 90,000 yuan per year starting at 35 to reach the same retirement goal.
How Ordinary People Can Achieve FIRE
FIRE is not exclusive to the wealthy; it's a strategy that anyone can achieve with systematic planning and execution.
The 25-Fold Principle
A fundamental concept in FIRE is the 25-fold principle. This principle suggests saving 25 times your annual spending to achieve financial independence. The idea is to then live off a 4% withdrawal rate from these investment assets, which should theoretically sustain your lifestyle indefinitely.
The Importance of Savings Rate
Your savings rate directly impacts how quickly you can achieve FIRE. A higher savings rate translates to a shorter working career. For example:
-
A 50% savings rate requires approximately 17 years of work.
-
A 70% savings rate requires approximately 11 years of work.
-
A 20% savings rate requires at least 35 years of work.
Opening Up Income Streams
Focusing on increasing income through side hustles and skill development is crucial. This involves leveraging your time to acquire valuable skills and then using those skills to generate income.
-
Example: Renting a house and then subletting rooms to others to reduce personal rent expenses.
-
Side Hustles: Translation, personal consultation, resume optimization, or running an online shop.
Conscious Consumption
Resisting the urge to overconsume and focusing on needs rather than wants is essential for FIRE. Consider whether purchases are truly necessary or simply driven by consumerism and social pressures. Savings should be directed towards investable assets to generate a sense of security.
Practical Steps to Begin Your FIRE Journey
Step 1: Assess Your Financial Situation
Differentiate between assets and debts. Assets generate positive cash flow or have the potential for future growth, while debts take money out of your pocket each month.
-
Assets: Investment real estate, index funds, stocks, small businesses.
-
Debts: Car loans (depreciating asset with monthly repayments), credit card debt.
The goal is to eliminate fake assets and accumulate real assets.
Step 2: Calculate Your FIRE Goal
Use the 25-fold annual expenditure law to determine the asset goal needed for financial independence. Project your annual spending after retirement and multiply it by 25.
Remember: Your current spending may be higher than your spending after retirement due to changes in lifestyle, location, and commuting costs.
Step 3: Track Your Expenses
Accurate tracking of expenses is essential to identify areas where you can cut back and save more. Distinguish between necessary expenses and emotional or social spending.
Step 4: Invest and Diversify Income
-
Start with simple investments: Begin with a high-yield savings account and then explore index funds like the S&P 500 ETF.
-
Consider investment real estate: Generate rental income.
-
Diversify income streams: Develop multiple income sources to increase financial stability.
FIRE: A Life System Reset
FIRE is not just about retiring early; it's about reclaiming control over your life and having the freedom to choose how you spend your time. It's about working to have the option not to work. It is a journey that requires effort and discipline, but the rewards are well worth it.
{# 
{# 
{# 
{# 
{#