Don’t start setting fire to F.I.R.E. just yet

25 June 2020

About a decade ago, the same kind of time hashtags were coming into their own, #FIRE, or Financial Independence to Retire Early really started to come into vogue.

 

F.I.R.E. is a concept of spending wisely, saving judiciously, and getting yourself in a position to live on a passive income while you're still sprightly enough to take full advantage of the free time.

We're hearing the term less these days, with the likes of F.I.R.E. fest taking most of the name's thunder, but I can tell you from my position working with financially inspired young people every day, there are still people gunning for the F.I.R.E. lifestyle, title or not. 

For those looking at the burning heap that is the global economy, lighting a F.I.R.E. of your own may seem completely untenable, but with a bit of grit, and a splash of fancy math, you'll realise that it's more achievable than it looks.

 

How much you're going to need to make this work?

The concept of F.I.R.E. is predicated on having enough money, come retirement, that if you take 4% out of your savings pool every year to live on, the investments will replenish what you have taken out.

To bring yourself into this state of financial utopia requires saving enough so that you have the equivalent of 25 times your annual costs — so if you're spending $40,000 per year, you'll need $1,000,000 to retire on. To achieve this admittedly daunting goal, FIRE devotees are extremely tight savers, doing away with all unnecessary expenses to save north of 50% of their annual income. 

 

So how the hell can I save more than half of my paycheck?

Downsize: The average cost for owning and running a small car is over $6,500 per year in New Zealand. If you can find a way to manage with one less car and invest this into your KiwiSaver or another smart investment, you could have an additional income of $18,000 per year through your retirement. The same philosophy can be applied to the home you live in — can you buy a mortgage in a cheaper area? Could you realistically take on a flatmate to your spare bedroom? Housing is our highest cost, so it also provides the most significant opportunity to save. 

Rethink your service providers: Did you know that merely moving your electricity, insurance or broadband to the lowest cost provider can save you $10 per week for each provider? If you were to invest this directly into your KiwiSaver fund, it would give you an additional $30 per week through your retirement. If you did all three of these things, it would give you an extra $90 per week in your retirement. That is an extra meal out every week for your retirement. And without any sacrifice on your part at all.

A new way of celebrating a pay rise: Many argue that those on lower salaries for longer become more adept savers as their wages rise. Don't let pay rises be an excuse to lead a more expensive lifestyle - see it instead as a chance to save more. By timing the increased contribution % to your pay rise, you won't notice the extra money leaving your account, and hence you won't miss it. The same goes for using annual bonuses and monetary gifts from family. Using these to make voluntary contributions into your KiwiSaver or other investments is a great way to achieve the R.I.S.E. lifestyle sooner.

Try a couple of days a week without any spending: The lockdown period was significant for showing many of us how frugal we can be, while still maintaining a conscious lifestyle. I clocked multiple days straight without registering a single expense on the credit card — a tough task during a typical week when a stray cup of coffee or a sandwich from the bakery can seem like a trivial expense. At this point, we all understand the compounding value of an additional $30-$40 savings per week if directed towards investment. 

Do not expect a silver bullet. The most tried and tested is a get rich quick scheme. They are out there, and there are lots of them, though 99.9% of them are surefire ways for you to lose the savings that you already have. New Zealanders always love property development, or maybe it is the next medicinal cannabis startup. Just be aware, it might work - but it will more likely put you back to zero and delay your retirement by a few more years. 

There is no one answer on the best way to save and retire early.  What we can tell you is that it is a long and hard grind. You need to be disciplined about every single dollar that comes in and think hard about what you spend and what you save. Though there are people that that have been incredibly successful at it. The central idea stays the same though — is there opportunity to trim some of the fat off of a particular lifestyle choice. 

Financial flexibility while you are still young can allow you to explore opportunities that you never thought were possible, travel, and take advantage of your hard-earned money. At the same time, you are young enough to enjoy it truly. Follow the Kiwi mustachians to stay up to date with other New Zealanders working hard to achieve a better retirement. 

 

How does KiwiSaver fit into F.I.R.E.?

Lots of people with an intention to retire early do not believe that KiwiSaver is for them; they believe KiwiSaver is useful because they want to access their retirement pot before they turn 65. We respectfully disagree and think that KiwiSaver is even more critical if you plan on retiring early.

To retire early, you need to plan on having investments and savings that will last through to your 95th birthday. To play it safe, your savings and investments need to be well-diversified and spread across different funds and different asset types. 

Our suggestion is to use non-KiwiSaver investment products to fund your life until you are 65, and then you can use your KiwiSaver to support your life from the age of 65. This way, you are segmenting your investments and savings by periods of your life. It is a particularly useful discipline as it will force you to keep an eye on the spending in different parts of your life.

 

How can kōura help?

Kōura is both a financial adviser and a KiwiSaver scheme. Our digital tools will build you a personalised portfolio for your KiwiSaver and then invest it into our low cost and sustainable funds. The perfect way to make sure that your last 30 years are as prosperous as your first 65.

 

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