Want to retire at 40?

What if we told you that it’s possible to retire more than 25 years earlier than the traditional age of 65? The Financial Independence Retire Early movement (FIRE) could help you get there!

At its core, FIRE is a lifestyle choice, cutting back on your ‘wants’ focusing more on your ‘needs’ and saving as much of your salary as possible. But are the benefits worth the extreme sacrifices?

Giving up those guilty pleasures now for more financial freedom in the long run, as well as the opportunity to explore your passions outside of full-time work can be mighty tempting, but for the majority of people FIRE is too extreme.

When we strip it back to the basic principles though, FIRE is the perfect starting point for financial independence, and the chance to retire a lot earlier than you might think is possible.

Let’s break it down into two parts. Financial independence and retiring early.

Being financially independent, means your assets generate an income year after year that is greater than your expenses meaning in theory, you’ll have enough money to live off for the rest of your life.

The most important factor though is how much you can save from every pay. Even just increasing your savings rate slightly can wipe years off your journey to financial independence. You want your money to snowball and let compound interest work its magic!

The general rule of FIRE is that you need to save 25 times your current spending in order to reach financial independence. This means you generally have to save 50% of your salary or more. Depending on the lifestyle you want when you retire, you may need less.

By saving 50% of your salary it’s estimated to take around 17 years to reach retirement. At 65%, just 10.5 years.

Which brings us to our next point, retiring early.

When it comes to retiring early within the FIRE movement, this doesn’t necessarily mean you stop working. Its more about escaping the mundane lifestyle of the rat race and focusing on the pursuit of happiness and meaningful work of your choice which can be paid or unpaid.

It’s about igniting the spark within you, bringing more purpose and freedom to your life. No more answering to a boss.

So how does FIRE relate to super?

It’s all about saving early and using tax concessions to grow your investments faster.

It’s undeniable that due to compounding interest, the earlier you start saving, the better off you’ll be. Whether it’s before or after tax contributions, there are a number of ways you can use your super to help set yourself up for financial independence and the chance to retire early.

Sure, you can’t access your super straight away if you retire early but you can always leave that part of your savings till later. The benefits of putting some of your savings into super rather than investments outside your super are:

  1. You can get a bonus return by putting money into your super before you pay income tax on it. Before tax contributions are only taxed at 15% (unless you earn over $250,000 a year). So, if your current income tax rate is 32.5% (which it should be if you’re earning between $37,001 and $90,000 a year) you effectively get a bonus return of 17.5%.
  2. You only pay up to 15% tax on the returns you receive from your investments in super – instead of your income tax rate.
  3. Your employer will be paying contributions while you're still working, so why not add to them and look after them.
  4. The government has offers in place for low-income earners including a low-income tax offset and government co-contribution to encourage you to save more inside your super.
Is FIRE too hot for you to handle?    

That’s ok. Like we said at the beginning of this article – for the majority of people FIRE is too extreme. By adopting a less aggressive version of FIRE you can still achieve financial freedom, albeit on a longer timeline and with more flexibility. We like to look at it from the view of a 50/30/20 budget.

  • 50% on needs
  • 30% on wants
  • 20% on savings

FIRE isn’t for everyone, but the basic principles are the perfect starting point on your journey to retiring early and comfortably.

Sources: aussiefirebug.com, mrmoneymustache.com and moneymag.com.au/retiring-by-30-fire-movement