How we've invested $500k to retire in our early 30s
If I told you that I planned to retire in my early 30s, would you believe me?
Understandably, this is an audacious goal, but one I've been working towards, alongside my husband, since my early 20s. It even has a name, too: FIRE.
FIRE (Financial Independence, Retire Early) is not a foreign concept to the Money pages, but it is one that sparks a lot of debate.
Why am I retiring early?
I've never been a fan of the 9-5 slog. As a youngster, I was curious about alternatives.
And even though I enjoyed my early career and had the DNA to be successful at work long term, I resolutely decided that working until I was 70 was not the life I wanted to lead.
I don't buy into the idea that exchanging my time for money five days a week over 50 years is the only way to have a positive and sustainable impact on the world.
And I also believe that if more people knew about how powerful saving and investing more of their income, instead of spending it on depreciating assets, could be for enjoying more of the stuff they love, and enjoying it earlier, we'd all be doing it.
Six stages of financial independence
Before we get into the guts of how most people, including us, are achieving FIRE, it's important to understand the six stages of financial independence.
The first three are categorised under "surviving", where money is a safety net, and the last three are "thriving", where genuine wealth is being built.
Stage 0: dependence
We all start here, depending on others completely for financial support.
Stage 1: solvency
Solvency is the ability to meet your financial commitments consistently.
Stage 2: stability
This is where you're establishing yourself financially. You have an emergency buffer or a surplus of cash.
Stage 3: agency
You've eliminated all debt and are living largely as you choose.
Stage 4: security
Your passive income, the money you earn while you sleep, covers your basic needs.
Stage 5: independence
Your passive income covers your current standard of living. For many people working towards FIRE, this is a very humble lifestyle.
Stage 6: abundance
Your passive income covers an incredible, abundant lifestyle, whatever that means to you.
The goal for most FIRE proponents is to reach stage five and six, but the numbers for what constitutes a comfortable retirement look different for everyone.
Most of us, though, believe in living frugally, eliminating all debt and investing most of our income in low-risk investments from which we can draw the equivalent of a "salary" each year. This should easily cover our living expenses, and then some.
It's really the same as the superannuation model, except you have more liquidity with the funds and the timeline is sped up. For my husband and I, these investments are a mix of high-growth, long-term holding assets.
So what do we invest in?
Over the past eight years, my husband and I have poured $500,000 of our after-tax incomes into property, listed investment companies, index funds, superannuation (voluntary contributions up to the $25,000 concessional cap each year) and term deposits.
We look for investments that have some form of yield, so that we can continue to draw income on them on top of the capital value. This is dividend investing, rental yield from investment properties, interest earned on our savings and then long-term, account-based pension payouts.
At this stage we're saving about 75% of our after-tax incomes each month to put into sinking funds and investments. This is where we're seeing the most gain for our efforts and something we will continue doing, helping the benefits of compound interest carry the weight as time goes on.
This is in addition to paying our primary mortgage in the inner suburbs of Sydney, our bills, keeping our car on the road, all of the overheads that come with running my copywriting business (like my office in Sydney, subscriptions, insurances and contractor fees) and other miscellaneous costs.
We're aiming for a retirement in the next few years with a passive income of around $75,000 a year which, according to our calculations, will afford us a comfortable lifestyle for our small family.
In order to draw $75,000 a year, the value of our investments needs to sit under $2 million. That number represents 4% of the overall return each year, a number widely coined the safe withdrawal rate (SWR).
The actual return of the portfolio is around 12%, but many studies (in particular, the Trinity Study) assume benchmarking a SWR against an average return of 7%, which is evidenced with how the market has performed even in times of great dips such as the GFC. That extra 3% accounts for inflation and tax on any taxable accounts.
Some FIRE followers have lowered their SWD to 3.33%, in addition to a slightly higher net worth, presumably to withstand more potential volatility.
Some plan to calculate the exact rate of inflation and any tax burden each year and draw accordingly. In any case, it is very much a personal preference.
How did we save that much?
This is what most folk are interested in - and it makes sense. We'd all like to learn how to put more of a crust into savings on the regular.
Information has never been easier to find, and yet that's both a blessing and a curse. Advertising permeates our life, shopping is now a 24/7 possibility and we have shifting priorities.
Some people will look at our $75,000 a year and say "there's no way I could live on that", and that's completely fine.
To us, $75,000 will be abundant and plentiful. We've learnt how to live comfortably not just within, but well under, our current means. We've shifted focus to what brings us joy and those are the things we spend on.
We don't subscribe to the idea that we need lots of space, multiple cars, all the newest gadgets or expensive five-star holidays to tourist hubs (unless we can travel-hack it). What we do is not radical; it's just not always the most convenient option.
We catch public transport or walk to get around. We make our own meals and coffee.
We buy things only when we have the cash to do so - or genuinely need something - and always compare prices. Often we shop second-hand. We DIY as much as possible and look for experiences, and time together, over things and space.
If something unexpected pops up - a car breakdown, a big vet bill, needing a new water heater - we dip into our emergency fund or cash-flow it directly from our income.
The recurrent theme is that we never look to get into any kind of debt for our lifestyle, instead opting to do the opposite: use the constant surplus to build genuine wealth.
What will we do when we retire?
The short answer is ... anything we like.
My husband and I have talked about this at length, and the current plan is for my husband to start his own business and me to work part time in my current business alongside being a mother.
We also have plans to live overseas for a year (perhaps with the benefit of geographic arbitrage on our side - drawing money in a strong currency while spending it in a weaker one), travel a month or so out of every year, volunteer and do things we enjoy.
Over time, we'll slow down the working part more and more. Because, for us, it's not about not working but having the choice not to as our priorities change. Often we're forced to shape our lives around work. What if it could be the other way around?
Ultimately, median income earners in middle-class Australia have major potential to completely change their money stories with just a few years of living frugally and making some basic investments. And all it takes is a spark.
Some quick-FIRE questions
Do you need enormous salaries to afford to do this?
Not at all. It's often not about how much you make over what you do with that money.
The people who earn the highest salaries in the country are often some of the poorest money managers you'll ever meet.
We are young professionals earning decent, above-average wages, but it's not about our earnings - it's about the way we've conditioned ourselves to use them.
How can I get my significant other on board?
It took my husband a little longer to come around to the idea to FIRE in its entirety, but when he saw the immediate fruits of our saving and investing he did too.
For a while I saved 60%-70% of my income alone and kept talking to him about FIRE and what I planned for our family.
That slowly got him excited, and then when he went through a FIRE calculator I'd done the sums for he was totally converted. Slow and steady wins the race.
Is there any age limit to being able to achieve FIRE?
Absolutely not. While a lot of the FIRE stories that make it to mainstream media are about millennials and Gen X, anyone of any age can set their own date to retirement.
The principles are the same, and as the frugalista blogger Mr Money Mustache says, anyone saving 75% of their income can usually achieve it in seven years (even if they start with debt). So if you're 45 that's still eight years earlier than you otherwise could.
But I have kids. Is it still possible?
Yes. In fact, why do we subscribe to the notion that having kids has to bankrupt us?
Of course, children can be expensive, but some of the things that really cost us when it comes to kids are things we actually have options for (at least in Australia), such as education, healthcare, food, entertainment and extracurricular activities.
There are obviously many more categories but I read of people achieving FIRE with two, three or more kids regularly and it's a great reminder that kids don't have to drain us financially.
How do you better safeguard yourself against unexpected costs?
This is a very personal thing, but for us we have factored in a number of rising insurance premiums for landlord, contents, life, health and trauma policies into our retirement figures.
Should the unexpected happen, we would be covered. It's worth doing this due diligence around protecting yourself in the worst case. Emergency funds will only go so far.
It's also important to understand tax implications for earnings and offset as best you can (the same way you might with your regular income).
In retirement, this might look like drawing from tax-effective super accounts, using the benefits of franked credits, setting funds up in trusts, logging deductions for rental property expenses and more. It's also worth noting that many followers of FIRE don't ever expect to sell their assets (it's their income stream, after all). This usually keeps capital gains tax at bay.
Where can I find out more about FIRE?
We've written extensively about early retirement, but you can also look at bloggers like Mr Money Mustache, The Joyful Frugalista, and me (That Girl On Fire) or subscribe to any of the FIRE groups on Reddit.
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