Quiz!
Imagine this simplified case: You make 100k net income per year starting at age 30, put your savings in an investment with 8% annual growth, and spend 3% per year in retirement. Compare the following 2 scenarios:
- You work for 40 years, save 10k per year (and spend 90k), and enjoy 20 years of retirement.
- You work for 20 years, save 50k per year (and spend 50k), and enjoy 40 years of retirement.
Scenario #1 involved doubling the number of working years + spending an extra 40k per year during 40 years of work. How much extra lifelong spending was provided, and what was the extra ending investment balance?
- +8M lifelong spending, with -8M investments left.
- +4M lifelong spending, with -2M investments left.
- +1M lifelong spending, with +1M investments left.
- Nearly equal lifelong spending, with +1M investments left.
- -3M lifelong spending, with -9M investments left.
8 Principles for Happiness in the FIRE Movement
FIRE stands for: “Financial Independence, Retire Early”. People aiming for FIRE save aggressively, as much as 50%-75% of their income, aiming to retire at a young age. They typically retire once they reach enough savings to support 3%-4% annual spending.
While the result may sound very appealing, the plan can result in an unhappy life or be abandoned, if not done right. Here are 8 principles that helped me in my process, and may help you:
- Spend for happiness: Drop all expenses that won’t make you much happier in life today or in the future, but keep and emphasize the expenses that are important to the core of your happiness, or to build a good future.
- Experiment and adapt: Keep dropping additional expenses, even if everyone tells you that the expense is as important as drinking water. Question every conventional wisdom, and you are bound to enjoy some pleasant surprises. When needed, reintroduce expenses.
- Keep low-frequency & lower-scale expenses: Eating out once a week (or month) instead of never can add to your happiness far more than the 5th weekly meal out. Going on a road-trip to a national park off season, and sleeping outside the park costs a small fraction of a flight to another continent with a stay in a nice hotel. Such a trip still gives you time away, with family or friends, nature, and relaxation – providing the bulk of the happiness.
- Save most when your spending/investment ratio is high: You will save more (1) early, compounding every dollar saved exponentially for longer – giving you free extra money, and (2) when your investments are low, and expected returns are higher.
- Invest for high growth: High growth helps reach independence earlier. In addition, high growth investments tend to be more volatile, providing excess gains to a consistent saver (read https://www.qualityasset.com/2018/07/31/how-to-use-volatility-to-make-money/ to understand). Two caveats: (1) Stay highly diversified across sectors and countries; (2) Be prepared to stay consistent through multi-year declines – something that comes with all high-growth investments.
- Aim for a conservative outcome: Aim for a 3% annual spending rate, to support a potential of many decades in retirement. Spending includes non-recurring and surprise expenses, including car upgrades, major home repairs, and healthcare costs, to name a few.
- Keep working at what you love: Once you reached financial independence, keep working at something you love. It can be your current job, a new lower- or higher-paying job, or a new business.
- Maintain 3% spending: As your investments reach higher peaks, you can raise your spending proportionately to enjoy the fruit of the optimizations leading to that point. You can call this modification the FIRES movement = Financial Independence, Retire Early, then Spend, Save or whatever makes you happiest. Whatever you choose, the compounded growth of investments is expected to grow the benefit exponentially over time.
There are several benefits to these principles:
- Maximum happiness gained from every dollar spent.
- Enjoying work in retirement from a position of power with no pressure.
- Decades of financial independence + growing spending. You are likely to enjoy far greater lifelong spending than the typical person.
Quiz Answer:
Imagine this simplified case: You make 100k net income per year starting at age 30, put your savings in an investment with 8% annual growth, and spend 3% per year in retirement. Compare the following 2 scenarios:
- You work for 40 years, save 10k per year (and spend 90k), and enjoy 20 years of retirement.
- You work for 20 years, save 50k per year (and spend 50k), and enjoy 40 years of retirement.
Scenario #1 involved doubling the number of working years + spending an extra 40k per year during 40 years of work. How much extra lifelong spending was provided, and what was the extra ending investment balance?
- +8M lifelong spending, with -2M investments left.
- +4M lifelong spending, with -2M investments left.
- +1M lifelong spending, with +1M investments left.
- Nearly equal lifelong spending, with +1M investments left.
- -3M lifelong spending, with -9M investments left. [Correct Answer]
Explanation:
The frontloading of spending created a disadvantage that was impossible to recover from, despite doubling the number of working years. Details:
- The extra spending in the first 20 years of scenario #1, led to a balance of 460k relative to 2.3M in scenario #2.
- 7 years later, with 13 years of work remaining for scenario #1, the annual spending of 90k was lower than the spending level of the person who retired already 7 years earlier.
- By the end of the working career, the 90k spending compares to 173k for the person retiring 20 years earlier. The investment balance grew nicely to 2.6M, but short of the 6.1M of the early retiree.
- By the end of retirement, the spending jumped to 196k relative to 460k for the early retiree. The investment balance reached nearly 7M vs. 16M for the early retiree.