The early retirees who know there's more to life than work
There's more to life than soldiering on in the workforce - earning and spending - well into your 60s, according to a growing number of Australians who aim to retire much earlier. They want financial freedom and more happiness from following their passions and interests. They are leading a simple life and saving hard to reach their goals.
For Pat Seyrak, it isn't that he doesn't like his job. He does. But his job is all-consuming and it doesn't leave much time to enjoy life's good experiences.
He wants to buy back his life. Instead of staying in his job as an engineer until he is in his mid-60s, he plans to retire early. Really early - at 35.
Pat and his partner, Steph, both millennials, want to take control of their lives now while their health is great, to get out and enjoy the world. They want a more balanced lifestyle with more time for family and friends.
They are followers of the popular personal finance FIRE movement - it stands for financial independence, retire early - who rigorously save $1 million or more, invest sensibly, retire in their prime and enjoy a modest, agreeable life.
It is the opposite of working flat-out throughout your life, piling on debt, living beyond your means and consuming voraciously.
And, no, they haven't won the lottery or been handed an inheritance or sold their software business for a small fortune. In fact, their salaries are fairly average.
"Most of us in the FIRE community realise how precious each year in our lives really is," says Mrs Money Flamingo, who is in her 30s and one of the many enlightening bloggers who write about their path to financial independence (FI).
"We see this as a major motivation to pursue FI," says the Sydney mother of two who has just reached her savings target.
"FI allows us to buy back years we may otherwise have spent in a cubicle."
While most Australians rely on drip-feeding their 9.5% compulsory superannuation - up to a maximum concessional contribution of $25,000 a year - into a retirement account, FIREs are aggressively saving much more outside super.
The movement is based on the philosophy of the Canadian-born blogger Peter Adeney, aka Mr Money Mustache, who believes insane levels of consumerism are ruining people's lives. People are working longer and longer because they are spending more money on expensive stuff.
"Everyone is very inefficiently going about their lives. It affects their health. They are not getting fun out of their lives," Adeney told Tim Ferriss, the self-improvement guru.
New life of leisure
A former software engineer, Adeney started blogging about his early retirement at 30 and subsequent "badass" life of leisure in 2011 at mrmoneymustache.com. He writes about how you can save 50% of your take-home pay from the age of 20 and retire at 37. If you can save 75% you can retire in seven years.
His "Mustachionism" lifestyle is about 50% cheaper than that of most of his peers and the surplus is invested in simple exchange traded funds and a rental house or two. He has inspired not only our seven case studies but has resonated with thousands of followers - there are 2.4 million posts on his Mr Money Mustache forum.
Money magazine first covered the FIRE movement in 2018 and we have now returned to check on how the seven case studies who had taken up saving hard are progressing. We also wanted to see how their investments were impacted by COVID's shockwaves.
With the exception of Tom, who was studying and working part-time and finding it hard to reach his savings goal, six of the case studies are still on track to becoming financially independent or have retired. Dave, from strongmoneyaustralia.com, who left school in year 11 and retired at 28, has been added to the case studies.
This is how they are going:
- Kate Campbell, now 22, is meeting her financial goals every year. She wants to retire when she is 40 but expects her savings target to change as her life evolves.
- Pat Seyrak, 32, is on track to retire at 35 with an annual income of $40,000.
- Dave, 32, retired when he was 28 and lives, together with his partner Alison, on $40,000 a year.
- Leo, 34, and Alisha, 32, (who have two children) are on track to retire this year with savings of $2.8 million and an annual income of $90,000.
- Serina Bird, 48, retired two years ago and her family is living on $60,000 to $70,000 a year.
- Jason, 48, is about a year and a half from reaching his target of $2.58 million, which will give him a $90,500 annual income.
- Joanna Jones, 63, who retired at 51 with over $1 million in superannuation, lives on $18,000 a year.
Hanging on despite the fear
Being on track to financial independence is having a profound psychological effect on our case studies.
"As the journey has progressed, I have noticed a slowly accumulating feeling of ease and power over my circumstances," says Jason, who saves around 60% of his salary and runs the popular FI Explorer blog. "Progress in the journey exerts a subtle force across daily life barely noticeable at first - but it gradually transforms your perspective."
Looking back on his years of spending before he started his FI journey, Jason says he thinks about the stress and inflexibility that are the invisible cords a high-consumption lifestyle represents. "[It's] tying people to stressful jobs they don't like, or to work longer than they prefer."
When sharemarkets dived 40% this time last year, the investments of the FIRE community - often in low-cost, well-diversified index and exchange traded funds (ETFs) - took a big hit, as did those of most other investors.
"There was quite a lot of fear around. A lot of people thought it [the FIRE philosophy of investing in share ETFs] was a bad idea," says Dave, from strongmoneyaustralia.com. Reddit's FIRE message board was full of desperate posts that the movement was over. But Dave and the others held onto their investments, staying the course.
At the height of the market's downturn, 32-year-old Pat, who is halfway to his retirement goal of $1.2 million, said: "I will be purchasing market-cap-weighted index funds and continue to do so whether the market continues to go down or up after my purchase."
He wrote on his website, lifelongshuffle.com: "There are too many forecasts. Too many armchair experts. Too much chatter and emotion-driven behaviour. And too many short-term speculators.
"Instead of freaking out, avoid them," he says. "Turn down the chatter and take a break. Go for a walk. Play with your kids. Just do anything else for a while. And continue on with your plan."
As it turned out, the downturn was shortlived and markets staged a remarkable recovery. Most investments are back to where they once were.
The philosophy of FIREs isn't about getting rich quick, but taking a slow path. They understand that market timing - trying to find the best time to get in and out of the shares - generally sucks.
With cash rates low, some FIREs have increased their shareholdings. Jason has raised his allocation to equities from 55% to 75%, which has meant placing all new money into low-cost diversified share ETFs.
His goal is an equal split between Australian and international equities while taking advantage of the tax advantages of Australian franked dividends.
FIREs relying on short-term renting of their investment properties through Airbnb had to adapt to the lockdowns. Serina Bird, who had been renting out her apartments for short-term stays, switched to long-term renting, which doesn't deliver as lucrative a rate of return.
COVID shone a light on the need to have the security of savings, a healthy emergency fund and the folly of drowning in debt - three essential beliefs of FIRE. "Times like this really reinforce the need to have good control over your finances as you never know what is around the corner," says Dave.
Research shows savings levels reached record levels during the pandemic. Worried about job security and the health of their family, Australians cut spending.
Dave says if you cling to the status quo and rely on a high income for your lifestyle, you are in a precarious position when things go wrong.
Network gives support
The FIRE movement became a source of inspiration to support people changing their consumption patterns. "I do love seeing more people in the FIRE space because it will help more people," says Dave.
Saving for the long haul is easier with a network of other FIREs and technology - websites, blogs, podcasts and calculators - that help you work out how much you need in retirement. There are impressive websites with transparent accounts of financial aims, savings patterns and the portfolios to help you reach your goals.
Of the seven case studies, Kate, Pat, Dave, Serina and Jason run blogs about their FIRE journey.
Jason doesn't reveal his real name as he is apprehensive about talking to his work colleagues about his plans to retire early. (Other case studies also use pseudonyms for privacy reasons.)
"For a concept that can seem niche, it's obvious that tens of thousands of Australians across the country are thinking about their financial life and the possibility of different forms of financial independence every day," he says.
Work out how much you need
Instead of paying a financial planner to help you work out how much you need in retirement, FIREs have what the blogger Peter Adeney calls a "shockingly simple" formula: take your annual expenditure and multiply it by 25. "This will keep you going for the rest of your life," he says.
This assumes a conservative return or income of 4% a year.
If you only save 10% of your income, you won't be retiring early. It will take you 51 years. Adeney says if you cut out some flat whites and takeaway food, and boost your savings to 15% a year, you could retire eight years earlier.
If you can live off a third of your income and devote the other two-thirds to saving, you would reach 25 times in 12 to 13 years. Then if you continued to live that way, 4%pa income on your nest egg would
cover your living expenses.
For example, if a couple earns $121,700pa after tax and lives on $40,000, they can save $81,700 a year. If the savings earn a rate of return of 4% after inflation, in 10 years they will have $1 million in today's money. If that can continue to be invested at 4% after inflation, they can live on $40,000pa in today's money indefinitely because their capital is not diminishing.
Some FIREs have recalculated their return from investments after the shock of the pandemic-led sharemarket crash last year. They became more conservative and lowered the safe maximum drawdown rate from 4% to 3.5% a year. This means that for every $1 million invested, they will only draw down $35,000pa.
The key to the FIREs' retirement is that they aren't running down their capital. They have a cushion of emergency cash so that they don't realise losses. They're simply living off their investment income. Joanna Jones has seen her stash of retirement savings rise by 20% over the past decade as she lives on around $18,000, well under what her assets are earning.
There is a view that early retirement is a nutty thing to do and frugal living is joyless. But Pat says: "I think the FIRE community often gets labelled or wrongly characterised as an extreme fringe, but when you dive in it is hard to fault a lot of what the community stands for."
He says focusing your spending on those things that are important to you and bring you happiness, rather than on things that bring little or no value to your life, is a good thing. "It leads to building financial security and a healthier relationship with consumption, money and how it can have a profound impact on your life."
Contrary to popular belief, not all FIREs cut their spending to the bare bones.
"My journey hasn't had as strong a theme of cost-cutting as some other FI seekers," says Jason. "What I have learned, though, is the truth that there is something magical about even just monitoring costs. I used to be sceptical of this, but after tracking my total credit card purchases over the past several years, I have found that even as the cost of living has risen, the curve of spending has bent down slightly. This may not continue forever but it has been testament to the powerful impact of mindfulness and transparency about costs."
Many FIREs have a philosophy of enjoying their surroundings, such as the Australian bush.
"I get just as much, or more, joy sitting on my deck, looking out over my fantastic view as I would doing a lot of more expensive things, including eating out at a restaurant," says Joanna Jones.
"So why not do the less expensive thing and stay home to watch the view as the sun sets over the national park in the distance, and the valley light up as every street light turns on?"
But people find money very confronting, says Serina. FIRE bloggers, such as Serina, have come under, well, fire from social media trolls who like to hit back at certain posts.
Serina Bird posted about Fridge Fridays when her family would eat what was in the fridge rather than eating out or getting takeaway. She says she wasn't saying this is something people should do, but it worked for her family as a way to save money.
The abuse was huge.
"People feel very threatened by comments about money," she says.
Three years after we first profiled seven Aussies who are working towards early retirement, we caught up with them again to find out how their plans and investments have fared during COVID-19. Click here to read a new case study each week.