In New Zealand, the current retirement age is 65.
That means when you turn 65, you can officially stop working and the government will start to pay your living expenses.
However, a lifestyle movement has grown strongly over the past decade aiming to turn this on its head.
Instead of waiting for the government to cover their living costs at 65, people are building financial assets that will pay their living costs many years earlier.
Using simple mathematics, they use a formula designed to achieve retirement in their forties, thirties, and maybe even their twenties.
This community is known as FIRE.
What Is FIRE?
FIRE stands for Financial Independence Retire Early.
There are several reasons FIRE is so appealing and has grown so strongly:
- It makes financial independence accessible to everyone, not just entrepreneurs or high earners.
- It requires no special skills
- It's easy to understand
- It's a community that learns from and motivates each other
- It's addictive
- It gets real results people can see
The truth is, many people do not have the temperament or skills to become an entrepreneur, an investment banker or a highly paid lawyer or surgeon (and many have no desire to).
However, FIRE principles are universal and can be followed by anyone, even if you're on minimum wage.
How does FIRE work?
There are three key components of FIRE:
- Regular income (9-5 is perfect)
- Extremely aggressive savings
- Passive investments
The first requirement of FIRE is a regular income stream.
This can be anything from a salaried 9-5, side hustles, a small business, or even just working 2-3 miscellaneous jobs like waitressing, cleaning, office clerk etc.
High Savings Rate
The second (and most important) requirement of FIRE is an extremely aggressive savings rate.
Your savings rate refers to how much of your take-home pay you save.
For example, if you bring home $3,000 per month, and you save $300, your savings rate would be 10%.
FIRE advocates a 50% savings rate, but ideally closer to 70%.
This means if you bring home $3,000 per month, you should be saving at least $1,500, but ideally closer to $2,100.
The third requirement of FIRE is to invest in passive and reliable investments.
Generally things like crypto and tech stocks are unsuitable (although there is wiggle room).
Your FIRE savings will ideally go into things like:
- Bank deposits with high interest rates
- Index funds
It's also common to invest in a property once your savings are high enough, although the property is not for you to live in. It should be tenanted to increase your income.
If you can maintain an aggressive savings rate of 50% or more, you should be able to reach financial independence within 20 years.
This means if you start working at 18, you will be retired before 38.
Of course, everyone's idea of financial independence is different.
Your personal goal will depend on your FIRE number.
What Is A FIRE Number?
Your FIRE number is your expected annual expenses x 25.
If you expect to spend $3,000/month in retirement, your annual expenses would be $36,000.
Your FIRE number would therefore be:
$36,000 x 25 = $900,000.
This means once you reach a net worth of $900,000, you should be able to retire.
This is based on the 4% rule.
How the 4% rule works
The 4% rule is a popular guideline you will read in many personal finance books.
It states if you limit spending to 4% of your portfolio each year, it will last for your entire retirement.
Dividing by 25 gives you 4%, which is why your FIRE number gets calculated that way.
The rule was invented by a financial planner who claimed between 1926 and 1976, even during the worst periods, there was never a market where you could withdraw 4% a year and deplete your portfolio in less than 33 years.
In other words, if you withdrew 4% per year from your portfolio, even in the worst case scenario, your portfolio would last at least 33 years.
Since you retire at 65, and practically nobody lives to 98, it became a "golden rule".
Nuances With The 4% Rule
Here's a couple of interesting factoids for you:
- The S&P 500 has returned 10.02% annually since 1926.
- The NZX 50 has returned 10.26% annually since 2001 (excluding dividends!)
On the surface, this looks like you should be able to withdraw much more than 4% per year, and your portfolio would still grow!
However, what this misses is the fact that markets do not move in a straight line:
Therefore, spending $40,000 of your portfolio each year is not equal.
It will deplete your portfolio much more value in a bear year (since you need to sell more stock to get the same amount of money).
Of course, a savvy investor will know how to mitigate this.
For example, you can spend freely in the years the market is up, and be more frugal when the market is down.
This is simply the old adage of "buy low sell high".
Spending in a bull market is akin to "selling high" which is not a problem.
Spending in a bear market is akin to "selling low" which is destructive to wealth.
You could also tell yourself, in a bear market you're going to limit yourself to spending dividends and interest only, so you don't need to sell any of your assets at low prices.
You could also aim to be more frugal, such as moving to a cheaper city or country for that year to reduce your spending.
Many FIRE retirees can be found living in places like Thailand, Vietnam or Mexico in order to keep their wealth growing, even after reaching their FIRE number.
Finally, the last thing people miss is in retirement, you're not just sitting around doing nothing.
Many people in FIRE are naturally ambitious and driven people, so they will continue to have side hustles and small businesses that feed their passions.
It is very unlikely you will stop earning completely during your FIRE retirement.
Therefore, in bear markets you can focus on increasing your cashflow so you don't need to deplete your assets at bear market prices.
How To Reach Your FIRE Number
Luckily for many of you, NZ and Australia are two of the best countries in the world for living a FIRE lifestyle.
- High minimum wage ($20+ per hour).
- Free healthcare and ACC.
- Interest free student loans.
- Generous Kiwisaver/Super
- No NZ capital gains taxes
- Tax free dividends (franking and imputation)
- Free schooling and many parenting subsidies (for those with kids).
In countries where the minimum wage is $5 or $10, it is impractical for many people to do FIRE.
However, in New Zealand, even if you sweep floors for a living your income will be high enough for it to work mathematically.
Let's look at a worked example of how you might plan your lifestyle around FIRE:
Minimum wage in New Zealand is $21.20 per hour.
Assuming you work 40 hours per work and take no holidays (work 52 weeks per year), you will earn $44,096 per year.
Since this is a minimum wage job - something like packing supermarket shelves - we'll asssume you will start as soon as you leave high school (age 18).
Using our income tax calculator, you will see you will pay tax of $6,737, leaving you with take-home income of $37,359:
You can work out your own personal after-tax income using the income tax calculator below:
INDIVIDUAL INCOME TAX
FOR NZ RESIDENTS FROM 1 APRIL 2021 ONWARDS
Let's aim for a savings rate of 50%.
This would equal $18,680 saved per year.
Using our compound interest calculator, we can then work out how long it will take you to reach your FIRE number.
Using a FIRE number of $900,000, at a return of 10% per year, reaching your FIRE number would take you 18 years:
This means if you start at 18, you will be a retired (almost) millionaire by the age of 36, even if you work at McDonald's the whole time and never get a payrise.
This obviously leaves a lot of room to wiggle, because most people will not just work at McDonald's until they're 36 and never receive a payrise.
Meaning in reality, you can reach your FIRE number much sooner than that!
Let's do another scenario:
You leave school at 18, do a four year degree, become an accountant at 22.
Your starting salary is $50,000, you get a pay rise of 10% per year.
After 13 years, your salary will be $157,000, your average salary over those years will be $94,318.
Using our income tax calculator, $94,318 after tax works out to be $72,273 per year.
Savings rate of 50% = $36,137 per year
This will get you to your FIRE number after 13 years, or at age 35.
(of course I took some liberties here to simplify things, but the end result is mostly the same).
Click the yellow bar below to open the calculator and work out your own FIRE number timeline:
INDIVIDUAL INCOME TAX
FOR NZ RESIDENTS FROM 1 APRIL 2021 ONWARDS
One thing you will notice after playing around with the calculators is even small numbers can make a big difference.
Most people might spend $5k on a new iPhone and a holiday, but saving an extra $5k per year turns into differences of hundreds of thousands of dollars in wealth over a span of 15 or 20 years.
Below you can see increasing your savings amount from $25k per year to $30k per year is a $300k difference in wealth after 20 years.
At a 4% dividend rate, that would be an additional $12,000 in income to spend each year.
Alternatively, you could take that $300k and put down a house deposit, or even buy a condo in cash in some countries.
In reality, this means even things like driving Uber a few nights a week, starting a side hustle like matched betting or flipping or even just trying to increase your savings rate from 50% to 55% can make a huge difference.
Finding Fellow Firebugs
One reason FIRE is so powerful is because of the strong online community.
Fore example, the FIRE subreddit has almost 2 million members. All over the web there are FIRE blogs, Facebook groups, forums where people swap tips on how to save every dollar and groceries, parking, rent, utilities and more to help each other reach their FIRE number faster.
There are even FIRE dating groups to help people find partners who are willing to live the same lifestyle and work towards the same FIRE goals.
When you are involved in communities like this, it is no longer is a burden to save money - it becomes more like a hobby and a lifestyle (with a big reward at the end!)
Having a strong community is key because it:
- Keeps you motivated
- Source of info and advice
- Shows you results/successes of those further in the journey than you
- Keeps you accountable
- A place to ask questions
- Connects you with like-minded people (especially because many of your real-life peers will not be like-minded!)
Not For Everyone
The key to success with FIRE is a drastic reduction in expenses which some can find extreme.
Because of this, its suitability is skewed to younger, single people (although FIRE families is a thing too).
It requires a certain personality to enjoy the type of challenge FIRE presents.
Frugal lifestyles are not new, but many people simply do not have the discipline or desire to live in such a way.
For example, one common strategy used by many firebugs is to continue living at home with their parents long after they finish school.
While this is normal in some cultures, some people simply cannot stomach it for whatever reason, even if the option is available to them.
Another common strategy is only eating food that is on special, rather than eating what you actually want.
For example, if beans are on special at the supermarket for 60% off, you will buy twenty cans of beans and eat beans for the next three weeks.
Things commonly seen in FIRE:
- Bulk buying groceries
- Bargain bin groceries
- Multiple roommates
- Living with parents
- Dumpster diving
- No car (bike, walk, public transport)
- Second hand clothes
- Clipping coupons
- Drinking tap water only
- No heat in winter (wear more clothes)
- Living in the cheapest part of town
- No vacations or eating out
An aggressive FIRE lifestyle may get you to retirement thirty years early, but requires many sacrifices.
While some people don't mind living this way (and some even LOVE it), it is certainly not for everyone.
- FIRE stands for Financial Independence/Retire Early
- People in FIRE aim to save at least 50% of their income
- The goal is to reach your FIRE number, which is 25x your monthly expenses
- It requires a very frugal lifestyle
- If done properly, it can retire you in your thirties or even earlier, even on minimum wage
- Many people in FIRE work extra jobs or side hustles to accelerate their savings
- As the lifestyle requires many sacrifices, it's not for everyone