03 Jul 2020
Australia had its bushfires. Now it’s in a virus conflagration. Will COVID-19 stop another kind of FIRE?
Financial Independence, Retire Early – known by the acronym FIRE - is a growing finance and frugality movement among professionals, millennials, Gen-Xers and minimalist lifestyle advocates.
"The FIRE number being aimed for depends on an individual’s projected lifestyle in retirement.”
The movement differs in style, if not substance, from strategies promoted by well-known financial advisors such as Paul Clitheroe, Noel Whittaker or Peter Thornill.
An anti-establishment movement, FIRE combines a minimalist lifestyle ethic - a “tread lightly” philosophy - with a consequential reduction in environmental footprint and a focus on cutting back on unnecessary expenses to achieve what is known as a ‘FIRE’ number.
Calculating the FIRE
A FIRE number is calculated by multiplying an individual’s monthly expenses by 12 and dividing annual expenses by a safe withdrawal rate (0.04 for 4 per cent). This is the “FI” (financial independence) number required to “RE” (retire early).
Key to this calculation is not an individual’s earnings but their savings rate as a percentage of their take-home pay. To get there, eschew the car for the bicycle or public transport. Cut out gym fees - you’ll be fitter too. The higher the savings rate, the quicker you can retire.
‘FIREys’ assume the so-called “4 per cent rule” (more a rule of thumb) drawn from the Trinity study - an academic paper that studied the success rates of different investment portfolios for various periods with different withdrawal rates over a 70 year period (1926-1995). The study found by only drawing 4 per cent of your money each year, a minimalist work-free lifestyle is possible leaving the balance largely untouched as capital growth offsets what you take out.
For example, a $A40,000 per year drawdown on a $A1 million portfolio attracting at least 4 per cent growth is manageable. A recent update to the Trinity study uses investment simulations from 1871-2019 and concludes the 4 per cent rule remains sound.
Lean or fat?
The FIRE number being aimed for depends on an individual’s projected lifestyle in retirement.
“Lean” FIRE necessitates living on an income of less than $A40,000 per annum, “regular” FIRE is $A40,000-100,000, “fat” FIRE involves some extravagance at greater than $A100,000 (and therefore a much larger portfolio). Meanwhile “barista” FIRE is agnostic about level because it may require maintaining a part time job.
FIRE advocates redefine “retirement” not as abandoning work but instead only working at what you like to do when you feel the need. In reaching your FIRE number, work becomes optional.
Did COVID-19 put out the FIRE?
The COVID-19 pandemic is having an impact on FIRE, like it is on everything else.
One retiree at age 34 with a portfolio of $US3 million said he is down by hundreds of thousands of dollars. A couple saw a net worth drop from a pre-pandemic $US2.3 million by $US298,000 in March. Another thinks FIRE will become “DIRE”, sending FIRE “retirees” back to work.
So has the pandemic dimmed the prospects of a future-proof retirement?
It’s unlikely. After all, FIRE is an attitude as well as a lifestyle change. Of course, financial implications may vary between FIRE members based on their investment mix and decisions made prior to 2020. A portfolio composed of 100 per cent stocks will naturally be hit harder than a mix of cash, bonds, business equity and stocks.
Those who are already retired may also have different concerns than those who are about to retire. Preserving assets and balancing spending is needed for the former, while keeping on track with savings and superannuation balances is a target for the latter.
Lessons from this recession, the Global Financial Crisis (GFC) in 2008 and the Asian Financial Crisis in 1997 are all tests of the FIRE philosophy. So far, it has come through - just as the Trinity study predicts.
One couple who planned for a sustained economic downturn by following a 3 per cent rule are doing fine. Conservative FIRE enthusiasts say the 4 per cent rule is profligate and should be cut to hedge against risk.
Certainly, the outlook is not the same for everyone, especially if accumulating debt and early withdrawal of super occurs in an individual’s late 50s and early 60s. However, these are generally very anti-FIRE things to do anyway.
Like any sensible investor, FIRE advocates look to the longer-term and make sensible decisions on what they have not what they “want”. They predict a likely market bounce-back and keep a generally positive attitude towards life.
Consistent with their unorthodox attitude, “retirement” always means having “side-hustles”. “Barista” FIRE is the default position. Setting up a bigger emergency fund and reshuffling some investments into conservative options is important too.
Haven’t heard of FIRE? This growing trend has been spreading online for almost a decade.
A Reddit FIRE group, founded in 2011, has more than 700,000 members. The podcast network Choose FI has had 1.6 million downloads.
The blog of Canadian FIRE enthusiast Mr Money Mustache - something of a cult hero for FIRE aficionados (who call themselves “Mustachians”) - has had 30 million unique views since 2011. There are even Mustachian Conferences - weekend getaways where tips on finance and minimalism are discussed amongst practitioners.
Very much part of the growing trend, Australia has several active FIRE Facebook groups, with Mustachians Australia and Financial Independence and Early Retirement Australia, leading the charge. There are no fewer than 22 FIRE bloggers in Australia and 780 worldwide.
Lessons for the young
Young people have been the most anxious and disproportionately hit by the pandemic. Unemployment is up, with fewer jobs and longer queues at Centrelink. There are real concerns about how to prepare for a financially secure future.
Young people need to learn what parents and grandparent always knew: It was ever thus.
Get skilled at something. Work hard to achieve financial independence. Do it early. Save. Invest. Unnecessary spending needs to be eliminated. Pair back expenses, find better deals on utilities and insurance, postpone travel (not hard right now) and stay positive.
This is essential to managing the crisis and setting yourself up for a better future.
Martin Davies is Principal Fellow in Higher Education at The University of Melbourne. Davies FIRED in 2014 (but still has side-hustles). Angelito Calma is a Senior Lecturer in Higher Education at The University of Melbourne (he can’t wait to be on FIRE).
The information provided is general in nature only and does not take into account your personal objectives, financial situation or needs. Please consider its appropriateness to you before making any investment decisions. It should not be relied upon as a substitute for professional advice.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
03 Jul 2020
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