Planning for retirement tends to be a key part of most financial plans and budgets. For people pursuing FIRE, it's pretty much the main goal. I mean, it's in the acronym, after all!
The thing is, FIRE isn’t just about crossing that finish line. It's about making sure you never have to come back to the world of the working - at least, not if you don’t want to.
Let’s be real, the last thing you want after leaving the working world behind is to find yourself sucked back in by necessity. The prospect of needing to re-enter the workforce to sustain yourself is probably not appealing. It becomes even less appealing if you find yourself in a situation where you have to do this later in life, when you’re older.
That’s why it’s equally important when doing your retirement planning and budgeting to think not only about how to reach retirement, but also about how to STAY retired once you get there. Whereas the average person plans to retire at age 62 and spend around 20 years in retirement, FIRE folks are likely going to spend at least 40-50 years in retirement. And those additional years in retirement mean that you’re going to need more money to live off of.
The longer you stay retired, the more likely running out of money becomes. So for us FIRE people who are retiring by age 30 or 40, the risk is higher than most.
But don’t worry! All you need to avoid running out of money is proper preparation and planning. Here are my five tips on how to come up with your own FIRE retirement plan and how to best ensure that you can remain financially independent for the rest of your life.
1. Determine Your Expenses
As a person pursuing FIRE, the first thing that you’re going to want to do is determine your expenses for the next sixty years. Regardless of whether you’re part of the FIRE movement, determining your future expenses should be the first thing anyone does to plan for retirement. Yes, it can be a bit overwhelming to plan for the next sixty years, but remember: You don’t need to be exact. You can always update your numbers along the way and once you get closer to retirement. At the beginning of your FIRE journey, just make an educated guess to give you something to start with.
2. Create a Phased Drawdown Plan
This plan dictates how you’re going to collect the income to support yourself during retirement. Don’t forget: It can exist in stages - meaning you can get different amounts of income at different points of time if that’s your plan!
So, let's say you have one million dollars saved. Based on the 4% rule, your Phased Drawdown Plan might look something like this:
PHASE 1 - Age 40 - 57: Access to $40K/year in investment returns. PHASE 2 - Age 57 - 59: Access to $40K/year + Deferred Pension PHASE 3 - Age 59 - 62: Access to $40K/year + Deferred Pension + 401(k) PHASE 4 - Age 62+: Access to $40K/year + Deferred Pension + 401(k) + Social Security
Now, under this hypothetical plan, you could potentially continue to withdraw the same amount of money each year from your initial investment accounts, or you could decrease your withdrawals once your pension and social security kick in. Basically, if you plan it right, you could confidently phase into old age with more than enough to maintain your standard of living!
3. Diversify Your Sources of Income
Most retirees choose to have most of their money tied up in the stock market. While this isn’t necessarily a bad decision, it's important to have a bit of diversification with your income streams so that you have more flexibility when you need to start pulling your funds. You might want to consider taking on a seasonal or part-time job in early retirement, for instance. Or you can focus on building another passive income stream.
Personally, I find passive income to be a really great way to supplement your retirement income and if you’re planning ahead, you have the time to build a significant nest egg for yourself. This is actually what Amon and I are doing right now - we’re building up our real estate portfolio for diversification of our assets.
4. Plan for the Worst Case Scenario
This is probably the number one reason why people choose to defer retirement even though they don’t necessarily have to. Worst case scenarios could be anything from a natural disaster that destroys your home, to a medical emergency that wipes out your savings. Essentially, a worst case scenario is any incident that could severely hamper your comfortable retirement if you don’t have the proper planning or insurance in place to deal with them. In other words, don’t skimp on the insurance guys!
5. Always have a Plan B
So let's say you have to go back to work for whatever reason, whether that be because you somehow lose all your savings within the first few years of retirement, or you simply find retirement a bit boring. Well, the worst case scenario here is that you just go back to your old life - in other words, Plan B.
It's true, re-entering the workforce after years out of it can be a challenge. But if you’re focused on building passive forms of income or you’ve discovered a new passion, you don’t necessarily have to return to the same job you were in before. Maybe you’ve discovered a love for, let's say, photography. Well, you can try to cultivate that passion and pursue photography as a profession! This is especially good news if you hate your pre-retirement job!
Remember, the whole point of the FIRE movement is to give yourself the freedom to pursue whatever you want and to follow your passions without being encumbered by financial burdens. So if what you want to do is start a whole other career, then go ahead and do that!
But, again, the ideal goal is to build a plan so that you can reach financial independence, retire early, and never have to work again. And, I believe that’s absolutely possible. So get your retirement expenses down, focus on your drawdown strategy, diversify your sources of income, plan for the worst case scenario (while hoping for the best), and always have a Plan B! You got this!
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