Today I’m excited to announce the second post in my new series, FIRE Advice for Noobs! As a noob myself, I know I have a lot to learn on this journey to FIRE.
I’ve asked a few friends who are thisclose to early retirement for some tips and pointers for those of us who are just beginning our journey to financial independence. Today we’ve got the lovely couple from Our Next Life!
Our advice giver’s today blog anonymously, so there’s no big reveal of faces or names. I love reading Our Next Life. Rather than share savings tips, they mostly focus on the the emotional and mental parts of FIRE, like why marriage is the biggest investment early retirees can make. They share their plans for what life will look like, from healthcare plans to travel plans, when they retire in 2017.
What can you tell us about your FIRE journey?
Hi Kara! Thanks for having us. We’ve both been in our jobs a long time, since we were 21 and 22 (we’re 36 and 39 now!), and have definitely climbed the career ladder. But somewhere along the way, we realized that happiness for us doesn’t come from career achievements, or the money, or the fancy titles. And that’s why we moved to the mountains from a pricey city a few years ago and are working hard to save fast and retire early!
When will you reach FIRE?
We’re committed to quitting our jobs at the end of 2017, when we’ll be 38 and 41, no matter what. We sure hope that we’ll have hit the number we’re aiming for by then, but we’re going to consider ourselves early retired by that date regardless, and then we’ll just recalibrate our budget around whatever amount we end up with.
How did you get involved in this world?
We got involved in this fantastic world when we started our blog, a little over a year ago. We have been pretty much floored since day 1 by the generosity of fellow bloggers in terms of giving advice and encouragement. We never expected anyone to read our blog, and we for sure didn’t think that blogging would motivate us to up our game and save even faster.
Will you have any streams of income in FIRE or solely just your savings? (If just savings/investments, please describe why you’ve chosen that and how you decided to forgo passive income.)
Our income streams are best explained in graphic form:
We’ve built up sizeable tax-deferred accounts, mainly our 401(k)s, by saving in those early and always maximizing our employer match, so we expect those to yield good income by the time we turn 59 ½ and can access our traditional retirement funds without penalty.
But in the meantime, we’ll live off our taxable accounts almost exclusively for the first 10ish years of FIRE, with rental income kicking in to cover a lot of our cash flow needs after the 15-year mortgage on our rental property is paid off. Our taxable accounts are primarily made up of Vanguard index funds, with a healthy cash cushion as well. In the years when we’re living off taxable accounts, we’ll take the dividend income that those funds kick out, plus sell a few shares. And we may work some little jobs here and there, but we don’t plan to need that income.
What is the single most important step someone looking to reach FIRE can take?
This is not a financial answer, but money is just a tool that supports the rest of life, right? 😉 We’d say the most important thing is figuring out not just what you want to escape from, but deciding what you actually want your life to be like after you can quit working for a paycheck. We’ve had quite a few people tell us since we started the blog that they had a really tough time adjusting to retirement because they thought only about the financial side of getting to FIRE, and not what they’d actually do with their time. Some even went back to work after working so hard to escape from it! So don’t just focus on finances – focus on the much more important life part of the equation, too!
What is the first step you recommend people take?
Get a total handle on your finances: exactly how much you earn, and exactly how much you spend and on what. Setting a timeline for FIRE requires you to be able to project how quickly you can save to hit your target number, and that means knowing exactly how much you can afford to save each month. Once you know exactly what you’re spending and saving, you can figure out what else to cut to level up your savings, and find what feels like the right pace for you.
What have been some valuable tools you’ve used on the road to FIRE?
There are a ton of great tools out there, like Mint and Personal Capital, but honestly, we prefer plain old Excel! We have a bunch of spreadsheets built out, like projecting different interest rate gains on our investments, to figure out how long our accounts will last us, to tracking our net worth gains each month while we’re saving. Excel works perfectly for us.
Any recommendations for sources of FIRE info? (books, podcasts, etc)
We are huge fans of the book How to Retire Early by Robert and Robin Charlton. It has all the detail you need to put together a solid plan!
How did you formulate your FIRE plan?
Our notions about retiring early were a lot more vague before we discovered the Charltons’ book. We mostly just tried to save, but we didn’t have any structure to our plan. After reading their book, we knew how we wanted to structure our plan, and we started to have a timeline for the first time. We knew we wanted to pay off our house before we retired, so we factored that in. We figured out about how much we wanted to be able to spend in retirement, which gave us our target number, based on the 4% rule. The trickiest thing was figuring out how much we needed to save in taxable accounts, to get us through the first 20 years, and we ran several projects with different investment growth rate assumptions, to arrive at the number we felt would give us a good chance of success long term. But we’re always making little tweaks to our plan as we get new info!
What was the biggest mistake you made just starting out?/ The best thing you did early on?
Our best decisions have been not overspending on housing. We bought our first place in 2009, with the 2008 crisis fresh in our minds, and having witnessed lots of layoffs among our friends and colleagues, so we wanted to be sure we could pay the mortgage on a single income in case one of us got laid off. We used that same rule when we bought the house we live in now. Spending as little as possible on a home means you can pay it off faster, and it means the monthly payments are low so that you can invest extra dollars every month in your retirement savings.
Where do you keep your investments and how did you choose?
We invest in Vanguard index funds more than anything. We don’t try to beat the markets, and we’re not interested in trying to pick stocks for dividends. We also like that Vanguard funds have by far the lowest management fees of any funds.
What kind of investing should newbies be looking into or do you personally recommend?
The research on trying to beat the markets is pretty compelling – any funds that claim to beat the markets actually do worse than the general index funds over the long term. So we always recommend to our friends that they just set up a Vanguard account and sock as much as they can each month into the basic index funds, like the S&P 500 fund or maybe the extended market fund.
What kind of accounts do you fund? (IRA, 401K, individual stocks, etc)
We still max our 401(k)s even though we have enough in those accounts now not to need to put another penny in – but it does help our taxes to reduce our taxable income with those 401(k) contributions. We are over the income limit for IRAs and Roth IRAs, so we don’t fund those. But the bulk of our savings is focused on Vanguard. We sock away a big chunk every month, and then put a lot more in at the end of the year when we get our deferred compensation (think of it as sort of a guaranteed though variable bonus).
How did you calculate your FIRE money needs? Which tools are best to do so?
Mainly by tracking our spending, and making some projections on things we don’t pay for now, like health insurance and cell phone plans. Then applying the 4% rule (or the 25x rule) to find our magic number.
What money tips would you tell your 27 year old self?
You can be retired in six to eight years if you start saving for real now! We didn’t figure it out until our early 30s, but if we’d gotten started when I was 27, we could for sure be retired by now. Oh well…better late than never! 🙂
How do you deal with market dips that take away big chunks of your savings?
Take deep breaths. 🙂 Then keep investing, keep investing, keep investing. We’re going to maintain about two years of expenses in cash at any given time in retirement, in addition to maintaining our emergency fund, so we hope to be mostly able to avoid selling shares during big dips.
Do you have a back-up plan?
We are loaded with backup plans! Our house will be paid off, so we can downsize to a smaller house if we need to free up cash. We could sell our rental property. We could get part-time jobs or do some freelancing. And we can live a lot more cheaply than we’re budgeting for, what we call “bare minimum mode.” We’ll also maintain an emergency fund and make sure we stay well insured on all fronts. I don’t think I’d feel comfortable quitting cushy jobs if we didn’t have multiple contingency plans in place!
Does any of your advice change for those on one income right now, as opposed to a couple?
Not really. Obviously we can save faster with two incomes, but the principles are the same. In some ways, saving for FIRE as a single person would be easier, because there’s no worrying about if you’re on the same page all the time. Having a FIRE plan puts a lot of extra financial pressure on all of your decisions.
For example, it’s never just buying a pair of shoes once you are working toward FIRE. Now it’s a “is this pair of shoes worth retiring later?” decision, PLUS the concern about whether your spouse will agree. While saving for FIRE gives us a lot to be excited about, which is fun to share with someone, there are also a lot more little disagreements over how we want to spend and save than there would be if we were just chugging along on a “normal” financial trajectory.
I pulled some great stuff from here, just like I did when Steve from ThinkSaveRetire contributed. I hope you do too! Leave any questions you have in the comments.
Kara Perez is the original founder of From Frugal To Free. She is a money expert, speaker and founder of Bravely Go, a feminist financial education company. Her work has been featured on NPR, Business Insider, Forbes, and Elite Daily.