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What if you could retire in your mid-30s and never work a 9-to-5 job ever again? For most people, the prospect of doing so seems like a fantasy — there's a mortgage to pay off, student loan debt that's accumulated, childcare expenses and a monthly car insurance payment. If you're a millennial and want to collect your social security benefit, you'd have to wait until you're in your 60s to begin receiving the monthly checks.
All of these factors make early retirement implausible for most people. However, for a small swath of those who follow the 'financial independence, retire early' movement, or FIRE, retiring in their 30s is a goal made possible by cutting expenses and aggressively saving and investing more than half of their annual incomes.
Kristy Shen and Bryce Leung, authors of the Millennial Revolution, are one such couple. In 2015, Shen and Leung retired in their early 30s from their careers as computer engineers. Before the pandemic, they spent their retirement living nomadically around the world in countries like Vietnam, Portugal, Germany, Malaysia and Hungary.
Shen and Leung first discovered FIRE in 2012 through blogs like Mr. Money Mustache, one of the pioneers of the movement who retired at age 30 after working as an engineer.
The couple had been saving up for a down payment on a house in Toronto in 2012. After doing the math, they realized that early retirement was attainable if they ditched the traditional dream of owning a house. They used the $500,000 they had saved up for the house and instead put it towards retirement.
"So for me, discovering financial independence really was a wake up call that the old rules don't apply anymore and this is the new rule of life and I'll find it," Shen said.
Shen emphasizes that the FIRE movement is inclusive to all people, regardless of race and socioeconomic status, though she notes it's easier to partake if you have a high salary. Shen is Chinese immigrant who arrived in Canada when she was eight. She says her experience growing up in poverty influenced her desire to seek financial independence.
"But there is a misconception that FIRE is only full of white privileged males who are in engineering. I actually do not subscribe to that definition," Shen said. "At one point, I was in China living off 44 cents a day and one of the reasons the FIRE movement appealed to me so much was because I never wanted to be poor again."
Three years after discovering the movement, they managed to collectively save up $1 million in cash and investments, including the money they had previously allocated towards buying a house. The year before they retired they were saving around 70% of their post-tax annual income of $150,000 CAD. Before that, their target savings rate was 50% to 60% of their annual income.
In order to build a retirement nest egg worth $1 million, Shen and Leung took steps like cutting certain lifestyle expenses — they stopped eating out and skipped purchasing a car, opting for the subway and a car-sharing service instead. They never stopped taking vacations but put a yearly limit on the amount of money they would allocate towards traveling. And with the money they saved, they invested in index funds.
Most FIRE followers choose to invest a portion of their money in a low-fee index fund. An index fund is a portfolio of stocks and/or bonds that are meant to mimic the performance of an index like the Dow Jones Industrial Average or the S&P 500. This means that investors don't have to choose individual stocks.
For Shen and Leung, index investing was easy — they could sit back and watch their money grow without having to time the market or rely on the performance of just a few companies. They opted for index funds that had annual returns that mimicked the performance of the world economy.
When investing in index funds, a trading platform is a good option because it won't charge commission fees for executing the trade. Free commission trading platforms may still charge expense ratios and management fees, but there are many index funds with low expense ratios.
In order to avoid market fluctuations or volatility associated with investing in the stock market, another option is putting money in a high-yield savings account, although this will make it harder to grow wealth over the long term.
The general rule of thumb that FIRE adherents follow is the 4% rule. The rule suggests that retirees don't spend more than 4% of their retirement investments each year, adjusted annually for inflation. This means that if your retirement investments are worth $1.25 million, you should try and keep your annual living expenses under $50,000.
Leung and Shen's goal was to have their total living allowance be around $40,000 per year. Doing so required saving and investing a significant portion of their income before they retired.
They also made sure to have a back-up plan to live in lower cost cities in case the market had a downturn and the value of their savings decreased. By splitting their time in countries between countries high costs of living, like Switzerland, and low costs of living, like Thailand, they're able to keep their average cost of living low.
"It [geographic arbitrage] is a concept that you earn the money in a strong currency. For example, money in Canadian dollars or American dollars or Euros, you actually spend the money in a place with a very weak currency so for example, like Thailand... so as a result you end up retiring faster," Shen said.
While travelling internationally is expensive for most people, Shen and Leung keep their total living expenses at around $40,000 even when taking regular trips.
They stay frugal choosing by choosing Airbnbs, apartments and homestays over fancy resorts and hotels. They also cook at home most of the time when travelling rather than eating out.
Using the points from travel credits cards can also be a way to help keep costs low when traveling.
While Shen and Leung have taken a hiatus from travelling due to Covid-19, they're eager to start travelling once Canada eases international travel restrictions. In the meantime, they've been staying in Toronto and taking domestic trips to Vancouver and Nova Scotia, looking forward to their next adventure on a budget.
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