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Retiring in your 30s: Is it possible and is it even a good idea?

Participants of the 'FIRE' movement say you can retire in your 30s. But is it too good to be true?

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Peter Adeney was working as an engineer after he graduated from college, saving and investing the typical 15% of his annual income towards retirement. Adeney didn't want to work 40 hours a week for the rest of his life — he craved the freedom to take 3-week vacations and spend time taking care of his children, among other things.

Over time, he would gradually increase his savings to 75% of his annual income, which would enable him to retire at the age of 30. Adeney, also known as Mr. Money Mustache, is considered one of the pioneers of the 'financial independence, retire early' (or FIRE) movement. 

At first glance, FIRE may seem appealing: you cut back on lifestyle expenses, invest your savings into low-fee index funds and sit back as you watch your retirement nest egg grow. If you're lucky, you'll be able to retire well before your 60s (when you would normally begin collecting Social Security benefits) and get to live out most of your life not tied to a 9-to-5 office job. 

What is FIRE?

FIRE is an early retirement movement where people aggressively save with the intention of retiring in their 30s or 40s. FIRE is not for the faint of heart — you'll have to invest more than half of your annual income and cut down on all of your expenses.

In order to retire early, FIRE adherents abide by the 4% rule, first developed by financial advisor William Bengen in 1994. The 4% rule suggests that people save 25 times their annual living expenses and withdraw only 4% of their nest egg in retirement, only increasing the amount to adjust for inflation.

For example, if your annual living expenses were $40,000 a year, you would need to save $1 million before retiring. The idea is that you could live indefinitely on your investments by assuming that the annual returns of your well-diversified portfolio will range somewhere from 5% to 8% (the power of compound interest!). 

There are different types of FIRE as well. Lean FIRE followers choose to live as frugally as possible in order to retire early and then choose to spend less than than the average American in retirement. Fat FIRE adherents to live more lavishly in retirement and are typically working in high-income industries like tech or medicine before retirement.

If you plan on doing FIRE, consider that you'll have less time to invest for retirement and that you'll be spending a longer time in retirement. This means that traditional financial advice, which suggests you save 15% of your annual income, goes out the window. 

For Adeney, it meant saving 75% of his income after taxes. Kristy Shen and Bryce Leung, a couple who retired in their early 30s, saved 50% to 70% of their combined annual income after taxes.

Adeney chose to invest his money in index funds in addition to real estate investments. With index funds, you don't purchase individual stocks. Instead, you purchase a basket of stocks that are meant to mimic the performance of a stock index like the S&P 500. Since index funds aren't actively managed, they typically have low expense ratios and fees (or the percentage of expenses to the the value of all of the assets under management).

"My go-to fund in this area is Vanguard's VTI exchange-traded fund, which I hold directly in one account, and indirectly through some 'automated advisor' services like Betterment in other accounts," says Adeney. "I'm also a fan of simple real estate investments as a means to building up wealth. I've had rental houses in the past and I currently own both my main house and a commercial building in the downtown of my city…"

Robo-advisors use computer algorithms to invest your money, typically into ETFs or low-cost index funds. They usually offer lower management fees or expense ratios than a traditional financial advisor.

Platforms like Betterment and Wealthfront allow you to choose your level of risk tolerance and time horizon (or how long until you will need your money) and will invest money in a portfolio in line with your financial goals. They're an easy way to invest your money on auto-pilot, regardless of whether you plan on retiring early or not.


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Is FIRE realistic?

Recently, however, the sustainability of the 4% rule has been challenged by researchers at Vanguard. Bengen had developed the 4% rule in 1994 by looking at stock market returns and bond returns between 1926 and 1992. But here's the catch: Bengen's expected retirement horizon was only 30 years and historical returns are not predictive of future performance in the stock market (the rule inflates the probability of future success because past returns on stocks and bonds were higher than the future returns predicted by Vanguard's model).

The researchers found that if you practiced FIRE and had a longer retirement horizon of 50 years, your chance of success (or your chance of running out of retirement savings before you die) would only be 36%. If, however, you have a more traditional retirement horizon of 30 years, your chance of success jumps to more than 80%.

Cutting spending and saving more than half of your annual income requires not only an investment of money, but serious time and effort.

"In order to achieve F.I.R.E every area of your life needs to support this to include your partner, children, hobbies, time, cash flow, housing, etc. And once you do achieve F.I.R.E you will still need to be very aware of your money to continue on the path," says Ashley Dixon, CFP at GenY Planning. "A lot of life transitions are out of our control and take money to support or move past."

When Select asked Adeney about what he thought about FIRE being a movement that excluded people making low-income salaries or who had major financial burdens like student loan, medical and credit card debt, he said that the movement wasn't just focused on early retirement.

"What we're really doing here is helping people to prioritize their spending and become more mindful and efficient with each dollar, so that more of it goes to the things that are important to them, and less of it slips away to stuff like interest payments, car depreciation or gasoline," says Adeney.

How to start with FIRE

While FIRE may seem like an unrealistic goal for many people, the values of investing for retirement early and being more conscious about your spending are easy to pick up, regardless of whether you plan on quitting your job and retiring in your 30s or 40s.

You'll first need to pay off your debt and build up an emergency fund before you start thinking about investing. You should prioritize paying off high-interest debt, like credit card debt, before paying off your lower-interest debt, like student loans.

In the event of an unexpected expense like your car breaking down, or being laid off, you should be able to rely on your emergency fund to cover your rent, food, transportation and other expenses. Most experts recommend that you save three to six months worth of living expenses in an emergency fund. A high-yield savings account is a great way to store money for this purpose: You'll get a higher interest rate than you would on a checking account and that cash will be more accessible to you than it would be in a brokerage account.

Dixon recommends that Gen-Zers and millennials take advantage of their employers 401(k) match and contribute to a Roth IRA. A Roth IRA has a tax advantage — your contributions will be taxed up front so you can avoid having to paying taxes when you withdraw money at retirement (as many people are in a higher tax bracket later on in life). She suggests people work their way up, first maxing out contributions on both retirement accounts and then starting to invest in a taxable brokerage account in order to cover unexpected costs in the future.

Bottom line

While FIRE is not a realistic undertaking for many, investing for retirement early, cutting down on discretionary expenses and paying down high-interest debt are some ways people can be more financially independent, even if they're not planning on retiring early.

As Adeney says, "sure, the end result is a surplus of money, and if you invest this money over time you will eventually have the option of retiring early and never having to work again. But that's just a side effect of living a life that is better in the first place. So I encourage people to think about doing things that help them live better right now."

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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