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Interested in retiring early? 3 lessons from people who retired in their 30s

Here are three lessons from participants in the 'financial independence, retire early' movement.

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For many, the prospect of working a 9 to 5 job for the next 30+ years seems monotonous and disheartening. FIRE or 'financial independence, retire early' is a solution to that issue. People who follow FIRE save and invest more than 50% of their annual income in the hopes that their investments will yield enough money to retire in their 30s or 40s. 

FIRE adherents invest anywhere from 50% to 70% of their annual income by aggressively cutting costs. There are many lifestyle changes FIRE followers make to achieve their goal of retiring early. Many eat at home instead of eating out, opt out of vacations and forgo a car for public transportation or a bike.

With the money they invest, FIRE followers typically use low-fee index funds that yield a modest 5% to 8% return a year. In order to figure out their FIRE number, most followers use the 4% rule, which was first developed by financial planner William Bengen in 1994. The 4% rule dictates how much a person is able to withdraw from their retirement savings, and the FIRE number is the total amount of money someone needs to retire.

Your FIRE number is calculated by multiplying your yearly living expenses by 25. For example, if your yearly living expenses were $50,000, you would invest $1.25 million and withdraw no more than 4% of your money each year in retirement, adjusting for inflation. While the 4% withdrawal rate has been contested, especially for FIRE followers who have longer retirement horizons, most FIRE followers still adhere to this rule. 

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FIRE, however, is not a realistic lifestyle for many. If you're struggling to pay off medical debt, haven't started building up your emergency fund, or don't make more than six-figures, retiring early likely isn't an option for you. 

Though FIRE isn't meant for everybody, there are some takeaways that might be useful for your own finances. Select spoke to three FIRE followers (who are either fully retired or who work part-time) about some of the financial and life lessons they've learned by retiring early. 

1. Focus on participating in the market rather than beating it

Most FIRE followers choose low-fee index funds over riskier, more volatile investments like individual stocks or cryptocurrency. Index funds are essentially a basket of different stocks that are intended to mimic the performance of a major stock index, like the S&P 500, which tracks the performance of the 500 largest companies in the U.S. (based on market capitalization). 

"The best advice I have is the conventional wisdom in the financial independence community is that it's better to participate in the market than to try to beat it," says Ed Ditto of Early Retirement Dude. "And one of the best ways to do that is to buy low cost index funds. You'll find that the Vanguard S&P 500 ETF is the darling of the FIRE set."

By investing in index funds, you'll gain exposure to stocks from many different industries. Therefore, you take on less risk by investing in an index fund. Index funds provide more diversity than an individual stock. If there's a decline in the value of stocks from one industry, it might be offset by gains in another sector. 

According to Investopedia, the average annual return for the S&P 500 in the 50-year period from 1970 to 2020 has been 10.83%. (Note that this is an average annual return, each year varies, depending on whether it's a bear or bull market. Also, past performance does not guarantee future performance.)

If you're looking for a way to get started investing, you should consider opening an investment account with a trading platform like Vanguard, E*TRADE or TD Ameritrade. These platforms don't charge commission fees for executing the trades of different securities.

These platforms will, however, charge fees, known as expense ratios, for the money you invest in funds. Expense ratios are fees charged for managing the fund and are lower for passively managed funds than actively managed ones. The expense ratio is typically expressed as a percentage. If a fund charges a 0.15% expense ratio, you'll have to pay $1.50 per year for every $1,000 you invest.

If you don't know where to start when building your investment portfolio, you might consider opening an account with a robo-advisor like Wealthfront, Betterment or Charles Schwab. Robo-advisors work by getting a picture of your current finances and future goals and then invest on your behalf.

You'll typically enter information about your age, risk tolerance and investment horizon. Afterwards, the robo-advisor will construct a portfolio made up of stock and bond funds. An algorithm will then automatically readjust the portfolio over time by selling and buying funds in order to help you reach your financial goals. Robo-advisors typically charge account fees on top of the expense ratios for funds. Make sure to read the fine print, so you know how much money you're being charged for investing.

Once they've mastered the basics of investing through index funds, some FIRE followers start investing in other asset classes that require more knowledge and experience.

"As time goes along, and as your portfolio starts to build, you owe it to yourself to take new risks," Kiersten Saunders of rich & REGULAR. "I think what people find when they get online is they start to see all of the hype and the buzz around crypto, NFTs, real estate, these types of asset classes that are either very risky or have high barriers to entry."

2. Find the method that works best for you

When Kiersten and Julien Saunders, Kiersten's husband, first discovered the FIRE movement in 2012, they weren't quick to cut back on all of their expenses and save more than half of their income. It would be another three years before they would have the epiphany that they wanted to fully participate in FIRE. 

By 2017 they had paid off nearly $200,000 on their mortgage, Julien's student loan debt, Kiersten's car and their shared credit card debt. While they're not retired now and currently making money through their blog and brand partnerships, they now have enough saved to retire if they wanted.

The couple consider themselves to have reached Coast FIRE. Coast FIRE is where individuals have enough money saved for retirement, but they still work to cover their day-to-day expenses. After Coast FIRE followers have hit their FIRE number, they don't have to worry about saving for retirement anymore.

For Kiersten and Julien, ramping up their savings to 70% of their annual income meant finding which method of saving and budgeting worked best for them. They tried zero-based budgeting, (making sure every dollar is accounted for), the snowball method (paying off your smallest debts first) and the avalanche method (paying off the debt with the highest interest rate first) before landing on 'paying yourself first'.

With 'pay yourself first' individuals first allocate money towards their savings goals, whether that be towards their Roth IRA each month or their credit card debt. Afterwards, they budget the leftover money towards their monthly expenses. By automating payments towards your debt or your retirement savings you don't have the opportunity to spend that money because you'll never even see it in your bank account.

Even if you're not planning on retiring early the methods mentioned above could be used to tackle your debt or to understand your monthly income and expenses. By finding which method works best for you, you might be more likely to stick with it. Apps like Mint or YNAB make it much easier for individuals to budget or track their income and expenses: Both apps allow you to link your bank accounts and credit cards, so you don't have to manually enter your information.

3. Retiring in your 30s or 40s isn't the only way to retire early

In order to participate in FIRE, you don't necessarily need to retire in your 30s or 40s. While FIRE followers are known for their extreme lifestyles, early retirement could mean retiring in your 50s or early 60s instead of when you're 67 and able to collect full Social Security benefits (if you were born after 1960).

Julien notes that for most people, changing their lifestyle so drastically could be out of the question. He encourages people, especially those with high salaries in dual-income households, to consider earlier retirement: You might be able to enjoy a higher quality of life for you and your children and also financially provide for other family members if you retire at 60 rather than at 40. 

Tanja Hester, author of Wallet Activism and Work Optional, believes that FIRE can be more accessible to people if the focus isn't just on full retirement. Saving and investing more of your income (even if it's less than 50%) might give you the opportunity to take a career break or to be in semi-retirement.

Hester considers herself one of the lucky ones: She didn't face any pricy medical expenses during her FIRE journey and while she wasn't working in a traditionally high-paying field, she and her husband, Mark, ended up in relatively high-earning careers which allowed them to save more.

She also notes that people who retire early are often able to do so because they work high-paying jobs and weren't burdened with a substantial amount of debt. For example, a dual-earner couple with no children or debt, making $200,000 a year would have an easier time reaching FIRE compared to a debt-ridden family of four making $100,000 a year.

"I think it [FIRE] was a big reminder of just how fortunate we were to be able to save that quickly... A lot of folks thought it was so impressive what we did, [but] I think [it] was just a reminder of how deeply unequal opportunities are in this country," says Hester.

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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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