For many people, the dream is no longer the white picket fence funded by the secure 9-to-5 job. The dream is financial freedom; to be able to travel and adventure, to focus on your family, to concentrate on your music, or to do some more DIY. It is to have the freedom to focus on all the other wonderful aspects of life that are not your job.
Seeking this freedom, the popularity of the FIRE movement (Financial Independence Retire Early) has been growing exponentially over the past over the past decade. Particularly prevalent among millennials, many people simply don’t want to work until the classic retirement age of 65.
The typical way in which people go about FIRE is to dollar-cost-average (Invest a set amount each month) into a low-cost index fund (such as one which tracks the S&P500) each month. An index fund holds a basket of stocks and seeks not to outperform the market, but instead simply to match it. The S&P500 is commonly known as “the market”. Investing this way consistently over the long-term is the classic recipe for financial freedom.
Assuming a 4% rate of withdrawal on retirement (the amount you can safely remove from a portfolio without deteriorating its value), one needs savings of approximately 30 times their yearly expenses – usually around the $1 Million mark in order to retire. This means that your spending remains constant through retirement.
Lets assume you invest every year in a index fund (ETF) that grows at 5% per year.
If you save and invest 25% of your income, you will be able to retire 32 years.
If you save and invest 50% of your income, you will be able to retire 16 years.
If you save and invest 75% of your income, you will be able to retire 7 years.
So, clearly by saving rigorously and investing consistently in low-cost index funds, you can fast-track your retirement. But we could speed up our route to financial independence further by improving our returns.
Lets assume you invest every year using an Aikido Quantitative Strategy that grows at 15% per year.
If you save and invest 25% of your income, you will be able to retire 17 years.
If you save and invest 50% of your income, you will be able to retire 11 years.
If you save and invest 75% of your income, you will be able to retire 5 and a half years.
So what is the formula for fast-tracking financial independence?
- Reduce your spending where you can, and increase your income.
- Consistently save and invest X% of your pay-cheque each month.
- Have an emergency fund in cash covering 6 months. Just in case!