What does FIRE mean?

FIRE is a new acronym spreading like fire (pun) throughout the personal finance world.  It stands for Financially Independent and Retired Early.  FIRE is the new personal finance goal replacing “I want to be rich.”  Being rich really means nothing—the same as being wealthy.  FIRE is the new standard because it allows us to define goals and objectives, and more importantly, measure our progress.  Let’s look at each one separately.

Financially Independent – The goal of being financially independent is to create a lifestyle focused on passively earning income while minimizing expenses.  There are many objectives you can use to achieve being financially independent and here are some: 

• Generate passive income – You can do this by investing and earning interest and dividends.  Renting out real-estate properties is a very common method.  You can also do this by having a side job like blogging.  The main objective is to create multiple “streams” of passive income so you minimize risks of losing a stream.
• Minimizing expenses – The most common mistake people make is losing control of their expenses or living beyond their means.  Minimizing expenses allows you to make the most out of your income and to save more.  This means staying away from debt, making smart purchases, and being aware of how much you’re willing to spend on entertainment and services 
• Increase your savings rate – By using your primary income to generate passive income and minimize expenses, you should be able to increase your savings rate.  Unfortunately, many people struggle to save at least 10%, when we should be striving for a 25-50% savings rate (or higher if possible).  In an age of seemingly infinite resources and excessive consumerism, people are struggling to save any money.

Retired Early – Defining “early” is a personal goal.  There is a huge movement to break away from retiring at 60 or later, and having very limited time to enjoy your retirement years.   Retiring early also doesn’t mean a specific retirement savings goal either.  For example, some people just want one million dollars without thinking what the $1M will provide or how long it will last in retirement.  The objective of working towards retiring early involves identifying how much you’ll need to generate by the time you retire.  You calculate how much retiring will cost you annually and then figure out much you’ll need to retire at the specified time you’d like to retire.

• Identify WHEN and HOW you’d like to retire – A common retirement goal for military members is to retire from the military at ~45 within the same lifestyle they were living.  When military members retire after 20 years of service, we receive 50% of our basic pay plus an additional 2.5% for each year after that.  In the beginning of 2018, the retirement system will change significantly.  The main problem with that goal is that BAH (Housing Allowance) is not part of our retirement, so military members actually only retire with 35% of their paycheck.  They’d need to generate an additional 65% of that income through investing and passive-income strategies in only about 20 years—a difficult task.  A generic FIRE goal is to retire at 55 with a lifestyle slightly less than having full-time jobs.  It’s recommended that your expenses (living, traveling, hobbies) only make up 80% or less of pre-retirement expenses.
• Your savings rate is within your control – The easiest ways to retire early are to have a high savings rate and live a retired lifestyle within your means.  It would be difficult to retire early saving only 10% of your income.  Conversely, one could retire early within an aggressive savings rate of 50% or more.  Additionally, you could also live a life in retirement which requires very little income.  I know one military family that will only need $25K a year for their retirement plans.  The military member’s retirement income will fully cover the cost of their simple retirement.

The people most interested in FIRE tend to be minimalists.  They have no interest in excessive consumerism or working until they’re old.  They want to enjoy life earlier and without the distractions of excessive TV consumption, celebrity worship, and the exhaustion of a hectic life.  Is this something that interests you?

You can’t save your way to a million dollars

There’s a common personal finance saying that’s incredibly relevant to military members and it’s, “You can’t save your way to a million dollars.” You simply can’t stash your money away in a simple savings account earning less than 1% interest—you must invest your money in a way that earns a positive rate of return. The decision not to invest can literally cost you hundreds of thousands of dollars.

I calculated a non-prior enlisted officer’s 20-year pay chart, excluding BAH (explained in the assumptions below), at different savings rates and different annual returns. To reach a million dollars at 20 years, an officer would need to save 20% of his or her paycheck for 20 years, at a 12% annual rate-of-return, and then he or she would have approximately $1M. If you save 50% of your paycheck and choose not to invest it, after 20 years you’d only have $785K—a loss of nearly $225K AND I imagine that almost no one can reasonably live off only 50% of his or her paycheck. 

For most of us, a 20% savings rate at a guaranteed 12% return rate is unlikely—closer to improbable. After 2 decades of helping people with finances, it’s difficult to convince people to save at least 10%. While reaching $1M at 20 years is an aggressive goal, reaching $1M by 65 is definitely attainable for ALL of us.

You may not become a millionaire by saving for 20 years, but you’ll set the foundation for guaranteed millionaire status during retirement by following these recommendations:

• Start Right Now – Unless this is your first day in the military, then you may already be behind the power curve. My assumptions track an officer starting to save the first month of his or her active duty. If you’re saving 0% right now, then try going to MyPay and at least put 1% towards your TSP. I can almost guarantee that 99% of people can live without that 1%.
• Increase Your Savings Rate – Probably the one step that’s mostly in your control, is to increase how much you save. Assuming a 10% annual return, a 10% savings rate after 20 years, would give you $426K, while a 20% savings rate with a 10% return would give you twice the amount of $852K. Considering the “real” inflation of nearly everything we buy, we must consider saving more than 10%.
• Increase Your Rate of Return – Keeping your money in cash will cost you thousands of dollars in just 20 years. At today’s interest rates, most banks pay less than 1% in interest, compared to 4-12% that many Total Stock Market mutual funds are able to return. The difference between a 10% savings rate at 1% at 20 years and 10% in 20 years is nearly $254K ($426K vs. $172K). By the time, you’re 65, the difference will be several hundreds of thousands of dollars. To increase your savings rate, I typically recommend that investors under 55 should be invested in Vanguard’s or *Fidelity’s Total Stock Market mutual funds. If you’re in the TSP, I recommend getting out of the “G” fund (the default fund) and move into the appropriate LifeCycle funds.
• Make Your BAH Work For You – In my assumptions for calculating the rate of return, I purposely did not include BAH because you must choose to make it work for you, and it’s not always entirely within our control. When you correctly use your BAH (by buying your homes or renting less than your rent and utilities), the portion that is going to buying down the principal or excess BAH (if renting) should be added to your savings rate. If you save $800/month in investments and $200 of your mortgage payment going towards principal or excess rent, then you’re actually saving $1K. If you rent above your BAH or live on base, then $0 can be counted towards your savings rate.

BL:  Not saving, or just putting your money into a savings account will cost you hundreds of thousands of dollars and will force you to work well into your retirement years. You can’t save your way to a million dollars—you must invest it. Start today, save more, invest better, and consider making your BAH work for you. You can easily have $1M by the time you retire.

Assumptions:

• My assumptions did not include the “theoretical value” of our military retirement because that’s dependent on the interest rates (or inflation rate) when you retire. I’m simply looking at how much extra you could earn by investing your money versus just saving. You can see the “theoretical value” of a military retirement here.
• I used standard promotion rates (a.k.a. “In the Zone”[Air Force]) to calculate future savings rates. There will be variances. For example, I know Marines promote to O3 (Capt) later than other services which would impact the calculation rates.
• I did not include inflation, because this is a simple calculator. But it’s worth noting that inflation will destroy your savings even further if not properly invested. As such, all future promotions were based on the 2016 Basic Pay Chart.
• As already explained, I did not include BAH rates in my calculations. There are too many probabilities that would prevent an apples-to-apples comparison of saving and investing.
• I didn’t calculate all the way until 65 on purpose. 1) My goal is to help people retire by 55 and 2) A twenty-year career is easier to grasp than a 65-year old goal. It’s hard enough getting people to forecast 30 days into the future, so I try to keep it simple.

*Full Disclosure: After nearly 15 years of inconsistently beating the stock market, I’ve put most of my portfolio in Fidelity’s Total Stock Market mutual fund (FSTVX).

Click Paralysis - Start Your Financial Journey Now

While deployed, I tried to motivate people to reach their financial goals with their deployed entitlements. They left my office with motivation and excitement, but by the time they got to their office, they had lost all motivation. I gave them a lot of options and ideas to think about and, instead of empowering them to start, it created paralysis.  I think most people just want to be told exactly what to do. So against my own philosophy, I created this post with the most vanilla information to jump start your finances.

Disclaimer:  No matter what I write, please do your own research. There are a lot of variables you need to think about, but I know those variables are what causes the paralysis, so each recommendation will be followed up with more research to do if you choose to.  This post also assumes that you have little to no debt.  If you have too much debt, then get rid of it first.

1.  Start an emergency savings account.  Go to CapitalOne 360 and open an account using this link.  Start the account with more than $250, and this referral link, and we both get $20 for opening a new account.  You should put no less than $5K and no more than $10K in it.

• For more research, go to www.bankrate.com and look for the best savings account to get the highest yield for your cash.  I know for sure CapitalOne 360 is no longer the type yielding savings account.  You should have 6 months worth of expenses saved up, so the $5K-$10K is just super generic.

2.  Start a ROTH IRA.  Go to www.fidelity.com or to www.vanguard.com.  You can put $5,500 a year into an IRA ($11K a year if married, regardless of spouses employment).  Once the money is in the account, put all your money in FSKTX (VTSMX for Vanguard).  Once you have over $10K, you'll be automatically enrolled in FSTVX (VTSAX) for Vanguard.  Contribute to FSTVX (VTSAX for Vanguard) every year, reinvest all dividends, and don't sell out until retirement.

• Both companies offer Total Stock Market mutual funds with different performances and fees.  Also, depending on your age and personal tax situation, you'll need to decide if a ROTH or a Traditional IRA is the right thing for you.  Lastly, you'll need to determine your risk profile to see if a pure stock portfolio is the right risk allocation.  MOST people would benefit from just sticking to the Total Stock Market mutual funds listed above.

3.  Military members, start your TSP.  Go to Mypay (https://mypay.dfas.mil), figure out how much you can afford a month, and then start contributing.  Then go to www.tsp.gov, sign up, get your PIN [can take 30 days], log in, and put all your money into a Lifecycle fund that matches when you want to retire from work (not the date you plan on retiring from the military).

• Not many people have money left after starting an emergency fund and maxing out an IRA.  If you do, then that's great, so you'll definitely want to take advantage of the TSP.  You don't want to put 100% of your money into retirement accounts so you can save for short- and medium-term goals.

4.  Civilians, max out your 401(K) matching contributions.  Find out how much your employer matches for your 401(k) and then contribute enough to get the max matching contributions.  It's free money.  Just walk into your HR department and they'll give you instructions.

• Just like for military members, you'll definitely want to make sure you're not putting 100% of your savings into retirement accounts.

5.  Go to your emergency savings account bank and open up a new bank account for your short- and medium-term goals.  Regularly put money into these accounts.  An example of a short-term goal is a vacation.  Open an account called Vacation.  Decide how much and by when you want to save it and start putting money into the account.



Hopefully I helped take some of that click paralysis away.  Just do exactly what I wrote here and you'll be ahead of 90% of the population in your income bracket.   

Blended Military Retirement System

Under the new “blended” retirement system, military members may be able to save more than the current system; however, it requires action on the service member and an exposure to market risk—both concern me.

The current retirement system allows us to retire at 20 years, and is called a defined benefit retirement system.  If we serve less than 20 years, we get nothing.  The value of the current retirement is abstract.  It is calculated at 50% of base pay, with an extra 2.5% a year, up to 75%.  We can also contribute to the Thrift Savings Plan (TSP) up to the maximum contribution limit ($17,500 in 2016).  Check out my blog post here where I explain how much a military retirement is worth.  I compare it to a 30-year bond.  Right now, the interest rates (and inflation) are low, making the current value of a military retirement valuable.  When inflation rises, our retirement loses value, or in economic terms, we are exposed to inflation risk.  The main reason for a change is to escape the “all or nothing” scenario, where a military member honorably serves for 1-19 years and 11 months and gets nothing if he or she gets out. 

I also feel that this change is designed to cost costs since the American public sucks at saving money.  The blended retirement system requires action on us, which after nearly 2 decades of helping people with finances, concerns me a lot.  It also pours money into the stock market through the TSP funds, and what government wouldn’t want more control over the financial system right?

For members entering service after 1 Jan 2018, the blended retirement reduces the defined portion of the retirement to 40% at 20 years.  No government system would be complete without the corrupt misguided option of offering us a lump sum payment.  We have the redux under the current retirement system.  A lump sum payment is a way for the government to save money, by not inflation-adjusting the payment.  You’d have to put that lump-sum payment to serious work to ensure you keep up with inflation.  I still haven’t met someone who took the redux and made that $30K earn more than a traditional retirement.

The Department of Defense (DoD) will put 1% of every military member’s paycheck into the TSP.  We will be auto-enrolled into 3% of our pay, which we’ll have to update annually.  The 4%, the 1% DoD and 3% auto-enroll, will be ours, and we keep that portion if we were to separate before 20 years.  A 4% retirement-savings rate is not ideal but at least it will “force” military members to start saving for retirement.  The best part of the blended system is that we’ll finally get a matching TSP contribution.

I refuse to share any graphic created by the DoD that shows a comparison between the two retirement systems because the DoD assumes an unstainable rate of return from the stock market.  While the stock market generally goes up, a good portion of our retirement is now reliant on the bond and stock market.  Additionally, I’ve spent nearly 2 decades trying to get military members to save more for retirement, and it’s not happening quickly.  For this new blended retirement system to be “better”, we must save more and hope for good market returns.

Should you opt-in?  If you know, with all your heart that you’ll be separating before hitting 20 years then yes.  But remember, like nearly everyone I met still serving after 10 years, I was only supposed to be in for 6 years, and now I’ve been in for 16 years.  The current system is still superior thanks to the 50% plus 2.5% each year (versus 40% and 2% each year) and the TSP contributions.

Financial Milestones for your Thirties

I have a growing concern that my generation (30-39) will have to work well beyond the age of 55.  Additionally, the future of “Mandatory” government spending programs like Medicare and Social Security is in jeopardy.  The excessive consumerism driving excessive debt and the lack of saving by our generation is very worrisome. 

GENERALLY SPEAKING, the decisions we made from 18-29 determined what social class we would end up.  Those of you that were already blessed to start in a good social class or became educated or found an extremely high-income job quickly will be wealthy in the future.  Those of us that became educated and started a career early are probably in the middle- to middle upper-class.  Those of that remained static since high school, or had a series of unfortunate events, are probably lower class.

The 30-39 years will determine at what age you can stop working at the social class you created when you were 18-29.  I started with generally speaking, because through entrepreneurship, inheritance, or the lotto, some of us will be able to bypass the 18-39 time period.  But if you’re 30-39, there are certain milestones you should have achieved to mathematically ensure you can retire at 55.

If you don’t meet 2 or more of the following, you are mathematically in danger of having to work past the age of 55.

1. $100,000 in net assets (before debt) – You should have $100K and more by the time you’re 30-39 to be able to retire by 55.  Unless you’re the next Warren Buffett, you’ll be tied to the same market returns as everyone else.  To retire by 55, you’ll need $100K or more to be invested correctly.  If you’re earning 4-8% a year in returns, then you’ll need ~$100K to start working now.  Additionally, if we have several years of negative returns, you’ll need more money to offset those losses.
2. Household income of $100K or more – Your household income, whether you’re single or married, should be $100K or more before taxes.  With the crazy inflation of nearly every commodity, an income of $100K is simply middle class.  For simplicity, I won’t go into the cost of living of each city, in each state; however, on a national average, $100K is basically middle income now. 30-39 is the prime age to maximize your income.
3. Job with full benefits (life insurance, medical, dental, unemployment credits) – No other commodity in America has grown as quickly as medical expenses.  Without proper insurance, medical bills can financially destroy a person for the rest of his or her life.  Neither political party has tackled the rising costs of medical care, only tap-danced around insurance coverage.  Insurance companies take your money, invest it and earn crazy investment profits, and then nickel and dime you.
4. 1 or more real estate investments – This is mathematically self-explanatory.  If you’re 39 and don’t have a mortgage yet, then even with a 15-year mortgage at 40-years old, you’ll be paying for a house all the way into your 55th year.  If you’re 39 and just bought a 30-year mortgage, that’s okay because you’ll have significant equity by 55, so you’ll have power moves available to you at 55.
5. Excluding your mortgage, you have less than 1-year’s income in debt – To include student and car loans, you shouldn’t have more debt than you make in a year.  If you only make $50K a year, you shouldn’t have $60K in student loans and a $40K car loan.  When you’re 30-39 with that much student debt, it may be a signal that your career didn’t correlate with the price of your education.  If you’re only making $50K and have a $40K car payment, then you’re probably living way above your means.
6. You have one or more different tax-sheltered retirement accounts – You have many options to properly save for retirement.  Here are several you should have: Federal Government (to include military)/Civil services/State worker pension; 401(k) or similar accounts, Thrift Savings Plan (for government workers), Individual Retirement Accounts (IRAs), and 529 college plans for your kids.

UPDATED (20 Nov 17) Although I don't like these "vanilla" measurements, it helps people conceptualize how much they need.  Some financial planners recommend having half your annual income by 25.  So if you make $50K a year, by the age of 25 you should have $25K in net assets.  By 30, you should have 1 times your annual income.  By 35, 2 times your annual income.  By 40, you should have 3 times your annual income. 

These are GENERALIZED milestones.  If you don’t meet 2 or more of these, then you need to start immediately reconsidering your retirement aspirations.  This Thanksgiving “break” reminded me that weekdays and weekends are something that we humans created.  It’s not scientifically real; just our perception of time.  Wealthy people who are financial independent don’t wait for the weekends; same with properly financed retired people.  Do you really want to be in this daily grind into your 60s or 70s or beyond?  Or worse, be totally dependent on politicians and government programs?