This isn't a fire that you might expect; I'm talking about the FIRE movement: Financial Independence, Retire Early. At a time in my life when my saving habits began to slip, I lucked upon a magical idea known as the 4% rule of thumb, and a domino effect of life-changing knowledge followed.
So What’s the Story?
Throughout my entire life, I have been a frugal saver. So much so that when I got a low-paying teaching job in the high cost of living suburbs of Denver, I still had plenty left over after living expenses. As a teacher, I am part of a state pension plan — one that will essentially guarantee a comfortable retirement if I work long enough. On top of that, I had been and continue to max out my Roth IRA each year. As a math teacher, I of course did the math. If I teach for 35 years, the pension will provide 80% of my salary, and the IRA will be much more than enough to cover anything else.
There was only one conclusion I could take from this, and I said to myself: “Why are you saving so much? You’re like a hoarder. It’s not doing anything sitting there in a bank account, so let’s get out there and spend some money!” I began to go on random shopping sprees for fun. I would order out whenever I pleased. I bought big expensive items because I thought they would be nice to have and — “I have the money so why not?”
Domino #1 - The FIRE Movement
The events that changed my life happened in succession over the span of a few months. The first was that, when listening to Stuff You Should Know podcast, they suggested How to Money podcast, so I gave that a listen. There, I heard about the FIRE movement (Financial Independence, Retire Early), and they interviewed some couple who lived in a van. I thought it was interesting, but early retirement was only for crazy people who lived in vans. But as FIRE kept coming up in money podcasts, I decided to look more into it.
Domino #2 - The 4% Rule
I listened to an Invest Like a Boss podcast about FIRE, and I heard talk of something they called “the four percent rule”. This rule referred to a strategy that would maximize the length of an investment portfolio so you can live off of it in retirement. The basic idea is that you can withdraw 4% of your portfolio every year, and as long as your investments are earning at least a little under 6% annualized, your portfolio will essentially last forever. Read more about the 4% rule in my article dedicated to it.
This gave me the answer to the question I've been asking myself: "why are you saving so much?" I could buy freedom! That got me excited, and I began to run some numbers in a spreadsheet. My thought was to take it as two phases:
Phase 1: I could build up savings in a taxable brokerage account to the point where I could retire early and use the 4% rule it to get me to age 59.5.
Phase 2: At age 59.5, I could access my retirement accounts and start the 4% rule over again to last the rest of my life.
Domino #3 - The Roth Conversion Ladder
As I continued to learn from podcasts and blogs, mainly ChooseFI (the best FI podcast by far in my opinion), I learned about the Roth Conversion Ladder as a strategy to access retirement savings early without penalty. I realized it didn't have to be two phases. I could just save everything in my tax-advantaged retirement accounts to minimize income tax and avoid capital gains taxes, and still retire early to live on the savings in my IRA and 401(k).
Domino #4 - The 457(b)
As I began to hammer down the Roth strategy, I learned about the wonderful early retirement benefits of a 457(b) account and that both my future wife and I, as teachers, had access. The 457(b) is a step above any other retirement account as it gives extra tax-advantaged space and there is no age limit for accessing the money as long as you have terminated service with the employer. The fact that both my future wife and I had access to our IRAs, 457(b)s, and 401(k)s means that we had a combined total of $90,000 in tax advantaged savings space (for teachers, that's essentially unlimited). So we put nearly all of our savings there. This isn't even mentioning that 8.75% of our salaries is automatically contributed tax-deferred into the state pension plan. So the plan now became to fill the 457(b)s and Roth IRAs first. We can live off of that, and when 59.5 comes along, our 401(k)s will be available too. Nice and easy.
Domino #5 - The Pension Account
"But as a teacher, you stay for the pension." This is the number one objection I get from mentioning this early retirement idea to my teacher friends. As I mentioned, in my current situation, the state pension promises to pay me 80% of my salary if I work for 35 years and retire at 58. This is a cushy life, and it basically means that I could just save the $6,000 in my IRA and spend basically everything else I have -- living it big.
The problem with that is that I'd have to work as a teacher until I'm 58. The math of the new plan is more like 42. That's a 16 year difference to recover my most precious non-renewable resource: time.
So I looked into what the pension offers if I cut and run, and it's actually not such a bad deal. The 8.75% of my salary that they take, tax deferred, gets put in an account that has a guaranteed growth of 3% yearly. If I ever decide to withdraw from the pension, I get all that money, the interest it has accrued, and an additional 50% match. This can all roll over to a traditional IRA. I'm more than happy to take that deal when the time comes for early retirement.
"But Won't You Get Bored Retiring That Early?"
To me, FIRE doesn't mean "retirement" in the traditional sense: sitting on the beach drinking mojitos every day. I'll have the time to spend with my family--my children. I'll have time to travel. And I'll also be pursuing hobbies and other passion projects including continuing with financial coaching. If you care to know more, read my post: "Why FI?"
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