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- My spouse and I consistently saved money gradually with the plan to retire when we turn 65.
- Next, FIRE instructed us that retirement isn’t determined by age, but rather by a certain amount of money.
- Currently, we're cutting costs by $1.2 million and putting money into property investments for an earlier retirement.
My spouse and I began our retirement savings just as many others do: by contributing to ours. 401(k) accounts at work.
At the time, we weren’t quite sure what we were doing—we simply understood that we had to invest for our future retirement savings. Initially, we began with target-date funds before moving on to a wide variety of investments. mutual funds We also began making contributions to a Roth IRA on the side.
We were feeling very proud of ourselves. Our retirement plans expanded gradually thanks to our 4% company match, with additional contributions whenever finances permitted. At this pace, we would amass sufficient funds for a comfortable retirement by the time we reached 65 years old. This was the extent of our foresight back then.
Next, I came across the FIRE (financial independence, retire early) movement.
Down the fire rabbit hole
Multiple books and podcasts familiarized me with a fresh idea: retirement isn’t defined by age but rather by a specific figure—a sum substantial enough for its generated interest to cover living expenses without depleting the capital itself. This nest egg would function like a perpetual cash flow source, granting us financial independence, eliminating the necessity of employment, and allowing us to retire comfortably. If my spouse and I managed to reach this target more swiftly, we could potentially leave our jobs earlier than anticipated.
My spouse and I set a provisional target of $1.2 million. As per the frequently referenced Trinity Study—which is practically considered gospel in this field— FIRE movement You can withdraw 4% annually from a stock portfolio without depleting the initial amount. Typically, stocks grow at a rate higher than this—about 7%. However, adhering to the so-called 4% rule ensures that withdrawal amounts remain sufficiently modest during bear markets when your investment might be experiencing losses.
This guideline enabled us to determine the size of our savings required. Being quite thrifty, we estimated that living on approximately $48,000 during retirement would suffice; this amount represents 4% of $1.2 million. Our motivation surged with this fresh perspective, although reaching such an ambitious target seemed far off at first. Despite earning sufficient funds for our basic requirements, we lacked room to significantly boost our regular incomes to increase saving rates beyond what we were currently doing. Consequently, we began exploring alternative methods to achieve our objective faster.
A transition from equities to property investment
We had not been involved with the FIRE community for long when we stumbled upon it. real estate investing As a way to reach our retirement goal sooner. We were interested in property investments even prior to learning about FIRE. Upon doing some rough calculations, we found out that this might just be the quicker path we needed.
When dealing with our investment properties, we recognized that we didn’t require the entire $1.2 million tucked away in a retirement fund; instead, we only needed an annual cash flow of $48,000 (which breaks down to $4,000 each month). To achieve this, we aimed for a $200 monthly profit per property. This meant that owning 20 units would be enough for us to retire comfortably.
A further attractive feature of real estate investing was having direct control over various aspects of the property. When purchasing stocks, one simply buys them and hopes they appreciate over time. In contrast, with a rental property, we had the ability to enhance its value through renovations. make Its worth will increase. Additionally, more attractive units would demand higher rental prices.
Furthermore, we might remove mortgages To assist with buying properties, we previously depended entirely on funding from our personal savings within our 401(k)s. This financial leveraging would enable us to amass a greater number of assets than what we could achieve individually. Post-retirement, we would be able to choose among these properties as residences if needed.
Considering this, we began acquiring properties for rent. So far, we have bought two. One of them exceeded our expectations. After running it successfully as a profitable Airbnb for some time, we transitioned it into a low-maintenance long-term rental.
The other project didn’t pan out as planned—it required more time and money for rehabilitation than expected. Although we fell short of our target cash flow of $200 per unit, the profitability from our initial property helped balance out the underperformance of the subsequent one.
A balanced approach
As we expand our real estate holdings, we have kept saving for retirement through our 401(k) and Roth IRA accounts. Investing always carries risks, and we did not wish to place all our proverbial eggs in one basket with just real estate. Should either of us be unable to renovate properties or should the property market face another downturn like in 2008, having a diversified investment strategy ensures we still have financial security from our stocks.
And having an early retirement as a fallback option isn't too shabby.
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The initial publication of this article took place in August 2023.
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