FIRE: Do you need to go all the way?
FIRE or Financial Independence and Early Retirement is a common goal of those who save or live frugally. Many in the community are doing very well on these goals and building impressive savings and investment portfolios along the way. However I sometimes read about people that hate their jobs and are dreaming for the day that they have enough to finally become financially independent and retire. In this short post I will suggest an alternative: a mini-retirement or gap year.
Mini Retirement
You might think that a mini-retirement is just a short term solution to the problem and for some this may end up being the case. If all you do in your mini-retirement is to sit on a beach drinking cocktails then returning to work may become even harder for you. However I don’t believe that most of us could spend a year doing this. It would be fine, actually really great, to do it for two weeks but after that the boredom would set in. Most of us would become restless and maybe even look forward to returning to work.
So what happens after the initial two or three weeks of rest and recuperation? For some they will be keen to start earning money again. If you have set aside your living expenses for a year then you are basically free to do whatever you want. You have the freedom to try and create wealth from scratch. All of the hobbies and ambitions you had but didn’t have time to pursue due to your day job over consuming your free time and energy you can now enjoy.
What to do?
Practically anything. Write a book, start a blog (or devote more time and attention to it), make and sell arts and crafts, paint, become a photographer, become a full time property developer, basically anything that you have a passion for that could be monetised. It doesn’t matter if you fail. In fact it is unlikely you will completely fail. Even if you fail commercially you are likely to have gained new skills and knowledge and confidence to try new endeavours. If these endeavours are successful then there is the sweet possibility of kissing goodbye to your day job for good.
What are the Costs?
I often see people in this community boasting of 50% plus savings rates. If you are one of these lucky few then it would take you less than a year to save enough to cover a year’s living expenses.
If you are already on the road to financial independence then you might know what your FI% is. The FI% is what percent of your total target for financial independence you have so far saved. Let’s say you are aiming for a $40,000-a-year retirement income then the 4% rule states you need a fund of $1,000,000 ($40,000/4%). Let’s say you have saved $250,000 already then you are at 25% FI.
How much would a one year mini retirement cost this person? Well at a 4% draw-down this person already has $10,000 they could use (4% of $250,000) so they only need to find the remaining $30,000. The further along the road of financial independence you are the less funding you will actually need. In fact, a person in this situation could effectively work 9 months of the year and retire for the other 3 months. I know a number of people that only work 6 months of the year.
Other Benefits
Clearly there are other benefits to taking a mini retirement early. You not only get to enjoy retirement when you are young and fit and healthy but it also gives you a chance to reflect on the aim of financial independence and early retirement. You will have the chance to answer questions such as; Is this right for me? What am I going to do when I reach FI? Will the income I’m estimating I need be enough? (Having a year off you can see much more accurately how much you are likely to be spending when you quit working).