FIRE Retirement

If the idea of retiring in your early 50s, 40s, 30s, or even late 20s appeals to you, you may be interested in joining the FIRE retirement movement. Designed for those who have the discipline and cash flow to save diligently, FIRE can be an effective path toward living a work-optional lifestyle. In this article, we will discuss what FIRE is and whether or not it may be right for you.

What is FIRE?

FIRE stands for “Financial Independence, Retire Early.” This program, inspired by Vicki Robin’s book “Your Money or Your Life,” is built on the premise of saving more money month-to-month than traditional retirement approaches and utilizing low-fee investment choices to be able to afford retirement earlier than the traditional age.¹

The “financial independence” portion of FIRE is considered to be about 25 times your yearly expenses. For example, if you decided you’d need $50,000 a year to live off of in retirement, you would need to save 50,000 x 25, or $1.25 million to be considered financially independent. Once that number has been met, you’d be able to retire and enjoy a life of financial freedom, withdrawing about three or four percent from your nest egg each year.

Top Considerations Before Joining the FIRE Movement

Retiring in your 30s may sound too good to be true. In fact, the whole FIRE movement and premise of retiring early can sound like more of a daydream than reality. And for some, it may be just that. But for others who are able or willing to embrace the lifestyle, financial independence early in life can be possible. Here are a few important considerations to make before deciding if the FIRE program may be right for you.

Consideration #1: You’ll Need to Spend Wisely

The big factors of the FIRE program are income, expenses, and time. The idea being, the bigger the gap between income and expenses, the less time it will take you to reach financial independence. And while it may sound extreme, depending on your timeline and desired income level in retirement, you could be looking to save more than half of your income to put toward early retirement. This is something that would need to be calculated individually, as it is based on your income level and current expenses. However, living a frugal lifestyle now is almost always a universal requirement of the FIRE program and other early retirement seekers.

Consideration #2: FIRE Followers Don’t Embrace Traditional Retirement

For those looking to retire early using the FIRE method, “retirement” doesn’t mean sitting around and doing nothing. FIRE followers are typically more focused on the first part of the acronym, “financial independence,” than they are on retiring early. That means that they’re likely to still work in retirement or pursue a passion project they were previously unable to due to the confines of a full-time job.

Consideration #3: You’ll Want a “Why”

Like many financial goals, it can be hard to find the motivation to skip dinners out or splurging on a new outfit. When you have a nondescript idea of retiring early, there’s little motivation to skip out on some enjoyment today for the possibility of an early retirement a decade down the line. Instead, those who have embraced the FIRE method often put a “why” to their savings programs, and it’s important to get as specific as possible. Define your “why” and let it guide you in making positive progress toward your financial independence.

The FIRE program is an appealing method of reaching retirement early on in life and allows for its followers to find the flexibility in doing what they love. It does, however, take self-discipline and the ability to spend less today in order to save for tomorrow. If you’re considering the FIRE method, it may be wise to work with a financial professional who can help you understand your current spending habits and what you’ll need in order to find financial independence for an early retirement.

1. Vickirobin.com, 2023

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Understanding Equity Compensation

Employers do what they can to foster a sense of ownership in their employees. After all, if you stand to benefit from a company’s success, you’re more likely to do a great job for them, or so the logic goes.

So, when you are hired for a job or promoted within your existing company, you might be offered some sort of ownership benefit. You might even get to decide whether to take all of your pay in cash or to use some of your pay to purchase equity in the company.

At first glance, the answer might seem simple: Show me the money! However, there are situations in which an equity position may make more financial sense. Finding that line is key to getting the most compensation from your career.

What do you need to know, then, to ask the right questions?

In some cases, employees have the choice to buy company stock in a tax-deferred retirement plan sponsored by their employer, the most common of which is the 401(k). In other instances, there may be other ways to buy into ownership.

Why is a retirement plan choice important? Well, the point of these retirement accounts is that you’re not paying tax on money today but rather at some point in the future when you take a distribution. If you are taking a distribution from the sale of stocks in your 401(k), you may have the choice of treating the appreciated securities as ordinary income or using the net unrealized appreciation (NUA) tax treatment.

It’s critical to point out that the NUA choice only works when you buy stocks that are kept in your workplace retirement account. The NUA election isn’t available for other types of accounts.

With an NUA, when you take this type of in-kind distribution (payment in the form of securities rather than cash), the rules are complex. So keep in mind that this article is providing a high-level overview and is not a replacement for real-life advice regarding assets held in your retirement account. You should consult a tax professional with an understanding of distribution rules before modifying or adjusting a distribution strategy.

There are several benefits to using an NUA with a distribution. For example, when securities are sold, any NUA is taxed at a long-term capital gains rate, which may be lower than an ordinary income tax rate. So, an NUA approach may help you manage your tax bill.¹

However, there are limitations, too. The NUA decision must be weighed against the potential market risk of holding a single stock upon distribution.¹

Once you reach age 73, you must begin taking required minimum distributions (RMD s) from your 401(k) or any other defined contribution plans in most circumstances. Withdrawals from your 401(k) or any other defined contribution plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10 percent federal income tax penalty.

Each of these scenarios might feel complicated, or even confusing, but there’s good news. You have a financial professional in your corner who may be able to offer insights into your overall compensation strategy. Their assistance may be key in helping you make decisions about whether to add equity to your retirement assets.

1. Ameriprise.com, 2023.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

The Five Basics of Financial Literacy

Credit and debt

Understanding the ways credit and debt work for and against you are some of the first steps toward understanding personal finance. While it’s not useful to be scared of credit and debt and avoid it entirely, there are some things to look out for.

Debt

Debt is like any tool: when used correctly, it can be quite useful. When used incorrectly, debt can easily spiral out of control. Missing payments may negatively affect your credit score, and that can take years to recover from. Missed payments, for example, can stay on your credit report for seven years.1

Credit Score

Your credit score is one of the factors lenders use to judge your trustworthiness and qualification for mortgages, auto loans, and other lending. Landlords and employers may also check your credit before renting to you or offering you a job.

Interest

Interest can work against you, but it can work for you, too. When you take out a loan with an interest rate, it’s working against you, but when you invest early and take advantage of compound interest, it’s working for you.

Compound Interest

When you’ve got an account that’s accruing interest, the interest earned gets added to the principal. Then, interest is earned on the new, larger principal, and the cycle repeats. That’s compound interest, baby!

The Value of Time

It’s never too early to start saving. In fact, the earlier you start, the better your result. By getting started with retirement savings sooner rather than later, you can leverage the value of time to your advantage.

Cindy vs. Charlie

Consider the case of Cindy and Charlie, who will each invest a total of $100,000. Cindy starts right away, depositing $10,000 a year at a hypothetical 6% rate of return. After 10 years, Cindy stops making deposits. Charlie, on the other hand, waits 10 years before starting to invest. He also puts $10,000 a year away for 10 years, at the same hypothetical rate as Cindy. After 20 years, who has more money? Shockingly, Cindy’s balance is nearly twice as big as Charlie’s, thanks to the extra time her investment returns had to compound.2

Inflation

Inflation has the potential to eat away the purchasing power of your money. That means, with inflation, the dollar you earn today may not be worth a dollar in the future. Here some things to keep in mind when thinking about inflation.

Cash in a Mattress

Keeping all your cash under a mattress is not only unsafe, it literally costs you money. Assuming the rate of inflation is a hypothetical 2%, every dollar you squirrel away will shrink in value to just $.98 next year.

Rate of Return

Because inflation erodes the purchasing power of your money, any returns you earn on your accounts may not be the “real” rate of return. If your account earned a hypothetical 6% rate of return over the last year, but inflation was 1.5%, your real rate of return was 4.5%.3

identity theft and safety

In the modern world, identity theft is one of the biggest threats to financial and personal safety. A cracked password or misplaced Social Security number can have big consequences on your current and future finances.

Consider using a password manager

The common wisdom is to use a unique password for each site and service you use. A password manager can make this easier by generating and storing strong passwords until you need to use them.

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Sources

1. Experian, 2023
2. This is a hypothetical example of mathematical compounding. It’s used for comparison purposes only and is not intended to represent the past or future performance of any investment. Taxes and investment costs were not considered in this example. The results are not a guarantee of performance or specific investment advice. The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for high returns also carry a high degree of risk. Actual returns will fluctuate. The types of securities and strategies illustrated may not be suitable for everyone.
3. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results.

Catch-Up Contributions

A recent survey found that 28% of workers are very confident about having enough money to live comfortably through their retirement years. At the same time, 27% are not confident.¹

In 2001 congress passed a law that can help older workers make up for lost time. But few may understand how this generous offer can add up over time.²

The “catch-up” provision allows workers who are over age 50 to make contributions to their qualified retirement plans in excess of the limits imposed on younger workers.

How It Works

Contributions to a traditional 401(k) plan are limited to $22,500 in 2023. Those who are over age 50 – or who reach age 50 before the end of the year – may be eligible to set aside up to $30,000 in 2023.³

Setting aside an extra $7,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance of the account, and by extension, in the eventual income the account may generate. (See accompanying chart.)

Catch-Up Contributions and the Bottom Line

This chart traces the hypothetical balances of two 401(k) plans. The blue line traces a 401(k) account into which $22,500 annual contributions are made each year. The red line traces a 401(k) account into which an additional $7,500 in contributions are made each year, for a total of $30,000 in contributions a year.

Upon reaching retirement at age 67, both accounts begin making withdrawals of $7,000 a month.

The hypothetical account without catch-up contributions will be exhausted before its beneficiary reaches age 80. Keep in mind, the IRS regularly updates these maximum contribution limits.

This hypothetical example is used for comparison purposes and is not intended to represent the past or future performance of any investment. Fees and other expenses were not considered in the illustration. Actual returns may vary.

Both accounts assume an annual rate of return of 5%. The rate of return on investments will vary over time, particularly for longer-term investments.

In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.

1. EBRI.org, 2022
   2. Economic Growth and Tax Relief Act of 2001
   3. IRS.gov, 2023. Catch-up contributions also are allowed for 403(b) and 457 plans. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.