The term “FIRE”, which stands for “Financial Independence, Retire Early” is a term that has been increasing in popularity over the last few years. “FIRE” is thought of as a way to escape a life of working in a stressful occupation for 40+ years before finally enjoying retirement. Although it sounds wonderful on the surface, it takes a very low-expense dedicated lifestyle in order to make this dream come true. Every city has a different cost of living. So we have created a case study to provide an example of: What does it take to successfully FIRE in Denver?
Matt and Ashley are a high-earning married couple who are both age 30. They each earn $150,000 in a high-stress job as a W-2 income earner for a total household income of $300,000. They worked very hard in their 20’s to pay down ALL of their student debt in order to be debt-free by age 30. They also managed to each save up $30,000 in an employer Roth 401(k) plan that their employers match 3% on their salaries.
They recently purchased a home for $500,000 and paid $20,000 as a down payment. Their mortgage balance is $480,000 on a 15-year loan with a 3.875% interest rate. They chose a 15-year mortgage (instead of a 30-year mortgage) in order to retire debt-free at age 45. Due to their high incomes, great credit scores, and no debt, their mortgage lender originally approved for them to purchase a $1.5M home. However, they elected for the less expensive home in order to save for an early retirement.
They visited with our CFP®’s at IMPACTfolio to find out what it would take to “FIRE” by age 45. They wanted to achieve the financial independence required to walk away from their high-stress jobs in 15 years and then live “comfortably” the next 50 years (from age 45-95). Here are the assumptions:
- Maximize contributions to each employer Roth 401(k)’s (currently $19,000 in 2019 and assumed to grow with inflation) with a 3% employer match.
- Assume a mortgage payment of $3,520/month (principal and interest) for the next 15 years. Then no further mortgage payments even if they move homes.
- Assume an annual health care cost of $12,000/year for each Matt and Ashley from retirement (age 45) to Medicare (age 65). This cost reduces to $6,000/year after age 65.
- Earmark an amount of $400,000, in today’s dollars, for future long-term care expenses.
- Assume all investments average a 6.25% rate of return.
- Assume all data points grow with 2.47% inflation (except the mortgage payment).
To make this financial plan successful (with an 84% chance of success), they would need to live on $62,000/year ($5,166/month) after-tax, in today’s dollars, both now and into retirement.
The rest of their income, $68,000/year, would need to be saved for retirement.
If we assume their property taxes, homeowner’s insurance, and HOA dues are $600/month (and will continue even after the mortgage balance is paid), that leaves about $4,566/month for ALL remaining expenses. This amount would need to include all their annual living expenses such as:
- Home maintenance and remodel
- PMI (private mortgage insurance) for the house
- Transportation (car lease, car purchase, car registration, car maintenance, gas, etc.)
- Travel and holidays
- Any child-related expenses (child care, sports, birthdays, saving for child’s future college costs)
- Insurance (life, disability, car, umbrella, etc.)
- Eating out and entertainment
- Recreation (gym membership, ski passes, etc.)
- Out-of-pocket medical expenses (annual deductible, H.S.A. contributions, etc.)
- Gifts for family and friends
Approximate Annual Cash Flow for Matt and Ashley in 2019
|($90,000)||Less: 30% Taxes|
|($38,000)||Less: Roth 401(k) Contributions|
|($62,000)||Less: Living Expenses|
|($42,000)||Less: Mortgage (Principal/Interest Only)|
|($68,000)||Less: Investment Account Savings|
Matt and Ashley are excited to create these options for their future and are planning to try it out for one year and re-evaluate to see if this is still their preferred course of action.
Of course, there are many different ways to successfully “FIRE”. This is simply one case study. The questions you may want to ask yourself if you are considering this option include:
- Could you live this modest lifestyle now and in retirement?
- Could you live on 20% of your gross income while the rest (80%) goes toward taxes, savings, and mortgage pay-down?
More studies and literature are coming out about the “FIRE” movement, and certain articles take a much deeper dive into the details.
One thing that the “FIRE” movement hasn’t addressed adequately is the modest lifestyle necessary to make this a successful financial plan. Perhaps it would be more realistic to find a career that you could enjoy for a longer period of time?
Call IMPACTfolio at 844-218-3800 to discuss a healthy financial future for yourself and your family.
Julie Fletcher McDaniel, CFP®, has been in the financial services industry since 2006. She is a co-founder of IMPACTfolio, a wealth management firm that specializes in IMPACT investing and holistic financial planning for one flat-fee.