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Where there’s a strong desire to retire, there’s FIRE

Cash Flow and Retirement

What number do you think of when you hear “early retirement?” 60? Possibly 50?

How about 35 or 40? Some people that young are leaving the workforce for good thanks to a relatively new strategy called FIRE (for Financial Independence, Retire Early). No, we’re not just talking about the founders of hot tech startups. FIRE is used by ordinary people who save aggressively by living a frugal lifestyle. Here’s how you can follow FIRE — or just adopt some of its principles.

Setting a goal

FIRE strategies start with maximizing retirement savings. Adherents commonly set aside at least 10% of their gross income for retirement. Those who hope to retire in their 30s or 40s may save as much as 70% or 80% of their current income for retirement. Depending on your responsibilities for children and other family members, that may sound like a tall order. But there are several strategies anyone can follow to maximize savings and retire earlier than they originally anticipated.

Start with an aggressive savings goal. Just keep in mind that it’s one thing to set lofty goals, such as saving half of your income for retirement, and another to actually transfer that money to savings every month. To succeed, put your savings goals in writing, along with the procedures you’ll follow.

For example, if you want to save 30% of your current income for retirement, calculate how much money that is and write it down. Then determine benchmarks for how much money you should have saved by the time you reach certain ages so you can monitor your progress toward your long-term retirement goal.

A good way to accomplish your goal is to arrange for automatic transfers into a retirement plan for each pay period or month. Consider contributing a fixed percentage (rather than a fixed dollar amount) of your earnings into your employer’s 401(k) plan. By doing so, with each raise or bonus, a portion will go to your retirement (assuming you’re not at the maximum allowed). Also, don’t pass up matches offered by your employer.

Finding the money

Many people are surprised to learn how much money they spend on nonessential items when they actually scrutinize their expenses. You might, for example, be able to disconnect your cable TV or downgrade your mobile phone package. Dramatically slash discretionary expenses, such as what you spend on entertainment tickets, restaurants, and take-out coffee. Keep your vehicles well maintained so you can drive them for 10 years or longer and think long and hard about buying anything that isn’t a “need.”

You may also be able to boost income by, for instance, selling merchandise on sites such as Amazon and eBay or driving for a ride-sharing service. What about offering dog-walking services to neighbors?

It’s important to recognize that expense-cutting and income-boosting activities probably won’t get you to your goal if you’re carrying excessive consumer debt. Strive to eliminate nonmortgage debt as soon as possible, starting with high-interest credit cards. Many FIRE devotees also put extra money toward their mortgage principal each month so that they can be mortgage-free by the time they retire.

Everyone can benefit

Obviously, not everyone can afford to retire before the typical retirement age of 65. But if you’re young, out of school, and employed, you might want to give it a shot. Everyone else can strengthen personal finances and advance their retirement goals by adopting FIRE principles. Talk to your Lenox advisor about building a retirement plan that makes sense given your personal circumstances.