[0:00]FIRE, Financial Independence, Retire Early. It's a beautiful idea. You save a lot of money, invest and retire at 40 or 50. You get to travel, pursue your hobbies and live off your investments. But based on my 18 years of investment experience, both on Wall Street and here in Europe, I see some major problems with FIRE. So if you have ever dreamt of retiring early, let me show you what the problems are and how to fix them. To explain the first problem, let me ask you this. Have you ever worked really hard for a goal? Like buying a new car, getting a university degree or earning a big promotion. For months or years, that was all you thought about. You spent evenings and weekends obsessing over it, you gave up time with friends, maybe even skipped some family events. And then one day you finally achieved it. Yes. You celebrated, it felt great. But then a month or two later, you're sat on the couch watching Netflix and you think to yourself, now what? It turns out that achieving this goal didn't give you the lasting happiness that you expected. What is worse, you now have this emptiness in your life where the goal used to be. With FIRE, that is not the exception. It is the norm. Over my two decades in finance, I've known dozens of people who retired early. One guy sold an insurance company after many years of hard, stressful work. He bought a helicopter and learned to fly it. He spent three months traveling, doing nothing productive, just trying to have fun. And he was miserable, he said he was literally trying to climb the walls out of frustration. So he started another insurance company, and now he's much happier. Or look at the gurus who popularized FIRE online, like Mr. Money Mustache or The Mad Fientist or others. These guys are great, I love their content, but for people who talk about retiring early, most of them spend a lot of time blogging or doing real estate or running businesses or making YouTube videos, which I can tell you is a lot of work. Now listen, I don't blame them. I myself had enough money to retire a few years ago. I took an entire summer, which I spent with my kids, doing nothing productive. We made some lovely memories, but I was bored out of my mind and I missed the social aspect of working with ambitious people to build cool things. So that is when I started my investment training business. Here's the thing, reaching FIRE is incredibly difficult. The standard advice goes something like this. You rent a cheap apartment, take public transport, cook your own food, write down every expense, save every cent that you can for years until you finally have an investment portfolio which is big enough that you can take out spending money every year for the rest of your life without ever going broke. So getting to FIRE is really, really hard and many people fail along the way. But the one thing that is worse than failing is succeeding and realizing that it was the wrong goal in the first place. So this is the first problem with FIRE. For many people it is simply the wrong goal. In a minute I'll explain an alternative that I think is much better. But for now, let's assume that in your case, FIRE is the right goal. Maybe you have a life dream that is meaningful, but it simply cannot pay the bills. Maybe you want to write books or paint or start a charity. So for you, retiring early makes total sense. Let's move on to the second problem with FIRE. And to understand it, we need to explore what early retirement really means. I mean, think about it. If you retire at 45 and expect to live off passive income, that means you basically expect other people to do everything for you for the next four or five decades. Other people will have to make your food and clothes, provide heating and hot water and maintenance for your house. They will have to educate your children, while you sit around just enjoying life. Now, I'm not saying this to be judgmental. If you earned it, good for you. All I'm saying is, that is very expensive. Realistically, if you want to spend X,000 euros per year in early retirement, you should aim for an investment portfolio which is 25 to 35 times that amount. So, for example, if you want to spend 40,000 per year, you will need at least 40,000 times 25, which is 1 million. Now, where does this calculation come from? Why multiply your annual spend by 25? Well, you may have heard about the famous 4% rule. The idea is that if you invest your retirement savings in the stock and bond market, you're going to be taking some risk. In the worst case, you can get what is called sequence of returns risk. This is when the market has a huge drop right when you're about to retire, and this can wipe out maybe half your portfolio. If you take too much money from your portfolio before or during such a major crash, you can quickly go broke. But based on historical studies, if you limit your spending, if you take out no more than 4% per year, and then only increase the amount with inflation every year, the chances of you going broke are quite low.
[5:01]So that is why people call 4% a safe withdrawal rate. This 4% number is based on a famous research paper called The Trinity Study, and it's been at the core of the FIRE movement from day one. Now, of course, 4 times 25 is 100%. So if you know how much you would like to spend in a single year, you just multiply that by 25 and you get your target portfolio size. Unfortunately, there are a lot of problems with the 4% rule. For one, The Trinity Study was based on the assumption that you retire at 65 and stay retired for 30 years. If you want to retire early, you might have a much longer time horizon, so this increases the chances of running out of money. For another, the study was based on American stock market data. If you look at global stock data instead, the 4% withdrawal rate doesn't look that safe. That is why I said you might need 25 to 35 times your annual spend in order to be safe. Okay, the upper limit is equivalent to a 2.9% withdrawal rate. If you use this more conservative assumption, funding 40,000 per year would require 1.5 million euros in savings. And clearly, that's a lot of money. Even if you invest for 20 years to get there, even if you get a good investment return like 9% per year, getting to 1.5 million would require you to save 2,400 euros every month. And for most Europeans, that is just crazy talk. So, that's the second problem with FIRE. It's really, really expensive. Okay, but I also have some good news, because the third problem with FIRE is that people make rigid assumptions. Like I will spend X percent of my portfolio every year, plus inflation, no matter what. If you make this kind of rigid assumption, it's easy to go broke, especially during market crashes. But in real life, people do tend to adjust. If the market collapses and your investments lose value, chances are you can find ways to reduce your spending. You may also be able to do some part-time work or some consulting to earn extra cash. So, if you are prepared to be flexible, a 4% or even 5% withdrawal rate can be quite reasonable. And that means you may only need 20 to 25 times your annual spending. So if you want to spend 40,000, that would be 800,000 to 1 million euros before you can retire. But you do have to watch out for problem number four. You see, early retirement means that you will have a lot of free time to travel, socialize and pursue your hobbies, while you are still young and healthy enough to do it all. Terrible, I know. But one of the reasons why it's easy for hard-working ambitious people to save money is that they don't have enough free time to spend it. Once you do have an extra 40 to 50 hours per week, you may discover that your spending shoots up because now you're paying for piano lessons, or new equipment for your photography hobby, or lunch dates with friends, or trips to Marbella. Even if you fly Ryanair, that's going to add up. So, when you budget for early retirement, don't assume your spending will go down, like what typically happens in old age. It is quite possible that you will encounter the fourth problem with FIRE, which is higher spending after retirement. And to prepare for it, you either need to assume that your overall spending level is higher, or you need to cut your base expenses by moving to a lower cost area, downsizing your house, or selling your car. So that's going to leave more budget for discretionary spending. Now, problem number five is also spending related. If you're just starting out with this, chances are you are still 15 to 20 years away from early retirement. And by that time, even with moderate 3% per year inflation, prices will be 80% higher than today, so you need to adjust your target numbers accordingly. Plus, over time, your career will advance, and you will see your friends and colleagues living nicer lifestyles with posh-er houses and cars and vacations. And it's quite possible that your own living standards will increase as well. So that if you are spending 40,000 per year today and that seems completely fine, you may end up spending 100,000 or more in the future. Even though I am a personal finance and investment trainer, I've had the same thing happen to me over time. I spend more in a month today than I used to do in three months 10 years ago. And seriously, I don't even regret it because I really enjoy the lifestyle that my money can buy. The house that we live in, the many trips we take every year, the experiences I get to have with my kids. But realistically, this does significantly increase the numbers that you need to hit for retirement. 15 years in the future, your goals might look nothing like today. You may even decide to aim for what is called Fat FIRE, retiring early while still enjoying a luxury lifestyle, which can require savings of 5 million euros or more. So that's problem number five: inflation plus lifestyle creep. Then there's the sixth problem with FIRE. Although, as we'll see in a moment, this can also be an opportunity. This is tied to the single most common complaint that I hear from European investors. I can't get ahead because my country has high taxes. Most European countries with high incomes like Denmark or the Netherlands, also have pretty aggressive personal income taxes. So that can make it much harder to reach your target number in the first place, and when you start taking out money, part of that money is going to go to the taxman. Instead of getting 50,000 euros to spend every year, you might only get 45 or 40,000 after taxes. Now, to be clear, no one should let the fear of taxes stop them from investing. Even if tax rates are high in your country, you are always better off investing and making a profit and paying some tax, as opposed to not investing and staying poor. But you do need to be realistic about your tax obligations. Prepare for this ahead of time, or you will be disappointed. All right, so we've covered six major problems with the FIRE movement. Now let's see how to fix them because while on the one hand, I really do believe that FIRE is not quite the right life goal for most people, on the other hand, as long as you have good expectations, getting to your FIRE number to this point where you could retire early if you wanted to, it can be liberating. I think it can be a worthwhile goal that keeps you motivated. So, if that appeals to you, here are a few recommendations. Number one, don't postpone your happiness until retirement. You have the right to be happy now. Never stay in a miserable job just because it pays a lot. You will hate your life, ruin your health along the way, and once you have enough money to retire, chances are you won't even enjoy it. Instead, make it your priority to find a better, more enjoyable job in the next 12 months. And as a side effect, you might discover that suddenly you're not even that interested in retiring early. My second recommendation is this: instead of FIRE, aim for FISRE. That's Financial Independence, Semi Retire Early. Make it your plan from day one that you will work part-time or do some consulting after you retire. Most people do that anyway. So, if you choose this as your goal in the beginning, it will make it much easier to reach the goal, because it takes much less money. Third, try mini retirements. My wife and I once spent nine months studying dance in Cuba. We lived like students, we explored the island, it was a great experience. I've got a friend who took a year off work to write a novel. And even just three months sitting on the beach, doing nothing, could help you decide if early retirement is really what you want. Just come up with a good story for why you took this time off so that you can avoid problems with your career. Now, my fourth recommendation is super exciting. Everybody loves this: Optimize your taxes. Now, there's a few different ways you can do this. If you're young and adventurous, you can move to a lower tax country. For example, if you could work remotely for a Danish or Swiss company while living in Latvia or Cyprus, that could accelerate your wealth massively. And then after you retire, if you can live in a tax haven like Cyprus or Georgia or Andorra, that could let you draw down your savings with much lower tax. But of course, relocation is a really big life choice and it's not right for everybody. The good news is, there are ways to optimize your taxes legally and ethically, no matter where you live in Europe. Virtually every country has tax advantaged solutions for retirement savings, for example, pension funds. Use these for the part of your portfolio that you will spend after age 65. Okay, so if you will retire early, you will need to spend part of the money before 65, so that stays in a taxable account, but part of it will happen after normal retirement age, so that should go in a pension fund or a different kind of account that has tax benefits. Now, looking at your taxable account, you should always pick tax-efficient investments. For example, accumulating ETFs, which tend to get better results in most European countries, although there are some exceptions, such as Austria, Switzerland, Denmark and the UK. And speaking of ETFs, this is my fifth and final recommendation: use smart investments to grow your wealth. Don't gamble on forex or crypto or single stock picks with the hope that one right bet will let you retire. It is much more likely that you will crash and burn. And also, don't overpay your bank for expensive actively managed funds. Those 1 to 2% annual fees can really eat up your wealth over time. Instead, use ETFs and index funds to grow your portfolio efficiently. Now, whether you're just thinking about investing in ETFs or you already have a portfolio, you probably do have some questions like, what are the best ETFs to use in my country and which investment app to use? How to optimize for taxes? And what is the best way to stay safe with all the geopolitical risks that we're seeing today? I address these questions one video at a time in this YouTube channel, but if you'd like a faster, step-by-step solution that takes you from A to Z, and also includes one-on-one support from me, you might be interested in my training program for European investors, the Index Masterclass. If you'd like to find out more, just follow the first link in the description.
