There's no doubt the financial independence and retire early (FIRE) movement is gathering steam for low income and high-income earners alike.
But for the average Australian, early retirement can seem like just a pipe dream. If you're not a banker, lawyer or doctor then it's impossible to save enough money to retire by 45 right? Wrong.
How you can FIRE with a low income
While the maths behind FIRE can get a little complicated, the underlying principle is very straightforward. Get a job, save hard and spend less.
By investing in income-generating assets, you can grow your savings to a point where you can sustain your lifestyle forever and be free of full-time work.
But how can you achieve the FIRE dream if you earn a low income?
If you can't make more money, the key here is to strip your expenses right back. That means no more fancy meals, luxury cars or expensive international holidays.
By increasing the gap between your wage and your expenses, your savings will grow. And if you can invest in ASX 200 shares like Afterpay Ltd (ASX: APT) or CSL Ltd (ASX: CSL), you could FIRE with a sizeable retirement nest-egg despite a low income.
A quick example…
Say you spend $30,000 per year and would like to maintain that forever. If you currently earn $40,000 after-tax, that leaves you with $10,000 per year of savings.
Many income earners that achieve FIRE do so with a "safe withdrawal rate" in place. That means that you decide what percentage of your overall wealth you will drawdown each year to sustain your retirement lifestyle.
For many, this level will be 4% or below. Empirical studies have shown that the 4% rule generally holds quite well over a 30-year period of time.
That means if you have a portfolio of $750,000, a 4% withdrawal per year would give you your $30,000 of required money. The basic idea is that your portfolio will grow at an average rate equal to or higher than your drawdown rate, so you won't run out of money.
So if $750,000 ends up being your magic number, you just need to save that sum in today's money for your future retirement date. Simple!
Obviously things will vary individually and there are risks involved, but the actual mechanics are easy.
In our simplistic example, if you have $50,000 in ASX shares at the moment that grow at a long-run average rate of 8%, you could soon be on the path to FIRE despite a low income. With $10,000 invested per year, my calculations say that you could reach your $750,000 target in just 20 years – plenty of time to enjoy retirement!
