Having the fire to retire

SavingsReadJuly 6, 2021

In many ways money and life are inextricably linked. Increasingly money itself is being seen as an enabler to achieving these goals, rather than an end achievement in itself. In terms of life goals, you may have heard about the FIRE movement. It stands for ‘Financial Independence Retire Early’.

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The FIRE movement examines people who’ve quit their jobs to spend more time with their kids, indulge in their passions or live extremely frugal lives. While there are a lot of  varying opinions around the approach, there are things we can learn from FIRE when it comes to setting clear life goals, even if (like me) early retirement is about the last thing on your mind.


So where do you start considering life goals?

Perhaps the most enticing aspect about FIRE is the element of control it gives. There are things in your financial life that you simply cannot control, no matter what you do. The equity markets, interest rates, and, to a lesser degree your income.

FIRE focuses on things you can control. The amount you spend. The amount you save. Elements that make big changes — like moving to a less expensive area or downsizing your lifestyle way before they have to — in order to tighten the reins. But these are their choices. And actively making these choices provides freedom to spend that other prized commodity, time, as they choose.

Having more control makes us happier. Even if FIRE is not something that appeals today. I like my job, but living like a monk in order to enable me to quit is not on the cards. However applying a little of the FIRE philosophy to put my life back into my hands – in the form of  disciplined retirement savings for instance - is an idea that resonates…


Financial goals are life goals

One of the biggest culprits in bad financial planning is disconnecting the process from the things that matter most to the person making the decisions. This is where your financial professional can help. If financial goal setting is to be truly successful, it must account for the way in which we behave, including the slightly unusual and irrational decision we all make from time to time.

Success can often be found by blending the defined lines of classical financial decision making with sufficient drive. After all, your financial goals and the chance of achieving them are only as good as your resolve to stick to them.


Plan for the worst

A college in the USA performed a study in which people were asked to rate the likelihood that a number of positive events, for example winning  the lottery, marrying for life and negative events, for example dying  of cancer, getting divorced, would impact their lives. What they found was that participants overestimated the likelihood of positive events by 15% and underestimated the probability of negative events by 20%.

What this tells us is that we tend to personalise the positive and detach from the dangerous. We understand that bad things happen, but in service of living a happy life, we tend to think about those things in the abstract. A solid or retirement plan won’t assume that everything will be milk and honey.


Picture yourself at 90

One of the reasons that we tend to under-prepare for the future is that we value comfort now more than we will in the future. Let’s say I offered you $100 today or $110 tomorrow. Chances are, you’d employ some self-control and go for the extra ten dollars. What if I changed my offer to $100 today or $110 in a month? If you are like most people, you’d take the $100 today rather than wait the extra 30 days. The official term for this devaluation over time is ‘hyperbolic discounting’ and it can have dangerous consequences for managing wealth over a lifetime.

A lot of important decisions that concern our health, wellness, financial security and careers are affected by hyperbolic discounting. All of these come with choices that require trading off immediate reward for your future good.


Break the big life goals down

We know setting money aside is important for your retirement income. Instead, we choose to splurge on an expensive night out which is enjoyable now, but might not be the best choice for future you. We then tend to set, big, lofty goals for ourselves, to bridge the gap as they yield massive rewards.  But we all know that bigger goals - like learning to speak Spanish or losing 20 pounds - take a while to achieve.

By breaking down big life goals into smaller tasks, your reward comes after the completion of each chunk. That way, the reward is no longer a far off possibility but something that is more immediate and guaranteed.

After all, if today’s needs and today’s dollars are always perceived as more valuable than tomorrow’s wealth and wants, we’ll all make hay will the sun shines. While this can be fun in the moment, you’re older self is not going to be too happy eating instant noodles every night – living a frugal FIRE lifestyle but not through choice.


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