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How To Retire Early On A Low Income

If you’re like most people, the thought of retiring early makes you burst with excitement. Maybe you hate your job and dream of replacing it with a fun, chill hobby like golfing or maybe, working for someone else doesn’t align with your life-long goals anymore.

Whatever your reason is, there are proven strategies that could help you bow out of employment while you’re still young. One such strategy that financial experts swear by is Barista FIRE which when properly employed should allow anyone to retire early even if you’re only earning a low income right now. Therefore, let’s get into how you can do that right now! To begin with, FIRE is an acronym that stands for Financial Independence, Retire Early. This financial movement has for a long time, helped money-wise individuals retire before the traditional retirement age of 60.

Actually, we have FIRE fanatics who’ve managed to down their work tools from as early as 34! However, this usually comes after adopting a very intense and extreme saving culture and needless to say, there’s no shortcut to retiring early other than cutting down your expenses upfront and saving.

The flagship of the FIRE movement is living frugally and amassing a ton of savings. As a FIRE devotee, you may sink so deep into saving to the extent of downgrading your lifestyle a bit. FIRE proponents often end up stashing up to 70% of their monthly paychecks for a set number of years and living off minimal withdrawals once they retire.

So assuming you don’t intend on building new streams of income after leaving the working world, your retirement savings will be what you rely upon to sustain you monetarily. Usually, FIRE devotees will withdraw a set amount of money every month from their investment portfolio. This amount goes towards catering for their living expenses without needing to clock in to work each and every day. Sounds impossible? Well, hear me out!

Let me set the record straight; saving for retirement calls for patience, diligence, and deep sacrifice. Even if you decide to pack up your stuff and go pitch camp in a forest where you have zero bills to pay, it would still take years before you have saved enough to do so. The FIRE retirement plan advocates for saving up to thirty times your annual living expenses before ditching employment. With roughly $1 million in your retirement account, you can comfortably quit your day job without the fear of going broke as long as you live in financial moderation.

However, this figure may vary depending on an individual’s lifestyle and post-retirement plans. While some people will prefer withdrawing both feet from the job market, others will want to leave footprints that will translate into some supplemental income. If you lie in the first group, meaning you don’t intend to work another day in your life, you will have to save a lot of money. If, however, you intend to take-up side hustles after leaving your day job, you will only need to save money that covers your annual living expenses. Since you’ll still be generating income, you could use it to take care of the other expenses. And it is at this point that the Barista FIRE concept makes its dent.

Barista FIRE is a variation of the FIRE movement. Unlike the other variations, it vouches for leaving at least one foot in the job market. This means that despite deserting the typical 9–5 work lifestyle, you’ll take up a paying part time job (like being a Barista at Starbucks hence the name) post-retirement. The idea is to stash away enough money in your future nest egg such that when you eventually call it quits, you’ll only have to earn a small fraction of income to live comfortably.

Since Barista FIRE pushes you to stash away the majority of your living expenses, you’ll probably to earn an extra $5,000-$10,000 a year to live. This isn’t much, and you can comfortably earn that amount while working minimal hours a week.

But besides that, I can name a tad too many benefits of infusing Barista FIRE with your retirement plan.

Benefits of Barista FIRE

One obvious benefit is that it gives you a sense of purpose. With this plan, you won’t have to work for 50 hours a week like you did in your day job. Thanks to the thriving gig economy, you can earn the required income supplement while doing something you genuinely love and enjoy! I mean, who wouldn’t love being paid to mix cocktails at their favorite bar or earn money while penning rib-cracking articles for Craigslist? A mad person I believe.

Secondly, Barista FIRE gives you the golden opportunity to socialize. Anyone who’s had a taste of full-time employment will tell you that it strictly allows for shallow engagements. The stress of working full-time while dealing with a difficult boss will often leave you with a diminishing willingness to live, leave alone time to mingle with friends.

But with Barista FIRE, you could hand in your resignation letter before you hit 40, then veer off to revive the social butterfly in you.

Lastly, the most important benefit of adopting the Barista FIRE concept is that it keeps your mind sharp. Do you remember that class you had to put off because of work? Or the books that have been sitting pretty in your rusty bookshelf for years?

Once you retire early, you’ll have more than enough time to learn new skills. Whether its windsurfing, flipping burgers, or learning FOREX, early retirement lifts the barriers to how far you can stretch your mind. The best part is that with the Barista FIRE concept, you won’t have to worry about juggling classes and earning your next meal. You’ll have these expenses covered!

By now, I’m sure you’re dying to sign up for your FIRE membership and get this ball rolling. Now, I’m going to explain to you how the Barista FIRE concept cuts down the time to retire.

Barista FIRE Fundamentals

Conventionally, retirement is reserved for the PRE-twilight years, usually sixty and above. Therefore, early retirement implies defying this norm and ditching employment at any point before the age of 60. Of course, having a stuffed retirement portfolio is a great place to start, but look at it this way. If all you plan to do is take out money from your retirement account without depositing, it will take a longer period to save enough. Besides, how sure are you that the amount you’ll save will be sufficient to cover unforeseen expenses like vacations and healthcare?

This is where this strategy comes in. Barista FIRE helps you, as a potential retiree, retire with the most viable margin of safety. Also, it helps you cut down the amount you’ll need to withdraw from your portfolio once you retire. Remember I mentioned earlier that a withdrawal rate is the percentage of a FIRE retiree’s portfolio that they’ll need to withdraw for monthly living expenses.

The gist is, the higher your annual withdrawal rate, the more money you will need to save, hence the longer you will have to wait to retire. On the other hand, lowering your withdrawal rate by getting an extra cash inflow will make you hit your saving target faster.

By targeting to earn at least $5,000 once you down your work tools, you can boost your chances of retiring early by a significant amount.

This is why Barista FIRE advocates for supplementing your retirement savings with an annual income of $5,000-$10,000. This way, you will only have to save for the basic living expenses like housing, education, and healthcare. If you’re lucky enough to get a part-time job that offers health insurance, all the better. In this case, your part time job will cater for miscellaneous expenses like gym subscriptions, car expenses, vacations and groceries.

Having said this, let’s look at how earned income can touch on your retirement window. Or rather, how can you save less money and still manage to retire early. To do this, we’re going to use two key variables. These variables are your annual cost of living and withdrawal rate.

Let’s use the example of Mark, a Senior Financial analyst who is leveraging the FIRE strategy to retire before the age of 45.

Mark nets an annual take-home pay of $72,000 and saves 50% of it. Also, Mark’s monthly cost of living is $4,000, and if you multiply this figure by 12 months, you get his annual cost of living which is $48,000. Using a withdrawal rate of 4%, Mark will need to save $1.2 million in order to retire early.

Keep in mind that this is under the assumption that he doesn’t plan to seek an active income source after he retires. In case you’re wondering, I arrived at this figure using the mathematical concept of cross multiplication. That is, if 4% (Mark’s withdrawal rate) equals $48,000, how much is 100% (his total retirement fund)?

As mentioned above, Mark is currently saving 50% of his annual paycheck, which amounts to $36,000 worth of savings every year. If you take his projected retirement portfolio and divide it by his annual savings, you get 33 years. But of course, retirement funds offer annual returns, so this time-window will reduce by about 8 years assuming he gets a 5% annual rate of return. Also, let’s not forget the advantages of compound interest, which is what retirement portfolios exploit to boost returns.

Eventually, Mark will take about 25 years to save enough money to cater for his post-retirement living expenses.

If Mark is 30 years old today, he will have to hang onto his job until he’s 55. This is not an option for him, since his goal is to retire by 45 to become a violinist. It is this vision that points Mark in the direction of the Barista FIRE concept.

If, after retirement, Mark lands a part-time violin-teaching job that earns him $1,250, every month after tax, he will only have to withdraw $33,000 annually from his investment portfolio, assuming he maintains the same cost of living. Here’s how I arrived at this:

Since his monthly expenses amount to $4,000 and his part time job earns him $1,250 monthly, his expected monthly withdrawal drops from $4,000 to $2,750. If you multiply the amount he will earn from his part time job by 25 years, you get $375,000. Now, remove this figure from $1.2 million since he won’t need to save it in his retirement portfolio since he will make up this amount by working as a violin teacher.

This brings his new portfolio goal from $1.2 million to $825,000. You get this by removing $375,000 (or his $15,000 annual income working as a part-time violin teacher times 25) from the initial portfolio goal of $1.2 million.

As you can see, instead of targeting a $1.2 million portfolio goal, Mark will now be targeting $825,000, which he can achieve in less time. If he maintains his annual savings of $36,000 it will take him about 17 years to leave employment for good!

Also, notice that if you take Mark’s new annual withdrawal amount of $33,000 and divide by $1.2 million, his new withdrawal rate is 2.75%. To be honest, he’ll be able to achieve this while working very minimal hours a day, and while doing a job that gives him purpose. To be exact, it will take Mark 12 less years to achieve his dream of retiring early.

If you’ve been contemplating early retirement yet you still want something to keep you busy once it happens, Barista FIRE is the best strategy to use. It gives much power to part-time jobs, and helps you retire early without downgrading your lifestyle. Also, this strategy is the best way to cushion yourself from financial risks and emergencies. You will always have something to fall back to when an unforeseen large expense comes your way.

There you go! That is the best way to retire early using the Barista FIRE concept.

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