You’ve probably heard of financial independence (FI) before, but usually, that’s a term associated with decades of saving and investing with the promise of never having to worry about money again somewhere in your 50s or 60s if you’re lucky. Aussie Firebug shows us how we can reach Financial Independence and Retire Early (FIRE) using ETFs & LICs.
This is a guest post from Aussie Firebug. Aussie Firebug is a leading commentator on the Financial Independence Retire Early (FIRE) movement in Australia. Check out his blog here.
You’ve probably heard of financial independence (FI) before, but usually, that’s a term associated with decades of saving and investing with the promise of never having to worry about money again somewhere in your 50s or 60s if you’re lucky.
What if I told you that it is possible to retire 30+ years earlier then the traditional age of retirement in Australia (65).
Most people would naturally think that is not achievable without a big inheritance, huge risk or extreme luck.
Would you believe me if I said that it’s 100% realistically feasible for most Australians without any of the above?
Welcome to the world of FIRE!
I like to think of FIRE as a mash-up of frugality, minimalism, stoicism and personal finance.
At its core, it’s mostly a lifestyle.
It’s about identifying what’s really important to you that brings happiness and cutting out all the other consumerism BS in your life that doesn’t matter. Pair that mindset with some basic education about investing and you’ll soon discover that reaching FIRE is not as difficult as it first seemed.
The beauty is that it really comes down to math and numbers. It’s very measurable with most of the important factors well within your control.
If you can save 25 times your annual expenses, you have an extremely good chance of living off your portfolio for the rest of your life.
For example, if everything in your life comes to a bill of $40,000 for the year. You will need roughly $1,000,000 invested to reach FIRE.
Does that make you as excited as me?
Saving 25 times your annual expenses doesn’t seem so bad to escape the daily commutes, pointless meetings, and asshole bosses.
The acronym itself stands for Financial Independence Retire Early and means different things to different people.
FI can be described as:
‘Having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.’
FI basically means that you have income-producing assets that generate enough money for you to live off…forever.
Seems simple enough right?
That’s because it is! But choosing the right asset class to suit your investing style is crucial. I started off in real estate but have moved to ETFs/LICs for the following reasons:
With our current three fund portfolio, we have exposure to over 6,000 companies in over 30 different countries. Our three properties are all located within Australia (different states mind you) and while I think it’s unlikely that they would all tank at the same time there is the possibility of a recession to hit Australia. If that were the case, those properties would almost certainly drop in value. If something like that did happen, they have enough cash flow to make it through but who knows how long it might take for them to recover and ultimately gain enough value for the strategy to work. I might be waiting for decades.
The odds of the entire world tanking over a long period of time is not completely out of the realms of possibilities, but it’s a lot less likely than one country going into recession.
If we ever needed the money that was locked in the properties. It might take 6+ months to sell them and go through the whole process. With ETFs, I can put in a sell order and literally have the money in my account within 3 days. This means that selling off parts of your portfolio to fund your retirement is possible.
This is probably the biggest reason why we made the move. The path towards freedom is a lot clearer with ETFs. We know that we will need roughly $1 million in the market to generate enough returns each year to live off forever. The high cash flow/liquidity makes index investing a popular choice for FIRE chasers.
Investing in ETFs does not require lengthy loaning processes. Leverage can have its place but it’s not required.
Some may argue that real estate can be passive, and to some degree, I guess it is. But from my experiences with real estate, such jobs as collecting rent, doing paperwork, dealing with tenants, responding to emails, maintaining the properties etc. can add up to be a part-time job. You will not find a more passive income stream with the same returns as what ETFs offer. And I also love the fact that the more ETFs you have does not mean more work. More properties = more work. But you will do the same amount of paperwork come tax time on a $50K portfolio vs a $3M one.
I believe that you need to know your shit when investing in real estate. I wouldn’t be comfortable investing in a property unless I knew the ins and outs of the area like the back of my hand. Where are the jobs coming from? What’s the population growth like? What’s the unemployment rate like? And on and on I could go.
The only thing I have to work out each time I buy ETFs is what I need to buy to rebalance my portfolio. That’s it! I don’t need to keep up to date with the latest trends or what’s the hot stock right now or any of that crap.
ETFs/LICs allows us to focus on the important things in life while our investments mostly take care of themselves.
The path to FIRE is clear with ETFs and they can enable you to reach freedom sooner rather than later.
Spark that 🔥