The difference between theory and practice – Your budget vs your actual spending

Posted on January 4, 2019 by Aussie HIFIRE

If you’re interested in FIRE then you likely have a budget or at least know that it’s a good idea to have one.  Maybe you use a spreadsheet, maybe you have an app or use the Moneysmart budget calculator, whatever works for you is fine.  Sure it’s not a necessity, but it likely makes life easier.  The trouble is that once we’ve made that budget, we’re not checking up on whether we’re sticking to it or not.

What we often find is that when we did up the budget we had a whole bunch of great ideas on cutting costs, we promised ourselves we’d limit how much we spent on clothes or eating out etc, we only looked at the expenses that immediately came to mind, and then we came up with the most optimistic scenarios we could think of. 

Which is better than nothing I suppose, but it’s not how it will actually work in the real world.  As the great Yogi Berra once said, “In theory there is no difference between theory and practice.  In practice, there is.”  So what do I do instead?

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Financial New Years Resolutions

Posted on January 1, 2019 by Aussie HIFIRE

With the new year just around the corner now is the time that most people are starting to think about their resolutions for 2019.  Almost every year there are the reliable ones like eating better, working out more etc, but as every regular gym goer can tell you the gyms are packed in January and back to usual by March.  Similarly I’d be willing to bet that restaurants have a pretty quiet January and the health food stores are killing it, and by March it’s all back to normal. 

Reading lists of new years resolutions though it seems as though there aren’t many about people’s finances.  This is probably partly because we just don’t tend to talk about our finances much, but also because it doesn’t seem to be that much of a priority for most people who just don’t feel that there is much they can do about them  So I thought it would be worthwhile to make some financial new years resolutions for myself and see how I go with keeping them, plus give some tips on how to make it more likely you’ll make the resolution stick.

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The shockingly complex math behind early retirement

Posted on December 27, 2018 by Aussie HIFIRE

Almost everyone in the FIRE movement has heard of Mr Money Mustache.  He wasn’t the first person to talk about FIRE, but he was certainly one of the people to popularise it with his blog.  Perhaps his most famous post is The Shockingly Simple Math Behind Early Retirement. 

Essentially this boiled down to assuming that returns are smooth and therefore if you know how much you are saving each year, how much you’ll need in retirement each year, and know that you’re going to get the long term returns of the stockmarket, then you can just use the 4% withdrawal rate rule and will know exactly when you’ll be able to retire and that you will never have to worry about money again! 

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How long will it take to hit FIRE?

Posted on December 17, 2018 by Aussie HIFIRE

This is one of the big questions, once we start out on this journey how long will it take to actually being able to declare financial independence and never work again?  We’ve all had a play around with spreadsheets, whether it’s our own or one of the various ones you can find on the internet.  There are varying degrees of sophistication and all sort of assumptions (or not) about taxes, rates of return, savings rate, withdrawal rates etc but once you plug in all the numbers you get a result that says you can retire in 18.274 years or whatever the figure is.

But what does the data look like historically?  I’ve talked plenty of times previously about sequencing risk (believe it or not this blog isn’t just about sequencing risk, I do occasionally talk about other stuff!) and how it affects the accumulation phase of FIRE, the withdrawal phase etc.  So how would the actual sequences of returns which we’ve seen historically affect how long it would take us to retire? 

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Can we control when we hit FIRE?

Posted on December 7, 2018 by Aussie HIFIRE

As I’ve talked about a number of times previously returns aren’t smooth and so we have to worry about sequencing risk ie a big fall in the value of our investments at the wrong time derailing our plans for FIRE.  As much as it’s nice to think that we can control our journey to FIRE, the reality is that so much of the outcome is driven by the returns of our investments. 

For the first 3 or 4 years these don’t matter so much, whatever we are putting into investments is usually far more than the effect of the returns of those investments.  After those early years though the returns on our investment can get big enough to determine if the value of those investments went up or down and it makes more of a difference as we have more money invested and get closer to hitting our numbers.  So what effect does that have on when we can retire?

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Why does everyone want to put out the FIRE?

Posted on December 3, 2018 by Aussie HIFIRE

There have been a number of articles in the mainstream media criticising the FIRE movement, some with valid points and others not so much.  I’m not sure why there has been so much attention recently, but I’ve tried to take an objective look at some of the issues raised and have a look at what’s valid and what’s not. Continue reading →

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Sequencing risk, the Trinity Study, and the 4% rule in Australia

Posted on November 21, 2018 by Aussie HIFIRE

I’ve written plenty of times previously about sequencing risk and the 4% rule aka the Trinity Study and they’re areas which the FIRE community are very much interested in.  For those who are new to the subject, the Trinity study as often used in the FIRE community basically means that each year you can safely take out 4% of the value of your investments when you retired and never run out of money.  Or to put it another way, once your investments are worth 25 times your living expenses you can declare FIRE and retire. 

The actual Trinity study only looked at this for 30 year periods rather than for the rest of your life so it wasn’t based on the situation for someone retiring in their 30s or 40s, but that often gets glossed over.  It also used US data rather than Australian so isn’t really applicable for those of us Down Under either.  I thought it would be good therefore to have a look at what the actual data says about how a 4% (and 3%) drawdown strategy would have worked historically in Australia for someone investing in Australian stocks and fixed income. Continue reading →

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FIRE Safety – FIRE Breaks

Posted on November 9, 2018 by Aussie HIFIRE

One of the major concerns for me with FIRE is the possibility of something going wrong with our plans which would affect myself and my family.  In particularly this is a concern once my wife and I have both retired because as frustrating as it might be to have to work a few years longer, it would be even worse to have to go back to work after retiring.  Even worse jobs are least likely to be available right when we’re most likely to need them.  The cause of something going wrong could be as inevitable as a stock or property market crash, less predictable like changes to legislation, or something out of the blue like an accident.  It’s impossible to get rid of all of these risks, but some of them at least can be mitigated.  And because I like clever wordplay even if I’m no good at it myself, I decided to call these risk mitigation strategies FIRE breaks! These are some of the FIRE breaks I plan on having in place. Continue reading →

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Sequencing risk on the road to FIRE – returns aren’t smooth and why it matters

Posted on October 26, 2018 by Aussie HIFIRE

Sequencing risk for those of you who haven’t heard of this enthralling topic previously is the risk that the order and timing of your investment returns is unfavourable and results in you having less money than you would if your returns were nice and smooth, ie like the ones we all use in our projections.  We tend to hear about sequencing risk mostly in the context of already being retired and drawing down money from your portfolio, but it also applies when you’re adding more money to a lump sum as you would be when you’re building up your wealth.  Which to be honest is the stage most of us are currently in and certainly the stage that I’m currently in, so it’s pretty important! Continue reading →

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What a Bear Market Feels Like

Posted on October 13, 2018 by Aussie HIFIRE

Depending on how you measure it we are right around the 10 year anniversary of the GFC which a lot of people classify as Lehman Brothers going under, although of course there are plenty of other significant events.  I had a pretty up close view of the GFC as at the time of much of it I was in London working on the equities trading floor of one of the biggest banks in the world.  Although the crisis had already been going on for quite some time at this point it had been somewhat slow moving and felt more like just a regular bear market than the huge event it turned out to be.  There isn’t actually a set definition of what a bear market is but I’m going to use a fall from peak to trough of at least 20%, which the GFC easily qualifies for.  Given that many in the FIRE community have never experienced a bear market I thought it was worth taking a look at what it felt like for me at the time.  Continue reading →

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