How to retire early and still be rich

If you want to retire early in the future but maintain a particular lifestyle, achieving FIRE may not be as difficult as you think…

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Many Australians are looking to retire early as the appeal of the 9 to 5 starts to wear off. The ability to be financially independent and retire early (a movement known as ‘FIRE’) is arguably greater than ever in 2020.

More education around financial independence has led to the rise of FIRE. The basic concept is to become financially secure so you can choose how you spend your time.

But many Aussies don’t want to just retire early and live the bare-bones lifestyle forever. So, is there a way that you can have the best of both worlds?

How to retire early and still be rich

You may hate your 9 to 5 but feel an obligation to keep earning more. Especially when family and other dependents are involved, it can be difficult to pull the trigger and FIRE.

However, there are also plenty of individuals who are saving and investing smartly to retire early and still be rich.

The basic mechanics of FIRE suggest taking your yearly expenses and multiplying them by 25 to get your retirement number. This is based on a long-run, inflation-adjusted investment return of approximately 4% per year.

In retirement, you can simply drawdown 4% of your portfolio for your expenses which should theoretically be covered by your 4–5% investment returns. If those long-run averages hold, you shouldn’t need to work again and can live off of your investments.

For instance, if you spend $40,000 per year and will continue to in retirement, then you would likely need a net worth of $1,000,000 to sustain this lifestyle.

That assumes your income-producing assets can provide for your lifestyle over a long-term investment horizon. However, you can retire early and still be rich simply by lifting your numbers.

If you want to live a lifestyle with $200,000 per year, the exact same maths applies. You would need to then have roughly $5,000,000 in income-producing assets for your comfortable retirement.

While that is a lot of money, a strong portfolio of ASX shares could get you there quicker than you might think. There are ASX 200 shares like Alumina Limited (ASX: AWC) which are yielding nearly 12% per year.

Similarly, shares like CSL Limited (ASX: CSL) and Afterpay Ltd (ASX: APT) have rocketed thousands of percent higher since their IPOs. 

Foolish takeaway

All it takes is a long time and a touch of luck along the way, and you might just be able to retire early and still be rich, even without the big salary.

Wondering where you should invest $1,000 right now?

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*Returns as of January 12th 2022

Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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