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FIRE (Financial Independence, Retire Early) - Does it work? · The Money Puzzle

• 0:09
  Speaker 1: Hello and welcome to the Australian's Money Puzzle Podcast. I'm
• 0:12
  Speaker 1: James Kirby, the Wealth Editor at The Australian. Welcome aboard, everybody.
• 0:16
  Speaker 1: You know, occasionally I'm prompted to cover an issue, or
• 0:20
  Speaker 1: you might say, like, by public demand. And I can
• 0:24
  Speaker 1: tell you that this FIRE movement, F-I-R-E, FIRE movement, Financial
• 0:30
  Speaker 1: Independence Retire Early, that's the acronym, It's been knocking on
• 0:35
  Speaker 1: my door for some time, comes up regularly in correspondence,
• 0:39
  Speaker 1: comes up in conversation. And I find people love this idea.
• 0:44
  Speaker 1: And it's, you know, it's a subject of videos and books, documentaries.
• 0:50
  Speaker 1: For what it's worth, it all goes back to a
• 0:52
  Speaker 1: book that came out in 1992 called Your Money or
• 0:55
  Speaker 1: Your Life. I think sooner or later we might have
• 0:58
  Speaker 1: a fire advocate on the show. But first of all,
• 1:01
  Speaker 1: we're going to have a look at it and see.
• 1:04
  Speaker 1: examine it really, and to see what it is and
• 1:07
  Speaker 1: what are its pros and cons. I wanted to get
• 1:09
  Speaker 1: someone who could really talk about it. I've got the
• 1:12
  Speaker 1: ideal guest, of course. It's James Gerrard of financialadvisor.com. How
• 1:16
  Speaker 1: are you, James? I'm doing well.
• 1:18
  Speaker 2: Thanks for having me on, James.
• 1:20
  Speaker 1: I imagine you've had people come up to you on
• 1:22
  Speaker 1: this one. And I've had people, I haven't actually asked
• 1:25
  Speaker 1: you that. Have you had people come up to you
• 1:27
  Speaker 1: and talk about fire? The fire movement? Yeah, I have.
• 1:31
  Speaker 3: Yes.
• 1:31
  Speaker 2: So that's it. Can you help me achieve fire?
• 1:34
  Speaker 1: Yeah. It's interesting, isn't it? You get a concept that everyone,
• 1:38
  Speaker 1: you know, it's like everyone already knows this, but if
• 1:41
  Speaker 1: you conceptualize something. I was just thinking about this, and
• 1:44
  Speaker 1: I was thinking about this thing in Ireland called the
• 1:47
  Speaker 1: Wild Atlantic Way. And so I grew up down around there.
• 1:51
  Speaker 1: And it's this strip of coast, and there was all
• 1:54
  Speaker 1: these towns on it. And everyone, they're always nice. It's fine.
• 1:57
  Speaker 1: It's all very interesting. West coast of Ireland, everyone loves it.
• 2:00
  Speaker 1: You know, tourists love it. But... Absolutely brilliant marketing ploy.
• 2:05
  Speaker 1: Maybe a decade ago or whatever, the Irish Tourism Board
• 2:08
  Speaker 1: came up with this thing, the Wild Atlantic Way. It
• 2:10
  Speaker 1: never existed, right? No one ever heard of it. They
• 2:13
  Speaker 1: just met it up in a boardroom. And it has
• 2:16
  Speaker 1: been so successful. And you meet people and they say,
• 2:18
  Speaker 1: I want to do that, the Wild Atlantic Way. It
• 2:21
  Speaker 1: captures people's imagination. It's the same towns, it's the same roads.
• 2:25
  Speaker 1: But it just managed to get it in a way
• 2:28
  Speaker 1: that people could have this particular focused ambition. And I
• 2:32
  Speaker 1: think FIRE is very similar. Financial independence, retire early. Before
• 2:38
  Speaker 1: we kick it around, we have to explain to people
• 2:42
  Speaker 1: what it is if they don't already know. Could you
• 2:46
  Speaker 1: explain the core proposal, if you like, of what FIRE is?
• 2:53
  Speaker 3: Sure.
• 2:54
  Speaker 2: I'll try to explain it in a nutshell.
• 2:56
  Speaker 3: It's basically most people work from, you know, start working
• 3:00
  Speaker 3: between 18 to 25. They'll work 40 or 50 years.
• 3:04
  Speaker 3: They'll retire usually in their 60s, and then they'll live
• 3:08
  Speaker 3: 30 or 40 years into retirement.
• 3:11
  Speaker 2: That's what happens traditionally. Under FIRE, it's, well.
• 3:14
  Speaker 3: Let's accelerate the wealth accumulation park. Let's work for less
• 3:19
  Speaker 3: years and enjoy more years in retirement. So to do that,
• 3:23
  Speaker 3: they're basically sacrificing enjoyment today so that they can retire
• 3:28
  Speaker 3: early and enjoy themselves later. So what that means practically
• 3:32
  Speaker 3: is that they save a lot. They aim to save
• 3:36
  Speaker 3: between 50% to 70% of their incomes. They try and
• 3:39
  Speaker 3: retire between the ages of 30 and 50. And in
• 3:43
  Speaker 3: terms of how much they try and save up, they go, well,
• 3:46
  Speaker 3: I'd probably need about 25 times my annual expenditure because
• 3:51
  Speaker 3: if I assume that I'm going to make 4% return
• 3:54
  Speaker 3: on my capital, I need 25 times of my annual
• 3:58
  Speaker 3: expenditure there. So basically, save up a lot of money
• 4:01
  Speaker 3: by being frugal, by working a lot, and then retire
• 4:04
  Speaker 3: as early as you can, and then live the rest
• 4:06
  Speaker 3: of your life happy. So sounds simple in practice, but
• 4:10
  Speaker 3: in reality, less than 5% of people who embark on
• 4:14
  Speaker 3: a FIRE strategy actually achieve it.
• 4:16
  Speaker 1: Where did you get those numbers from, James Gerard?
• 4:21
  Speaker 2: The internet, right? You can trust the internet.
• 4:23
  Speaker 1: As my teacher used to say, where did you get
• 4:24
  Speaker 1: those numbers from, Kirby?
• 4:28
  Speaker 3: From various website searches and academic research papers into the
• 4:32
  Speaker 3: FIRE movement.
• 4:34
  Speaker 1: I wonder, we'll come back to that in a moment.
• 4:37
  Speaker 1: It does sound low. If it was half successful, then
• 4:43
  Speaker 1: what's wrong with that? If someone said, I aspire to
• 4:46
  Speaker 1: retire at 50 and I didn't do it until I
• 4:49
  Speaker 1: was 57... Well, you know, that's not a bad achievement.
• 4:53
  Speaker 1: Assuming you want to. One thing we have to challenge
• 4:56
  Speaker 1: here is some assumptions. We assume, folks, that the attraction
• 5:01
  Speaker 1: of the fire movement is this notion that you can
• 5:03
  Speaker 1: retire early and you want to. So we'll take that
• 5:05
  Speaker 1: as a given. And then it's about how you actually
• 5:10
  Speaker 1: construct this and what you must do. I don't want
• 5:13
  Speaker 1: to simplify it. Delayed gratification is a major part of it. Saving,
• 5:18
  Speaker 1: real saving is a major part of it. I was
• 5:21
  Speaker 1: just looking at these sort of three core principles of FIRE.
• 5:25
  Speaker 1: The FIRE number, the FIRE lifestyle, and this idea of
• 5:30
  Speaker 1: protecting your savings. And I'd like to just go through them, James,
• 5:33
  Speaker 1: with them in this segment. So they have this key
• 5:36
  Speaker 1: thing where you must figure out how much you'd need
• 5:40
  Speaker 1: as a retired person. And in a way, again, I
• 5:43
  Speaker 1: do not want to be cynical here, but in a way,
• 5:45
  Speaker 1: you don't need anything, right? That is, if you got
• 5:48
  Speaker 1: to retirement age, there's a government pension that would pay you.
• 5:51
  Speaker 1: Maybe it's about how long is a piece of string.
• 5:55
  Speaker 1: What they say to people is, if you want to
• 5:56
  Speaker 1: do this, you have to assume you need it for
• 5:58
  Speaker 1: 25 years or more, and you need to take out 4%
• 6:03
  Speaker 1: of your savings each year. These are American numbers, so
• 6:07
  Speaker 1: they're oblivious, if you like, to our social security system,
• 6:10
  Speaker 1: which would give you a core amount, assuming that you
• 6:15
  Speaker 1: qualify for it or partially qualify for it. But anyway...
• 6:17
  Speaker 1: It runs on this basis that you stack up an
• 6:19
  Speaker 1: amount of money and then you take out a certain
• 6:22
  Speaker 1: amount of that each year. Their number is 4%. This
• 6:25
  Speaker 1: is the famous FIRE number, right? So I'll just read
• 6:28
  Speaker 1: out what they have here. If you had a 1.75 million,
• 6:32
  Speaker 1: if that was your FIRE number, right, which is the
• 6:35
  Speaker 1: amount you have in super basically in our world, you'd
• 6:38
  Speaker 1: have to have it in the super system, but saved
• 6:40
  Speaker 1: up for your retirement. If you had 1.75 million was
• 6:42
  Speaker 1: your FIRE number, using their 4% guideline, this would allow
• 6:48
  Speaker 1: you to withdraw 28,000 annually. Okay, so that's what it
• 6:52
  Speaker 1: would be. Well, as I say, we'll put the pension
• 6:54
  Speaker 1: to one side, but you can probably, no doubt you'd
• 6:57
  Speaker 1: be able to supplement this with what your pension access is.
• 7:00
  Speaker 1: The point I want to make is that's a principle
• 7:02
  Speaker 1: in the system already, isn't it, James? If you were
• 7:04
  Speaker 1: a self-funded retiree, it just so happens that that is
• 7:08
  Speaker 1: what they demand by law that you take out, isn't it, 4%?
• 7:11
  Speaker 1: So is that the FIRE number? The FIRE number being what.
• 7:16
  Speaker 3: Number.
• 7:17
  Speaker 1: you save, and then what number you must have from
• 7:23
  Speaker 1: that to live per year. Is that basically the first
• 7:26
  Speaker 1: principle there, per number?
• 7:27
  Speaker 2: Yeah, that's basically it.
• 7:30
  Speaker 3: The thinking is that if you're earning 4% on your capital,
• 7:34
  Speaker 3: so if you've got a term deposit or an ETF
• 7:37
  Speaker 3: portfolio in the share market and bond and property markets,
• 7:41
  Speaker 3: you're probably going to earn about 4% income, which means
• 7:44
  Speaker 3: that Once you've saved up that capital, so if we
• 7:46
  Speaker 3: use a round number like a million dollars, you're expected
• 7:49
  Speaker 3: to get probably about $ 40, 000 per year. And if you
• 7:51
  Speaker 3: can live off that $ 40, 000 per year, you're going to
• 7:54
  Speaker 3: maintain the million dollars and you don't have to work anymore.
• 7:58
  Speaker 3: But as you've alluded to, there is the government age pension,
• 8:01
  Speaker 3: but that comes in at age 67.
• 8:02
  Speaker 2: You can access your super, but that's at age 60.
• 8:05
  Speaker 3: So for people who want to embark on a fire
• 8:07
  Speaker 3: strategy and retire in their 20s, 30s and 40s, They
• 8:11
  Speaker 3: need to have personal money outside of super so that
• 8:14
  Speaker 3: they can sustain themselves up until the point where they
• 8:17
  Speaker 3: can access their super or the government age pension. So
• 8:20
  Speaker 3: one variation of the fire strategy is called a lean fire.
• 8:24
  Speaker 3: And that's where you minimize your outgoing, do your living
• 8:27
  Speaker 3: expenses when you decide to stop working. So think about
• 8:31
  Speaker 3: moving out into the bush, going off the grid, getting
• 8:33
  Speaker 3: a few chickens, having some solar panels and minimizing your costs.
• 8:37
  Speaker 3: So you're spending money $ 10, 000, $ 15, 000 a year, which means
• 8:41
  Speaker 3: that the money that you need to save up isn't
• 8:43
  Speaker 3: as much as if you're living in Turack, Melbourne, for example. Okay.
• 8:48
  Speaker 1: Assuming that the majority of our audience have their chickens
• 8:53
  Speaker 1: in a hut in the woods somewhere, that they're probably
• 8:55
  Speaker 1: in town, we'll assume that, right? That's a safe assumption.
• 9:00
  Speaker 1: Then a point that immediately hits me is our entire
• 9:05
  Speaker 1: savings system turns on super. Super is a tax-protected vehicle,
• 9:11
  Speaker 1: and the catch is you must keep the money in
• 9:13
  Speaker 1: there till the day you retire. 60 is the earliest
• 9:16
  Speaker 1: you can get that tax-protected money out. And so, ironically,
• 9:20
  Speaker 1: the super system works against the notion of FIRE, or
• 9:23
  Speaker 1: certainly against the notion, the FIRE concept of retiring really early,
• 9:28
  Speaker 1: 40s or 50s. Is that fair to say?
• 9:30
  Speaker 2: It is fair to say, yeah.
• 9:32
  Speaker 3: You accumulate assets in your personal name, you're subject to
• 9:35
  Speaker 3: capital gains tax, you generate that income from the dividends,
• 9:39
  Speaker 3: the interest, the distributions on the investments. Again, you're taxed
• 9:42
  Speaker 3: on that as well. So it is harder to retire
• 9:47
  Speaker 3: before the normal retirement age just due to your money
• 9:50
  Speaker 3: being in your personal name and being taxed at our
• 9:52
  Speaker 3: marginal tax rates, which can be up to 47%.
• 9:55
  Speaker 1: Yes, exactly. So that's what I'm saying. Ironically, folks, the
• 9:59
  Speaker 1: tax system actually wants you to keep working longer than
• 10:02
  Speaker 1: the FIRE concept suggests. But okay, let's take the second
• 10:06
  Speaker 1: thing now on FIRE. There's three big principles, right? One
• 10:09
  Speaker 1: was to calculate your FIRE number. Another one was commit
• 10:12
  Speaker 1: to the lifestyle, the FIRE lifestyle. And the third one
• 10:15
  Speaker 1: was to grow and protect your savings. Now, this is
• 10:17
  Speaker 1: where I do get cynical, okay? So there's this idea
• 10:19
  Speaker 1: of spending little, as little as you can, saving as
• 10:22
  Speaker 1: much as you can. Fine, fine by me. But then
• 10:24
  Speaker 1: there's like, they have these sort of like sub notions.
• 10:28
  Speaker 1: They have fire movement approaches in two ways, coast and barista, right? Coast,
• 10:33
  Speaker 1: save and invest much of their money decades before retirement.
• 10:38
  Speaker 1: And then when they hit their fire number, they can
• 10:40
  Speaker 1: coast through retirement because they've fired enough, because they've saved enough.
• 10:44
  Speaker 1: The second type is the barista. This refers to having
• 10:47
  Speaker 1: a low stress part-time job with flexible hours. And the
• 10:50
  Speaker 1: barista fire advocate typically set a lower retirement fund target
• 10:54
  Speaker 1: for themselves and choose to work part-time jobs to supplement
• 10:57
  Speaker 1: their income once they hit retirement. Come on. Part-time barista,
• 11:02
  Speaker 1: I think it's a tough job. That's a hard job
• 11:05
  Speaker 1: standing there making coffees for people and being socially gregarious.
• 11:09
  Speaker 1: But what I'm saying is, It's harder than that line suggests.
• 11:13
  Speaker 1: To me, that's not on. I don't think you could
• 11:15
  Speaker 1: be a part-time barista and finance anything close to a
• 11:20
  Speaker 1: comfortable retirement. I'm undercutting it here, but I have to.
• 11:23
  Speaker 1: I feel a responsibility to tell people it's not that easy.
• 11:26
  Speaker 1: What do you think about that as a qualified advisor?
• 11:29
  Speaker 2: I agree. Yeah.
• 11:30
  Speaker 3: So the barista fire is like, save really hard and
• 11:33
  Speaker 3: then stop working full-time and then work part-time and be
• 11:36
  Speaker 3: a barista or something like that to cover part of
• 11:40
  Speaker 3: your costs. So you partly live off your savings, partly
• 11:42
  Speaker 3: still work part-time. But as you say, that might not
• 11:45
  Speaker 3: be easy. It may be stressful and you may have
• 11:48
  Speaker 3: been better just to stay working part-time and pace yourself
• 11:52
  Speaker 3: out a little bit more. Now, with regards to the
• 11:54
  Speaker 3: fire lifestyle in general, I've gone through the depths of
• 11:57
  Speaker 3: the internet, looking at different forums on fire so that
• 12:01
  Speaker 3: your listeners don't have to. And I've actually found a
• 12:03
  Speaker 3: few different examples of what people have actually done, extreme
• 12:07
  Speaker 3: fire measures with regards to their lifestyle. So if you like,
• 12:10
  Speaker 3: I'll read out some of them that I had noted. Okay.
• 12:13
  Speaker 3: So some people, they live with their parents into their
• 12:15
  Speaker 3: forties because they don't want to pay rent. They don't
• 12:18
  Speaker 3: want to have a mortgage. Some of them were living
• 12:20
  Speaker 3: in vans, some bought tiny homes. I saw another person
• 12:24
  Speaker 3: who posted that they don't have friends as part of
• 12:27
  Speaker 3: their fire strategy because.
• 12:29
  Speaker 2: Friends are expensive.
• 12:30
  Speaker 3: If you don't have friends, you don't have to buy
• 12:31
  Speaker 3: anyone birthday gifts, no wedding gifts, you don't have to
• 12:33
  Speaker 3: go out for drinks.
• 12:34
  Speaker 2: Makes sense, right?
• 12:36
  Speaker 1: These are extreme examples, but logically can't knock them, yeah.
• 12:40
  Speaker 3: Another one was, and this is a little bit more contentious,
• 12:42
  Speaker 3: don't have children because we know how expensive children are.
• 12:45
  Speaker 3: And then there's more practical ones, don't have a car, walk,
• 12:49
  Speaker 3: use a bike, public transport. And then there was a
• 12:51
  Speaker 3: whole section on food, a whole sub-fire category on food.
• 12:55
  Speaker 3: So people just living off rice and eggs and pasta,
• 12:58
  Speaker 3: the low-cost staples and all the different recipes they could
• 13:00
  Speaker 3: make on that.
• 13:01
  Speaker 1: Is it all about saving, James? Is it all about saving?
• 13:04
  Speaker 1: Is there no emphasis on building your income?
• 13:07
  Speaker 3: Well, there's two parts to it. There's the what you
• 13:10
  Speaker 3: can control and you can really control what you spend.
• 13:13
  Speaker 3: So a lot of people spend a lot of effort
• 13:15
  Speaker 3: on the fire movement on reducing their expenditure so that
• 13:18
  Speaker 3: they can save 60, 70, sometimes 80% of their income.
• 13:22
  Speaker 3: And then the other part is generating your income, which
• 13:26
  Speaker 3: it was interesting that it's a very much a economic decision,
• 13:29
  Speaker 3: a cost benefit analysis when it comes to almost everything
• 13:32
  Speaker 3: with fire. So for example, when it comes to your
• 13:35
  Speaker 3: job and your income, the decision around do you go
• 13:38
  Speaker 3: to university if you're pursuing the FIRE strategy really comes
• 13:40
  Speaker 3: down to how many years is it going to take
• 13:43
  Speaker 3: you to get your university degree? How many years are
• 13:45
  Speaker 3: you not earning income that you could have been earning
• 13:48
  Speaker 3: while you're studying? What's the cost of that degree? But
• 13:50
  Speaker 3: on the other side of the equation, how much extra
• 13:53
  Speaker 3: income per hour are you going to make if you
• 13:54
  Speaker 3: do have that degree qualification? So everything is very thought
• 13:58
  Speaker 3: out with the FIRE strategy. And then the last part,
• 14:00
  Speaker 3: which we'll come to, is the investing part. So there
• 14:02
  Speaker 3: is some focus on that as well. But I did
• 14:05
  Speaker 3: see a lot of emphasis around ways to cut down
• 14:08
  Speaker 3: on spending so you can save more.
• 14:09
  Speaker 1: Okay, I suppose that is reasonable. And there are certain
• 14:14
  Speaker 1: things to be greatly admired in this FIRE strategy. Not
• 14:17
  Speaker 1: everyone can increase their income, particularly people on salary arrangements,
• 14:22
  Speaker 1: but you can always save. That is a lever we
• 14:26
  Speaker 1: can all pull. We can all save more. Every single
• 14:27
  Speaker 1: person listening to this show, including me and you, James,
• 14:29
  Speaker 1: we could save more. I could not have lunch downstairs today,
• 14:33
  Speaker 1: or I could have a smaller one. And I would say,
• 14:35
  Speaker 1: so we all have that power. We'll be back in
• 14:38
  Speaker 1: a moment. It is very interesting. It really is the
• 14:41
  Speaker 1: FIRE concept. And we're going to take a look at
• 14:44
  Speaker 1: the most important part, I would think, from our listeners'
• 14:47
  Speaker 1: point of view, which is this aspect of growing your
• 14:49
  Speaker 1: income and protecting your income, which they put up very
• 14:53
  Speaker 1: high as a priority. Back in a moment. Hello and
• 15:06
  Speaker 1: welcome back to the Australian's Money Puzzle podcast. I'm James Kirby,
• 15:09
  Speaker 1: wealth editor at The Australian, and I'm talking to regular
• 15:12
  Speaker 1: guest of the show and contributor to the wealth section,
• 15:15
  Speaker 1: James Girard, who will also be hosting some shows, folks,
• 15:19
  Speaker 1: with Stuart Weems in September when I am taking a holiday.
• 15:24
  Speaker 1: Are you allowed to take a holiday? I bet you're
• 15:26
  Speaker 1: not allowed to take a holiday at all on the
• 15:27
  Speaker 1: fire movement. Just plough away week after week, half starved. See,
• 15:33
  Speaker 1: I have to stop myself. I have to stop myself
• 15:35
  Speaker 1: undercutting this. It's not fair.
• 15:37
  Speaker 3: Okay.
• 15:40
  Speaker 1: And it depends. But as I say, I completely like,
• 15:44
  Speaker 1: I completely admire concepts within this. All I'm actually skeptical about, James,
• 15:53
  Speaker 1: is that they mislead people into thinking that you could
• 15:58
  Speaker 1: retire soon. that it's easier, that you might make a
• 16:01
  Speaker 1: terrible mistake and assume that it is easier to do so.
• 16:06
  Speaker 1: I have often been asked, you know, well, why are
• 16:08
  Speaker 1: you still working? You don't have to keep working, do you?
• 16:11
  Speaker 1: And it's true. I don't have to. Maybe you don't
• 16:14
  Speaker 1: have to, James. Certainly I don't have to. My family
• 16:17
  Speaker 1: are older than yours. But it's a question of the
• 16:21
  Speaker 1: lifestyle I want. I could stop tomorrow, but I couldn't
• 16:25
  Speaker 1: live the way I live now tomorrow. if I was
• 16:27
  Speaker 1: to be realistic about it. And you can apply that
• 16:30
  Speaker 1: to anyone's life, I think, in terms of what's the
• 16:32
  Speaker 1: reality of this retire early. Assuming you want to, right?
• 16:36
  Speaker 1: I don't even want to, but I'm assuming that people
• 16:38
  Speaker 1: want to. Okay, now, getting down to brass tacks here
• 16:42
  Speaker 1: about what I think is a very important part of it,
• 16:45
  Speaker 1: is they talk about how to build income. They begin
• 16:48
  Speaker 1: to passive income. Again, a part of me is going
• 16:51
  Speaker 1: to say, passive income, yeah, but it's never going to
• 16:54
  Speaker 1: have the returns of active income. It certainly doesn't offer
• 16:58
  Speaker 1: the same possibilities. It offers the same return as the market,
• 17:02
  Speaker 1: but it doesn't offer to beat the market, which you
• 17:05
  Speaker 1: can do if you're active. We'll put that to one
• 17:07
  Speaker 1: side for a moment. So, James, before we talk about
• 17:10
  Speaker 1: how they talk about making money, they've got a really
• 17:13
  Speaker 1: big emphasis on protecting yourself, enforcing circumstances, building up three
• 17:19
  Speaker 1: to six months' worth of savings. Gee, honestly, that's a
• 17:22
  Speaker 1: very slow way to start building money rainy day funds
• 17:26
  Speaker 1: and ensuring everything you can think of. What do you
• 17:28
  Speaker 1: think of that central concept?
• 17:33
  Speaker 2: Yeah, it makes sense. It's prudent.
• 17:36
  Speaker 3: It's good to have that cash buffer there for unforeseen circumstances.
• 17:40
  Speaker 3: It is very sensible for a large part what the
• 17:43
  Speaker 3: FIRE philosophy is. It's really just being more frugal in
• 17:48
  Speaker 3: these earlier years and then enjoying yourself later. So even
• 17:51
  Speaker 3: though I said earlier that only 5% of people are
• 17:53
  Speaker 3: successful in achieving that, the majority of people do get
• 17:58
  Speaker 3: closer to their financial goals because they have saved more,
• 18:01
  Speaker 3: they have worked harder, they have invested better, they have
• 18:04
  Speaker 3: implemented good, solid financial foundations like having a cash reserve.
• 18:09
  Speaker 3: So overall, it's a good thing, but it's really that
• 18:13
  Speaker 3: degree of how far do you push it? Do you
• 18:15
  Speaker 3: not have friends, you know, dive into dumpsters and get
• 18:18
  Speaker 3: out expired food so you don't have to buy a
• 18:20
  Speaker 3: loaf of bread, a at the local shops.
• 18:22
  Speaker 1: Yeah, there's a point at which being frugal becomes being mean,
• 18:25
  Speaker 1: or miserly, for want of a better word. And miserly
• 18:28
  Speaker 1: has connotations, all sorts of connotations, and rarely linked with happiness,
• 18:33
  Speaker 1: which is something you can't really measure. Maybe you do
• 18:38
  Speaker 1: it and you retire at 50 and you look back
• 18:39
  Speaker 1: and you say, gosh, you know, I can't really go
• 18:42
  Speaker 1: to nightclubs now till four in the morning. And I
• 18:45
  Speaker 1: could have in those days or, you know, I could
• 18:47
  Speaker 1: have sailed around the world or I could have, whatever,
• 18:50
  Speaker 1: played soccer at a high level or whatever. But I
• 18:52
  Speaker 1: didn't because I didn't want to buy expensive boots, whatever.
• 18:54
  Speaker 1: I'm just, again, playing devil's advocate here. OK, so they're
• 18:57
  Speaker 1: big into insurance. And I am not that I'm not
• 19:00
  Speaker 1: big into insurance. I think you should insure yourself. But, whoa,
• 19:04
  Speaker 1: I would be extremely careful in spending a penny more
• 19:07
  Speaker 1: than you actually need to from an actuarial point of view.
• 19:10
  Speaker 1: Passive income, they think that this is the big secret.
• 19:13
  Speaker 1: I don't think it's a secret, but maybe it is
• 19:15
  Speaker 1: a secret to many people. They still don't realize what
• 19:17
  Speaker 1: ETFs are and index funds. What do you think of
• 19:22
  Speaker 1: this building passive income concept for the average person in
• 19:27
  Speaker 1: the average situation who doesn't have much money and only
• 19:30
  Speaker 1: has a very limited amount to apply to wealth building?
• 19:34
  Speaker 3: So building the passive income under the FIRE strategy isn't
• 19:38
  Speaker 3: really any different to how most people build their wealth.
• 19:41
  Speaker 3: They have a bit of cash as a buffer. They
• 19:44
  Speaker 3: start to have surplus every month that they identify. They
• 19:48
  Speaker 3: put that aside and then they invest the into something,
• 19:51
  Speaker 3: whether that's to save a deposit and then purchase an
• 19:53
  Speaker 3: investment property or a home and pay down the mortgage
• 19:56
  Speaker 3: or whether that's into an ETF portfolio.
• 19:59
  Speaker 2: The goal is to grow the asset.
• 20:01
  Speaker 3: So what I observed is that The FIRE strategy is
• 20:04
  Speaker 3: to have more growth-based assets in those earlier years to
• 20:08
  Speaker 3: try and get nearly double-digit returns.
• 20:11
  Speaker 1: Okay, interesting.
• 20:12
  Speaker 3: Okay.
• 20:12
  Speaker 1: And then they have, I think, the third prong of
• 20:14
  Speaker 1: this is to basically work more, side gigs, side hustles, again,
• 20:18
  Speaker 1: which I would completely agree with, and I think which
• 20:21
  Speaker 1: probably all of us did at various times in our lives.
• 20:23
  Speaker 1: When you're in that early accumulation phase and you just
• 20:26
  Speaker 1: have to get going, that would seem to make perfect
• 20:30
  Speaker 1: sense towards financial independence. So having had a look at
• 20:34
  Speaker 1: it all, James, and I've had a good look at
• 20:36
  Speaker 1: it all, but I haven't met anyone who's a disciple
• 20:39
  Speaker 1: as such. Maybe we have some listening to the show.
• 20:41
  Speaker 1: I'm really keen to hear from you folks if you
• 20:44
  Speaker 1: have tried it or you've experimented with it or you've
• 20:47
  Speaker 1: met people who live by it. Having taken the deep dive, James,
• 20:51
  Speaker 1: if I came to you in earnest and said, I'm
• 20:56
  Speaker 1: applying myself to the fire, concept. I love it. It's
• 20:59
  Speaker 1: going to change my life so far. And I'm really
• 21:02
  Speaker 1: starting to save. What would you say a broad advice
• 21:05
  Speaker 1: to someone like that? What would your instinct be to
• 21:08
  Speaker 1: tell them?
• 21:09
  Speaker 3: It's really just having balance in your life. What makes
• 21:13
  Speaker 3: you happy? You know, I'll sound a little bit philosophical here.
• 21:17
  Speaker 3: But you know, any of us can drop dead tomorrow.
• 21:19
  Speaker 3: And if you've spent your 20s and your 30s being
• 21:22
  Speaker 3: frugal and almost miserly, and then you pass away unexpectedly,
• 21:26
  Speaker 3: what has your life been? You've been working towards this
• 21:29
  Speaker 3: future that you haven't had. So there's nothing to say
• 21:31
  Speaker 3: about enjoying every day as much as you can. But
• 21:34
  Speaker 3: then on the other hand, there's the, you need to
• 21:36
  Speaker 3: think about the future as well. So if people are
• 21:38
  Speaker 3: comfortable with their lifestyle while pursuing a fire strategy, so
• 21:42
  Speaker 3: if they're comfortable to work, do extra side gigs, do
• 21:46
  Speaker 3: lots of hours, save more than the average person, be
• 21:49
  Speaker 3: a little bit more aggressive than the average person in
• 21:51
  Speaker 3: their investing activities, and they're comfortable with that, Fantastic. You're
• 21:54
  Speaker 3: probably going to retire earlier than most people and have
• 21:57
  Speaker 3: more passive income than the average person would in retirement.
• 22:00
  Speaker 3: But if you're finding you're not enjoying it and it's
• 22:02
  Speaker 3: really grinding on your lifestyle, well, then it's not for you.
• 22:07
  Speaker 1: Very good. It's really interesting, isn't it? Look, hats off
• 22:10
  Speaker 1: to whoever came up with the concept. People love the concept.
• 22:13
  Speaker 1: I like the F, I like the FI part, financial independence.
• 22:17
  Speaker 1: I reckon that's great. Retire early, that's your call. I
• 22:20
  Speaker 1: imagine it does instill, for people who have never really
• 22:23
  Speaker 1: thought about it or reviewed their own situation, I think
• 22:26
  Speaker 1: it's got a lot going for it. I would just
• 22:28
  Speaker 1: be careful, as James says, about overdoing it. Because you
• 22:33
  Speaker 1: only live once, or you're certainly only 20 or 30 once.
• 22:38
  Speaker 1: And you don't get those years back, as everyone will
• 22:40
  Speaker 1: tell you when they're older. All right, we'll take a
• 22:42
  Speaker 1: short break. We have some great questions back in a moment.
• 22:53
  Speaker 1: Hello and welcome back to the Australian's Money Puzzle podcast.
• 22:56
  Speaker 1: James Kirby here with James Gerrard from financialadvisor.com. One thing
• 23:00
  Speaker 1: we should have covered there because Tuesday is very much
• 23:03
  Speaker 1: an emphasis on property. I don't see much in the
• 23:06
  Speaker 1: way of property investment mentioned in that fire coverage. A
• 23:08
  Speaker 1: lot of it is the US, of course, and property
• 23:11
  Speaker 1: is so much more central to our wealth building than theirs,
• 23:14
  Speaker 1: particularly residential property. Did you come across anything on property
• 23:19
  Speaker 1: as such as an asset?
• 23:22
  Speaker 2: I did.
• 23:23
  Speaker 3: The people were very rational when they spoke about it.
• 23:25
  Speaker 3: It was basically what works out better. And when I
• 23:29
  Speaker 3: say better, what means that they can retire sooner under
• 23:31
  Speaker 3: the FIRE movement. So if they can buy a property
• 23:34
  Speaker 3: in a cheap location, pay off that mortgage over a
• 23:37
  Speaker 3: 10-year period, fantastic.
• 23:38
  Speaker 2: They're not having to pay rent. Whereas others have figured that, okay.
• 23:42
  Speaker 3: I'm happy to build a tiny home for $ 50, 000 and
• 23:46
  Speaker 3: plonk that somewhere in a friend's backyard. And that's fine.
• 23:49
  Speaker 3: That means that I can retire early. I don't need
• 23:51
  Speaker 3: to buy the land and have a proper house. So
• 23:54
  Speaker 3: it really came down to how much they were willing
• 23:56
  Speaker 3: to compromise where they wanted to live as to deciding
• 23:59
  Speaker 3: between buying a property and then, or otherwise just renting
• 24:02
  Speaker 3: under the FIRE movement. And maybe just one other thing,
• 24:04
  Speaker 3: which I wanted to mention about the FIRE movement is
• 24:07
  Speaker 3: that I actually have a client who pursued it. He
• 24:09
  Speaker 3: worked really hard in his 20s and 30s and he
• 24:12
  Speaker 3: retired in his early 40s. And he said to me
• 24:15
  Speaker 3: the other day that Look, it's great on paper to
• 24:18
  Speaker 3: retire in your 40s. But the thing is that your
• 24:21
  Speaker 3: friends aren't retired. They're working Monday to Friday. So, you know,
• 24:25
  Speaker 3: I can go play golf every day, but I've got
• 24:27
  Speaker 3: no one to go play golf with. I can go
• 24:28
  Speaker 3: to lunch every day. I've got no one to go
• 24:30
  Speaker 3: to lunch with. Everyone else is busy.
• 24:31
  Speaker 1: He can live in Sydney, right? And he's retired and
• 24:35
  Speaker 1: he's in his 40s.
• 24:36
  Speaker 3: Yeah, that's right.
• 24:37
  Speaker 2: Yeah.
• 24:37
  Speaker 1: What does he do then?
• 24:39
  Speaker 2: He's a doctor. So, he worked.
• 24:41
  Speaker 3: tirelessly but not just as a gp he started to
• 24:44
  Speaker 3: buy and grow medical practices so he built up a
• 24:47
  Speaker 3: very good empire of businesses there and has been able
• 24:50
  Speaker 3: to retire in his.
• 24:51
  Speaker 1: 40s interesting interesting yeah my dad retired when he was
• 24:54
  Speaker 1: 60 which was early at the time or at least
• 24:56
  Speaker 1: it wasn't common at the time and he absolutely loved
• 25:01
  Speaker 1: it and he took to it straight away and like
• 25:04
  Speaker 1: literally was a model of how to retire he had
• 25:07
  Speaker 1: a lot of interest outside of work and he found
• 25:09
  Speaker 1: work Very hard in the end because he was in building,
• 25:13
  Speaker 1: which is a tough game, as anyone knows. Okay, now
• 25:16
  Speaker 1: some questions. We'll only get through a few. James, I
• 25:19
  Speaker 1: might just zoom in on one or two. I really
• 25:22
  Speaker 1: want to get covered. Sally says, I found your interview
• 25:24
  Speaker 1: with Eliza Owen of CoreLogic interesting, but I disagree with
• 25:27
  Speaker 1: her conclusion of oversupply in Victoria based on the number
• 25:31
  Speaker 1: of supply oversold. The supply problem is a chronic problem.
• 25:35
  Speaker 1: I'm very surprised that all of a sudden we have
• 25:37
  Speaker 1: oversupply problem based on auction rates. Okay, Sally, well, Eliza
• 25:42
  Speaker 1: was fairly convincing on that. I think there's a couple
• 25:44
  Speaker 1: of things there. Melbourne is in relative oversupply, and the
• 25:49
  Speaker 1: other states are undersupplied. Melbourne had 100,000 more houses built
• 25:54
  Speaker 1: than Sydney, for instance, which is a larger city. So
• 25:58
  Speaker 1: to that extent, it is the state with relative oversupply.
• 26:02
  Speaker 1: We probably could examine that harder and have a long
• 26:05
  Speaker 1: debate about it, but that, I think, would hopefully cover
• 26:08
  Speaker 1: the bases there. Carl asks, very simple question, C-A-R-L, Carl.
• 26:14
  Speaker 1: Are you generally better off borrowing a million to negatively
• 26:17
  Speaker 1: gear an investment property or salary sacrificing? Salary sacrificing into super,
• 26:24
  Speaker 1: I presume he means, James. What do you reckon?
• 26:28
  Speaker 3: Yeah, salary sacrificing into super, you get a tax break.
• 26:32
  Speaker 3: So rather than pay tax at your marginal tax rate
• 26:34
  Speaker 3: of up to 47%, the money that goes into super
• 26:37
  Speaker 3: gets taxed at 15%, or if you earn more than $ 250, 000,
• 26:40
  Speaker 3: it gets taxed at 30%. So there's this benefit, this
• 26:45
  Speaker 3: tax benefit of putting money into super.
• 26:47
  Speaker 2: So that's great.
• 26:49
  Speaker 3: The downside is that you have to wait until you're
• 26:51
  Speaker 3: 60 and retired to access that money. The alternative, which
• 26:54
  Speaker 3: Carl mentioned, is borrowing a million dollars and negatively gearing that,
• 26:58
  Speaker 3: so buying an investment property.
• 27:00
  Speaker 2: Fine, but.
• 27:02
  Speaker 3: The risk there is that your gain or loss is
• 27:04
  Speaker 3: magnified because you've borrowed a heap of money. You've put
• 27:07
  Speaker 3: in minimal of your own capital there. And so there's a.
• 27:10
  Speaker 2: Really big risk that if you get it wrong, you
• 27:12
  Speaker 2: really get it wrong.
• 27:13
  Speaker 3: And it's ruined some people financially where they've borrowed a lot,
• 27:17
  Speaker 3: bought property, and it hasn't gone to plan. So we
• 27:20
  Speaker 3: think about mining towns in Western Australia or Queensland in
• 27:23
  Speaker 3: the past where they want to ride the wave. The
• 27:26
  Speaker 3: market's been going up. They buy, unfortunately, at the top
• 27:28
  Speaker 3: of the market, and then they see the property drop
• 27:30
  Speaker 3: by 50% in the few years that follows. They're left
• 27:33
  Speaker 3: with debt that they need to pay off over a
• 27:35
  Speaker 3: 20-year period, and they've had to sell the property.
• 27:38
  Speaker 1: So, Carl, history would suggest you could be better off.
• 27:43
  Speaker 1: What you're really asking is, if I gear up on property,
• 27:47
  Speaker 1: will I do better than ungeared, diversified investments in superannuation?
• 27:51
  Speaker 1: And no one can really tell you that. To be fair,
• 27:53
  Speaker 1: you should gear your superannuation to gear against, to match
• 27:57
  Speaker 1: dollar for dollar the geared dollars in property. But I
• 28:00
  Speaker 1: think the essential point which James is making, and by
• 28:02
  Speaker 1: the way, this is never advice, it's information only, is
• 28:06
  Speaker 1: that you've all your eggs in one basket. It's not complicated.
• 28:08
  Speaker 1: You've all your eggs in one basket, Australian residential property.
• 28:11
  Speaker 1: And there's nothing to say that Australian residential property will
• 28:14
  Speaker 1: be a knockout investment forever. It's been pretty good for
• 28:18
  Speaker 1: a long time. and will probably continue to be, but
• 28:21
  Speaker 1: you will go against the basic core principles of diversification,
• 28:25
  Speaker 1: which we all sincerely believe in around here at The
• 28:27
  Speaker 1: Money Puzzle. Okay, final question. If I can, James, sorry
• 28:32
  Speaker 1: to bounce through this, but it's interesting. I'm going to
• 28:35
  Speaker 1: read out what the reader, Kate, says, and then I'm
• 28:38
  Speaker 1: going to read out the response from a previous guest,
• 28:41
  Speaker 1: because previous guests have the right of reply, just like
• 28:43
  Speaker 1: you have, James. Should anyone come marching in on what
• 28:45
  Speaker 1: you said today? So fire people might. Okay. Kate says,
• 28:49
  Speaker 1: I enjoy listening to the podcast here in New Zealand.
• 28:53
  Speaker 1: I was listening to some back episodes and I listened
• 28:55
  Speaker 1: to why rental growth is going to weaken. This was
• 28:58
  Speaker 1: from April. It was Nerida Conisby from Ray White. She says,
• 29:04
  Speaker 1: Kate says from New Zealand, I was interested to hear
• 29:07
  Speaker 1: Nerida's comment on New Zealand rental market and the anecdote
• 29:10
  Speaker 1: provided that was the opposite of what the data shows.
• 29:13
  Speaker 1: She said the changes made by the government here in
• 29:16
  Speaker 1: stopping negative gearing has seen landlords leave the market. This
• 29:20
  Speaker 1: was what was expected to happen, but data says differently.
• 29:25
  Speaker 1: In New Zealand, it is the law that bonds collected
• 29:29
  Speaker 1: are lodged with tenancy services, a government agency, and they
• 29:33
  Speaker 1: also report on bond data. This is the best record
• 29:36
  Speaker 1: of tenancies in the country, and it shows in June
• 29:39
  Speaker 1: 2020 2021, before the law changed, the number of bonds
• 29:42
  Speaker 1: lodged were 385,000. A year later, it was 388,000. That
• 29:47
  Speaker 1: is the opposite of landlords leaving the market. So Kate
• 29:52
  Speaker 1: is making the point, hey, if you remove negative gearing,
• 29:56
  Speaker 1: it doesn't hit the market. As badly as many say. Nerida,
• 30:01
  Speaker 1: I had to go back, obviously, to Nerida and say,
• 30:04
  Speaker 1: this is what Kate has said. I've sent her your correspondence, Kate.
• 30:08
  Speaker 1: And Nerida says, OK, she says, it's interesting. I double
• 30:12
  Speaker 1: checked what Kate is saying is correct about rental bonds. However,
• 30:17
  Speaker 1: investor lending has plummeted, basically cut in half. So investors
• 30:24
  Speaker 1: are certainly not entering the market in New Zealand like
• 30:27
  Speaker 1: they were. It's also extremely challenging to sell a house
• 30:30
  Speaker 1: in New Zealand at the moment with interest rates so high.
• 30:34
  Speaker 1: On rental demand, New Zealand's extremely low population growth in
• 30:39
  Speaker 1: 2021 and 2022. As a result, there is no additional
• 30:41
  Speaker 1: demand for rental accommodation. The main challenge right now is
• 30:44
  Speaker 1: that it is the least affordable country in the world
• 30:47
  Speaker 1: to be a renter. So, I never doesn't deny what
• 30:51
  Speaker 1: you've said, Kate. She challenges your interpretation of the data.
• 30:57
  Speaker 1: And we will leave that amazing question hanging out there.
• 31:00
  Speaker 1: If we scrap negative gearing, would it make the market
• 31:04
  Speaker 1: better or worse for investors? Many say it would. Neruda
• 31:08
  Speaker 1: implies that. And Kate implies that the experience in New
• 31:12
  Speaker 1: Zealand hasn't suggested that using the one criteria. being the
• 31:17
  Speaker 1: registration of bonds in the market. Interesting, though, we'll never know.
• 31:22
  Speaker 1: Paul Keating tried it. He only lasted about a year
• 31:25
  Speaker 1: and a half, and then he backtracked and put it
• 31:28
  Speaker 1: back in. And Paul Keating didn't backtrack on much. And
• 31:32
  Speaker 1: I don't think anyone, we always say we don't know
• 31:34
  Speaker 1: if anybody will go near it here, but perhaps somebody
• 31:36
  Speaker 1: will be clever enough to find a way to look
• 31:38
  Speaker 1: at all tax reform without having themselves voted out of office.
• 31:42
  Speaker 1: That remains to be seen. James Girard, financialadvisor.com. and regular contributor,
• 31:48
  Speaker 1: weekly contributor to the Australian Wealth Collection. Lovely to have
• 31:51
  Speaker 1: you on again.
• 31:52
  Speaker 2: Thank you.
• 31:52
  Speaker 3: My pleasure as always.
• 31:54
  Speaker 1: Great to talk to you. Great to have the questions
• 31:57
  Speaker 1: rolling in, everybody. Do mention us to someone you know.
• 32:01
  Speaker 1: Mention the show. It would be lovely if you did that.
• 32:02
  Speaker 1: I really appreciate that. The email is themoneypuzzle at theaustralian.com.au.
• 32:09
  Speaker 1: And the producer today was Leah Simango. Hope you soon.
• 32:14
  Speaker 3: Thank you.