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FIRE- Finding your magic number for financial independence · The Money Puzzle

• 0:10
  Speaker 1: Hello and welcome to the Australian's Money Puzzle Podcast. I'm
• 0:13
  Speaker 1: James Kirby. Welcome aboard to a special show. One of
• 0:17
  Speaker 1: the most popular podcasts we did last year was on
• 0:20
  Speaker 1: the FIRE movement. That is, if you recall, FIRE, Financial
• 0:25
  Speaker 1: Independence Retire Early movement. It caught the imagination of many
• 0:29
  Speaker 1: listeners and the guests on the show. Lionel Lee sparked
• 0:33
  Speaker 1: quite a conversation, I will say, among listeners. Now, since
• 0:36
  Speaker 1: I spoke last to Lionel, the fire movement has launched
• 0:40
  Speaker 1: what you might call a spinoff, getting a lot of attention,
• 0:42
  Speaker 1: a lot of attention across social media, across media generally.
• 0:47
  Speaker 1: It's called COAST, C-O-A-S-T, or To Some Coast Fire. Now,
• 0:51
  Speaker 1: COAST simply means the dollar amount which you can coast
• 0:57
  Speaker 1: on when you've saved it to fund a full retirement.
• 1:01
  Speaker 1: It means you get to this number and you don't
• 1:03
  Speaker 1: have to contribute any more because you're already there. How
• 1:06
  Speaker 1: are you, Lionel?
• 1:07
  Speaker 2: I'm good. Thanks for having me on the show, James.
• 1:09
  Speaker 1: How are you?
• 1:10
  Speaker 2: Good, good.
• 1:11
  Speaker 1: Have a bit of fun later when I read out
• 1:13
  Speaker 1: some of the responses we got to your last time
• 1:18
  Speaker 1: on the show. It was something that definitely caught people's imagination.
• 1:21
  Speaker 1: So lovely to get you back on. And I just
• 1:23
  Speaker 1: want to explain to listeners, Folks, if you heard the
• 1:27
  Speaker 1: first FIRE show, it doesn't really matter whether you did
• 1:29
  Speaker 1: or did not because we'll cover it today. But specifically,
• 1:32
  Speaker 1: this idea of the cost is about this magic number, right?
• 1:34
  Speaker 1: So I just want to give you an example. Let's
• 1:37
  Speaker 1: say you want 1.8 million by the time you're retired, okay?
• 1:41
  Speaker 1: Which is more or less what they're saying you need
• 1:43
  Speaker 1: for a company, comfortable retirement. And let's assume that you're 35, okay?
• 1:46
  Speaker 1: There's something close to the show average age. And I'll
• 1:50
  Speaker 1: assume a return of 7%. Okay, 7% is entirely reasonable.
• 1:54
  Speaker 1: That's the long-term average of super over the last, oh,
• 1:57
  Speaker 1: long time, 50 years or so. Then working backwards, the
• 2:01
  Speaker 1: number you need at 35 in super is $ 239, 600. Sounds
• 2:08
  Speaker 1: like a lot, but the attraction basically is this idea
• 2:13
  Speaker 1: that you can get to a number, which is a
• 2:17
  Speaker 1: sort of, as I say, an enhancement of the whole
• 2:19
  Speaker 1: FIRE idea. And once you get there, You you are
• 2:23
  Speaker 1: you're done and dusted. Obviously, our own local system has
• 2:27
  Speaker 1: the SGC in there. Twelve percent of your salary goes
• 2:29
  Speaker 1: into retirement. So you've got to work that in. But
• 2:32
  Speaker 1: just to to capture it and to tell you how
• 2:35
  Speaker 1: influential this idea has been, the Google search on this
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  Speaker 1: topic is up 50 percent in 12 months around the world. Lionel,
• 2:45
  Speaker 1: bring us back to basics, if you would, about FIRE,
• 2:48
  Speaker 1: Financial Independence Retire Early. What is the essence of this
• 2:51
  Speaker 1: movement and what does it hold for our listeners? What
• 2:55
  Speaker 1: does it promise?
• 2:56
  Speaker 2: Yeah, for our listeners who, I guess they were listening
• 3:00
  Speaker 2: to the previous podcast or for listeners who are new,
• 3:04
  Speaker 2: as in this is the first listen, essentially FIRE is
• 3:09
  Speaker 2: a mathematical framework. I think that's why it's attractive for
• 3:13
  Speaker 2: many people because it gives them a simple number to achieve.
• 3:18
  Speaker 2: And once they achieve that number, it allows them to
• 3:22
  Speaker 2: get financial independence and also the ability to retire at
• 3:27
  Speaker 2: an earlier age or whatever age that they are wanting
• 3:30
  Speaker 2: to do so, which is then in sync with what
• 3:33
  Speaker 2: you mentioned about about Coast Fire because Coast Fire is
• 3:36
  Speaker 2: essentially an extension of the original fire concept. It is
• 3:39
  Speaker 2: originally from the US. There are adaptations to different markets,
• 3:43
  Speaker 2: including Australia. So I think that's important for listeners to
• 3:46
  Speaker 2: be aware of that, you know, you can't just adopt
• 3:49
  Speaker 2: it wholesale as James introduced very succinctly. You know, you
• 3:52
  Speaker 2: need to look at the local context. What are also,
• 3:57
  Speaker 2: I guess, the financial system that's available in Australia and
• 4:00
  Speaker 2: also the taxation system here as well. It affects how
• 4:03
  Speaker 2: fireworks and how you can achieve fire. And with Coast Fire,
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  Speaker 2: it essentially, as you mentioned, James, the magic number, right?
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  Speaker 2: So it is the exact dollar number that any Aussie
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  Speaker 2: needs to have invested today so that the concept is
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  Speaker 2: that the compound growth alone itself will fund your retirement
• 4:23
  Speaker 2: by whatever the target age is.
• 4:25
  Speaker 1: Mm-hmm. So the earlier, the better line, it sounds like,
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  Speaker 1: first of all.
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  Speaker 2: Yes, based on Coast Fire, yes. That is what the mathematical.
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  Speaker 1: Are you comfortable with that figure of 7% that we
• 4:35
  Speaker 1: could assume a 7% return?
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  Speaker 2: Well, I guess when we chat more about Coast Fire,
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  Speaker 2: one of the dangers of in terms of the 7%
• 4:44
  Speaker 2: return is whether or not that is actually, I guess,
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  Speaker 2: in the financial industry, they call it the real rate
• 4:50
  Speaker 2: of return. If it's the real rate of return, meaning that, again,
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  Speaker 2: for friends who are not familiar with this financial jargon,
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  Speaker 2: it basically just means the annualized return. So what return
• 5:02
  Speaker 2: you get every year from your investment, which is adjusted
• 5:06
  Speaker 2: for inflation. So adjusted for inflation is an important word
• 5:09
  Speaker 2: to take into account. I think most financial planners in
• 5:13
  Speaker 2: Australia use an average of 5% to 7%. So 7%, yes,
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  Speaker 2: it's still relevant. We will just be on the high side.
• 5:22
  Speaker 2: I am very conservative. So as I guess listeners already
• 5:25
  Speaker 2: know from James and my conversation about FIRE, we also
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  Speaker 2: said that FIRE is not a magic wand. It's not
• 5:32
  Speaker 2: like Harry Potter with the magic wand and you get
• 5:35
  Speaker 2: the results that you want. So So in terms of
• 5:37
  Speaker 2: the real rate of return, you know, I would still
• 5:39
  Speaker 2: be more favorable towards a lower rate.
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  Speaker 1: Right.
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  Speaker 2: Okay.
• 5:44
  Speaker 1: Yeah, so keep in mind, folks, that inflation has to
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  Speaker 1: be taken into consideration.
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  Speaker 2: That's right.
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  Speaker 1: And to some extent, the return that you will get
• 5:51
  Speaker 1: is linked with, obviously, the level of risk you take.
• 5:53
  Speaker 2: Yes.
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  Speaker 1: But just for guidance, your long-term superannuation, I'm talking 40-year long-term,
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  Speaker 1: is something in the order of close upon 7%, and
• 6:03
  Speaker 1: actually higher in recent years. But we would take a
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  Speaker 1: conservative view. That's one part. The second part is that, again,
• 6:11
  Speaker 1: to adapt this idea for local purposes, basically from the
• 6:15
  Speaker 1: age of, depending on when you were born, but at
• 6:18
  Speaker 1: the moment, roughly once you're about 58, you can start
• 6:21
  Speaker 1: to tap into your own super. That can be a
• 6:24
  Speaker 1: self-managed super fund or any super fund you have. But
• 6:27
  Speaker 1: the essence of it, I suppose, Lionel, is to get
• 6:29
  Speaker 1: the money in early to get the compounding. And this
• 6:33
  Speaker 1: has captured people's imagination around the world. But the fire
• 6:37
  Speaker 1: movement as such, it's informal, right? There's no guru, there's
• 6:40
  Speaker 1: no leader, there's no institute of fire somewhere, is there?
• 6:43
  Speaker 2: No, not that I know of. It started... you know,
• 6:47
  Speaker 2: decades ago in the States. I mean, Coast Fire is just,
• 6:51
  Speaker 2: I guess, an extension of the original fire movement. It's
• 6:54
  Speaker 2: also because times have changed as well, you know, around
• 6:57
  Speaker 2: the world. Specifically in the US, we have to take
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  Speaker 2: also into consideration why Coast Fire became, I guess, an
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  Speaker 2: extension of the original fires because of the tech structure
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  Speaker 2: there as well. It kind of encourages people The whole
• 7:12
  Speaker 2: concept of coast fire, or at least it supports the
• 7:14
  Speaker 2: mathematical calculations of coast fire. So as you have rightly explained, James,
• 7:19
  Speaker 2: you know, someone can be able to, I guess, scrim
• 7:24
  Speaker 2: and save up a specific amount. That amount can actually
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  Speaker 2: then go into a compounding, a long-term compounding effect to
• 7:32
  Speaker 2: then allow them to coast for the rest of, I guess,
• 7:35
  Speaker 2: their lives once they reach that retirement age.
• 7:38
  Speaker 1: When did you first come across the fire movement yourself?
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  Speaker 1: And Lionel, folks, is a lecturer across Australia and different universities.
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  Speaker 1: And he also moves between Australia and Singapore with a
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  Speaker 1: global private investment company, which he's involved with. When did
• 7:53
  Speaker 1: you come upon the fire movement first, Lionel?
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  Speaker 2: I came across the fire movement actually in the early
• 7:59
  Speaker 2: days when I was working. So it was probably around 97, 98,
• 8:03
  Speaker 2: in the 1990s, 97, 98, when I first came across
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  Speaker 2: that in the US. So I didn't come across the
• 8:12
  Speaker 2: fire movement outside of the States. So as I mentioned,
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  Speaker 2: it is essentially an American mathematical framework.
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  Speaker 1: And then more recently, the coast fire movement has given
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  Speaker 1: it a sort of a second wind and reinvigorated the
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  Speaker 1: whole concept. it seems to me perhaps the essence of
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  Speaker 1: it for the everyday listener is that it really works.
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  Speaker 1: That if you do get principal serious savings into your
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  Speaker 1: super or even any investment account, given the benefits of time,
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  Speaker 1: it really does work. I mean, it seems to me that's,
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  Speaker 1: it's outstanding appeal that, that it shows people who don't
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  Speaker 1: perhaps don't know that compounding is, is, is very real.
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  Speaker 2: Yeah. It's, You're right. It is appealing because it's simple.
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  Speaker 2: So as we've explained, and it's important for listeners to understand,
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  Speaker 2: it is essentially a mathematical framework. So Coase Fire, which
• 9:07
  Speaker 2: again is an extension of the original fire, is about formulas,
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  Speaker 2: mathematical formulas and calculations. So Coase Fire is The main
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  Speaker 2: appeal is it gives fellow Aussies an exact dollar figure, right?
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  Speaker 2: So once their super or any investment account hits that
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  Speaker 2: exact dollar figure, that threshold, they can then switch to
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  Speaker 2: part-time work or change careers, basically without worrying about saving
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  Speaker 2: another dollar for old age, which is why, as James,
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  Speaker 2: you mentioned, you've explained initially, it's called coasting, right? So
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  Speaker 2: it's nothing to do with the coastal scenery of Melbourne,
• 9:42
  Speaker 2: you know, Victoria and the rest of Australia. I mean,
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  Speaker 2: the beautiful scenery that we have, it's got to do
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  Speaker 2: with coasting, right? So in terms of just kind of
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  Speaker 2: chilling out. And also the other thing I think is
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  Speaker 2: appealing to Aussies is that it is not just easy
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  Speaker 2: to understand. They don't need to, especially if you're not
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  Speaker 2: a finance, I guess, a student or a financial services
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  Speaker 2: industry professional, you don't need to understand macroeconomics. You don't
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  Speaker 2: need to understand... institutional stuff, you know, you just need
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  Speaker 2: to basically look for like some kind of a low
• 10:12
  Speaker 2: cost index fund in order to get started. So the
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  Speaker 2: other thing that I just want to add at this
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  Speaker 2: point that triggered, I guess, an interest about cost and
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  Speaker 2: fire and not just the interest but i guess more
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  Speaker 2: more adopters of course fire is also because of the
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  Speaker 2: increased promotion and attractiveness of low-cost index funds or etfs.
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  Speaker 1: Yes which has made this so at its best there
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  Speaker 1: is a really good synergy here yes once upon a
• 10:41
  Speaker 1: time we would have had to say on the show
• 10:43
  Speaker 1: well perhaps you should build a share portfolio and maybe
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  Speaker 1: you have some try and have some funds that beat
• 10:49
  Speaker 1: the index, et cetera.
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  Speaker 2: That's all.
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  Speaker 1: I won't say that's gone, but there's a much simpler,
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  Speaker 1: and that's really good, Lionel, and very good point you're making.
• 10:56
  Speaker 1: That's simply the creation or the arrival of passive investing, folks.
• 11:00
  Speaker 1: Index investing has made this particularly easy because you simply
• 11:04
  Speaker 1: buy your ETFs. You might buy the Australian stock market,
• 11:07
  Speaker 1: or you might buy the world stock market. You might
• 11:09
  Speaker 1: buy the Wall Street stock market. Very easy, very big funds.
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  Speaker 1: They're all there. And they allow you to basically buy
• 11:16
  Speaker 1: the markets. And that then is the sort of practical
• 11:19
  Speaker 1: application of this. We'll take a short break and we're
• 11:22
  Speaker 1: going to talk to you about how to actually do it.
• 11:24
  Speaker 1: Back in a second. Hello, welcome back to the Australian's
• 11:36
  Speaker 1: Money Puzzle podcast. James Kirby here with Lionel Leigh. who
• 11:41
  Speaker 1: is a guest on the show, has been on before.
• 11:44
  Speaker 1: And when we talk to Lionel, we have been talking
• 11:45
  Speaker 1: about the FIRE movement, Financial Independence Retire Early movement, which
• 11:50
  Speaker 1: has had, I'm shy of using colloquial expressions here, like
• 11:55
  Speaker 1: it's been rekindled, but it has, by this notion of COAST, C-O-A-S-T.
• 12:01
  Speaker 1: This is running very big in the US at the moment,
• 12:03
  Speaker 1: and I'm sure it'll come here pretty soon too. This
• 12:06
  Speaker 1: notion that you can get a number into your savings
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  Speaker 1: and from that number, you will be able to retire
• 12:12
  Speaker 1: earlier than you might have expected or necessarily have been
• 12:15
  Speaker 1: required to work so long. The simple reason is it's compounding.
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  Speaker 1: If you give me $ 100, 000 when I'm 55, that's great.
• 12:21
  Speaker 1: If you give me $ 100, 000 when I'm 35, it's much,
• 12:24
  Speaker 1: much better because it will compound as time goes by.
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  Speaker 1: So Lionel, just listening to the first part of the show,
• 12:31
  Speaker 1: in terms of practical challenges, I imagine people think the
• 12:33
  Speaker 1: way to do this is to put it into AI.
• 12:35
  Speaker 1: Just put your age, how much you want per annum,
• 12:39
  Speaker 1: and see what AI comes up with. What do you
• 12:42
  Speaker 1: say to people who ask you?
• 12:43
  Speaker 2: I would say that use AI to help you to
• 12:47
  Speaker 2: make those calculations because there is a formula in personal finance. Essentially,
• 12:51
  Speaker 2: the calculation is based on what we call time value
• 12:53
  Speaker 2: of money. So there is a present value and future
• 12:56
  Speaker 2: value formula. But not everyone knows that. So, I mean,
• 12:59
  Speaker 2: instead of spending time to go learn that formula, just
• 13:03
  Speaker 2: plug that information into here. But I think what's important
• 13:06
  Speaker 2: for our listeners from this conversation is what we can
• 13:09
  Speaker 2: do is we can arm them with basic understanding of
• 13:13
  Speaker 2: the information to ask their AI that then allows them
• 13:16
  Speaker 2: to get that right number. Yeah, so we talked about
• 13:19
  Speaker 2: the magic number. And the first thing that our listeners
• 13:22
  Speaker 2: need to understand is to find that personal magic number.
• 13:26
  Speaker 2: They work backwards from their ultimate retirement goal, right? The calculation,
• 13:30
  Speaker 2: as James, you have articulated, relies on compound interest. And
• 13:34
  Speaker 2: this compound interest does the heavy lifting over time. So
• 13:38
  Speaker 2: there are actually just three things or three distinct ingredients.
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  Speaker 2: It's like a three-ingredient cake that they just need to
• 13:46
  Speaker 2: pay attention to. So first is the fire number that
• 13:49
  Speaker 2: they want. So the total nest egg that they want
• 13:54
  Speaker 2: to have to retire. So in the FIRE movement, this
• 13:58
  Speaker 2: is typically calculated using what FIRE calls a 25 times rule.
• 14:04
  Speaker 2: That means you multiply your expected annual retirement expenses now,
• 14:10
  Speaker 2: as in what you think you'll need in the future,
• 14:13
  Speaker 2: by 25. And the FIRE movement also advocates a 4%
• 14:18
  Speaker 2: safe withdrawal rate once you actually retire. The second thing,
• 14:23
  Speaker 2: as James, you've explained is there is a time component.
• 14:26
  Speaker 2: So the time horizon, meaning the number of years remaining
• 14:31
  Speaker 2: between your current age and your target retirement age. And
• 14:35
  Speaker 2: then of course, the last is your real rate of return,
• 14:37
  Speaker 2: whether you use 5%, you know, to 7%, that's what
• 14:40
  Speaker 2: we're talking about. I would actually use a 5% rather
• 14:43
  Speaker 2: than a 7% just to be on the safe side.
• 14:45
  Speaker 2: So let's save the average Aussie. I mean, to look
• 14:48
  Speaker 2: at it from practical terms, if we've got, you know,
• 14:50
  Speaker 2: a fellow Aussie at 20 years, 25 years, they are
• 14:53
  Speaker 2: likely not going to have a big lump sum to
• 14:56
  Speaker 2: be able to put aside for close fire. So I'm
• 14:58
  Speaker 2: just saying maybe a 35-year-old wants to retire at 65,
• 15:02
  Speaker 2: which is basically a 30-year time horizon. We're looking at 5%
• 15:05
  Speaker 2: inflation-adjusted return. So let's say if you've got 60,000 of
• 15:10
  Speaker 2: future expenses, it's very simple. You take 60,000 times 25,
• 15:13
  Speaker 2: you've got 1.5 million. the time to grow that is
• 15:18
  Speaker 2: over 30 years. So if you take that information, the
• 15:20
  Speaker 2: three ingredients that we mentioned, and plug it into AI
• 15:23
  Speaker 2: like I'm doing right now, or just whatever AI that
• 15:26
  Speaker 2: you use, the number that comes out is $ 347, 066. What
• 15:29
  Speaker 2: that means is that this 35-year-old would need $ 347, 066 in
• 15:32
  Speaker 2: their investment account to stop working and then retire at
• 15:45
  Speaker 2: the end of 30 years with the amount of 1.5 mil.
• 15:50
  Speaker 1: So you can see, folks, that it's further a practical
• 15:52
  Speaker 1: expression of the principles of FIRE, which really were to
• 15:56
  Speaker 1: save early. That was basically it, wasn't it, Lionel? To really,
• 15:59
  Speaker 1: to knuckle down early, save early.
• 16:01
  Speaker 2: Yes.
• 16:02
  Speaker 1: That's always been there. That's the financial independence part. The
• 16:05
  Speaker 1: retire early part, this has become the practical part of
• 16:08
  Speaker 1: it that You can actually now do the numbers. As
• 16:10
  Speaker 1: you say, you can do the numbers yourself. It's not hard.
• 16:14
  Speaker 1: And then the second part is you can actually activate
• 16:17
  Speaker 1: the idea of investing because of passive investing, index investing.
• 16:22
  Speaker 1: That would seem to be, the two things seem to
• 16:23
  Speaker 1: have come together quite nicely for everybody. Can you just
• 16:27
  Speaker 1: explain a little bit more about the, if someone's listening, right?
• 16:31
  Speaker 1: Pick a number again, say the 32, they want to
• 16:34
  Speaker 1: retire at 62. then they want to find out what
• 16:37
  Speaker 1: number they should have to have a comfortable retirement. They
• 16:41
  Speaker 1: can work off the fact that the experts say it's
• 16:45
  Speaker 1: currently about 1.7 million. It's a different number for everybody. Yes,
• 16:50
  Speaker 1: that's right. The key variable there is how much the
• 16:53
  Speaker 1: expected returns are. Are you saying 5% is all they
• 16:57
  Speaker 1: can expect or is it 5% plus inflation?
• 16:59
  Speaker 2: Well, 5% is actually the annual rate that's already taken
• 17:04
  Speaker 2: inflation into account, which is why We're using 5% to 7%.
• 17:07
  Speaker 2: I'm just using 5% on the lower end.
• 17:09
  Speaker 1: Yeah, okay. A real rate of 5%. Is that it?
• 17:12
  Speaker 2: Yeah, yeah, that's right.
• 17:14
  Speaker 1: Keep that in mind, folks. When we say 5% is
• 17:17
  Speaker 1: a real rate. So, for instance, at the moment, 5%,
• 17:20
  Speaker 1: a real rate of 5%, but at the moment, what 5%
• 17:23
  Speaker 1: would mean would be about whatever coming up between 8%
• 17:25
  Speaker 1: and 9%. And that's quite realistic at the moment, too. Okay,
• 17:29
  Speaker 1: very good. Now, in terms of both the fire movement
• 17:33
  Speaker 1: and the coast movement, When you explain it to people,
• 17:37
  Speaker 1: what's their response line? How do you find people react
• 17:40
  Speaker 1: to the concept?
• 17:41
  Speaker 2: I think people react favorably because as we have clearly
• 17:45
  Speaker 2: explained in the early part of this podcast, it is
• 17:50
  Speaker 2: a simple mathematical formula. You don't need to be a
• 17:53
  Speaker 2: financial services industry professional or a department of finance professor
• 18:00
  Speaker 2: to actually work out the math. It is very easy.
• 18:03
  Speaker 2: And if you can't be bothered to learn the formula,
• 18:06
  Speaker 2: you can just go on to any of your AI
• 18:09
  Speaker 2: tools and just plug in the three ingredients like we said, right?
• 18:11
  Speaker 2: It's just like it's basically a three-ingredient cake, you know?
• 18:14
  Speaker 2: So that gives you a simple answer. But I think
• 18:17
  Speaker 2: one of the things that I also... caution I guess
• 18:22
  Speaker 2: adopters or users and similarly for our listeners is that
• 18:26
  Speaker 2: Coast Fire is not you know again a magic potion
• 18:30
  Speaker 2: it's not you know abracadabra and you are actually then
• 18:34
  Speaker 2: able to retire it has risk as well associated with
• 18:38
  Speaker 2: it and it's important that our listeners are aware of
• 18:41
  Speaker 2: those risks especially if it's going to be tied in
• 18:45
  Speaker 2: with their superannuation. I think one of the risks that
• 18:48
  Speaker 2: listeners may not be aware of because they're so excited
• 18:50
  Speaker 2: about how easy Coast Fire can work for them is
• 18:54
  Speaker 2: that there's this issue of lifestyle creep, right? So I
• 18:58
  Speaker 2: think the younger generation, more the Gen Zs, the millennials,
• 19:01
  Speaker 2: and even the Gen As as well when they come into,
• 19:04
  Speaker 2: I guess, an age when they are working adults, the
• 19:07
  Speaker 2: magic number will change significantly for them because they're it
• 19:11
  Speaker 2: assumes that your future living expenses stay locked, right? So
• 19:15
  Speaker 2: when we talked about the formula earlier, I used the
• 19:17
  Speaker 2: example of 60K. So you are assuming that you need
• 19:21
  Speaker 2: 60K per year. In the future, but that's forecasting, right?
• 19:26
  Speaker 2: You're doing that calculation now, 30 years down the road.
• 19:28
  Speaker 2: Those are projections. But what happens when you, for example,
• 19:33
  Speaker 2: have children? So you go from single to married, you've
• 19:37
  Speaker 2: got kids. What happens if you buy a house? What
• 19:40
  Speaker 2: happens if you, touch wood, have health issues? Then your
• 19:44
  Speaker 2: original FIRE number will fall short. So the calculation, the
• 19:47
  Speaker 2: formula that we've given to you, which is not unbiased, ours,
• 19:50
  Speaker 2: but it's what Coast FIRE advocates, is a static number. Yeah,
• 19:55
  Speaker 2: a static formula. So you need to take that into consideration.
• 19:58
  Speaker 2: Second thing also is, that Coast Fire relies entirely on
• 20:04
  Speaker 2: the low-cost ETFs as a way to actually build up
• 20:09
  Speaker 2: the compounding. But you've got to remember that those are
• 20:12
  Speaker 2: also historical averages. So everything that we've said so far
• 20:15
  Speaker 2: with the 5% to 7%, how super funds have been performing,
• 20:19
  Speaker 2: The word is how they have been performing, not how
• 20:22
  Speaker 2: they will perform over the next 30 years, year on
• 20:25
  Speaker 2: year over the next 30 years. So if the stock
• 20:28
  Speaker 2: market in which the funds invest in experience any kind
• 20:33
  Speaker 2: of downturn. Of course, they'll experience upturns as well, but
• 20:36
  Speaker 2: if they experience downturns or prolonged downturns, having coast fire,
• 20:42
  Speaker 2: which puts you into an autopilot kind of state, can
• 20:47
  Speaker 2: actually derail your entire retirement plan as well because it
• 20:51
  Speaker 2: is passive and it's not active enough because you're not
• 20:53
  Speaker 2: really monitoring people who are doing coast fire kind of
• 20:57
  Speaker 2: like they're coasting, right? So it's like chilling. So I'm
• 21:00
  Speaker 2: chilling out. I don't really pay attention or I am
• 21:04
  Speaker 2: being programmed or conditioned to pay less attention. So your
• 21:08
  Speaker 2: retirement might get derailed by, again, return risk that takes place.
• 21:14
  Speaker 2: And then, of course, there is superannuation. As we mentioned earlier,
• 21:17
  Speaker 2: In the States, where Coast Fire was created, it's a
• 21:22
  Speaker 2: different tax system there.
• 21:24
  Speaker 1: That's right. And they don't have the compulsory super.
• 21:26
  Speaker 2: That's right.
• 21:27
  Speaker 1: So we might actually mention that. But one thing, if
• 21:30
  Speaker 1: you would be so patient as to just tell the listeners,
• 21:32
  Speaker 1: just repeat the formula, if you would.
• 21:34
  Speaker 2: Yeah.
• 21:35
  Speaker 1: I just want to try you again. Let's pretend I'm, say,
• 21:38
  Speaker 1: 28 and I want to retire at 58. And I
• 21:42
  Speaker 1: want to have an income of, what is the average
• 21:44
  Speaker 1: income now, which is 100,000 a year. So I'm 28.
• 21:49
  Speaker 1: When I'm 58, I want to retire on 100,000 a year,
• 21:53
  Speaker 1: which is the average salary at the moment. How would
• 21:55
  Speaker 1: I do that? How would I put it into the AI? Yeah.
• 21:59
  Speaker 2: So again, the three ingredients, right? So we just need
• 22:02
  Speaker 2: our listeners to remember the three simple ingredients for this cake. Yeah.
• 22:06
  Speaker 2: Retirement cake. Yeah. So first thing is we take that
• 22:10
  Speaker 2: number that they are looking at their future annual expenses, right?
• 22:15
  Speaker 2: So James, you mentioned say 100K. So we take 100K
• 22:19
  Speaker 2: and we basically times 25. Yep. So that gives us
• 22:24
  Speaker 2: the full fire number. Yeah, for the coast fire. So
• 22:27
  Speaker 2: in this case, it gives us $ 2. 5 million. Then we
• 22:31
  Speaker 2: look at the second ingredient in the cake is basically
• 22:34
  Speaker 2: our time horizon. So every listener is at a different age.
• 22:39
  Speaker 2: If they're 28, for example, and they are going to
• 22:41
  Speaker 2: be retiring at 60, that gives them, what, 38 years
• 22:46
  Speaker 2: worth of time for their returns to compound, right? And
• 22:52
  Speaker 2: if we're taking the rate of return... of 5%. So
• 22:55
  Speaker 2: it's just about putting in that information. So you've got
• 22:58
  Speaker 2: your future annual expenses of 100K, your targeted number of
• 23:03
  Speaker 2: 2.5 million, your time to grow in this case would
• 23:07
  Speaker 2: be 28 to 60, which is 32 years. Just put
• 23:11
  Speaker 2: that into your AI to then get the answer. That's it.
• 23:16
  Speaker 1: Right.
• 23:16
  Speaker 2: Yeah. So that would be the simple formula. Yeah.
• 23:18
  Speaker 1: And that number is the one that the sooner you
• 23:21
  Speaker 1: get to that number, The day you get to that number,
• 23:23
  Speaker 1: you're there, right? This is the marvelous thing, isn't it?
• 23:26
  Speaker 1: You get to that number, you're there. Okay, just to
• 23:29
  Speaker 1: localize it for a moment, we have a couple of issues.
• 23:32
  Speaker 1: One is we have SGC where 12% of your salary
• 23:35
  Speaker 1: must go to super as long as you're working. So
• 23:37
  Speaker 1: to some extent, some of our listeners, the number might
• 23:43
  Speaker 1: be lower because if they keep working, they're still going
• 23:47
  Speaker 1: to be contributing to super, aren't they?
• 23:49
  Speaker 2: Yes, of course.
• 23:50
  Speaker 1: So that would mean that they probably don't need quite
• 23:53
  Speaker 1: as high a number as a U.S. person would need
• 23:55
  Speaker 1: since they haven't got compulsory super.
• 23:57
  Speaker 2: Yes, yes. So Coast Fire applying it to our Australian
• 24:01
  Speaker 2: situation with the super, if you think about it without
• 24:04
  Speaker 2: going into even great detail at this point in time,
• 24:08
  Speaker 2: you can already imagine how the 12% actually kind of
• 24:11
  Speaker 2: like for lack of better words, supercharges your coast fire number.
• 24:17
  Speaker 2: Not the starting number, but the end numbers and the
• 24:20
  Speaker 2: total amount that you get. So we all know that
• 24:23
  Speaker 2: for Aussies, whenever you work a job, your employer pays
• 24:25
  Speaker 2: you an extra 12% on your salary. It goes into
• 24:29
  Speaker 2: our super. But the point that we need to just
• 24:32
  Speaker 2: highlight to listeners is you generally cannot touch this number
• 24:34
  Speaker 2: until you turn 60 years, right? So there's a preservation age.
• 24:38
  Speaker 2: Just using ATOs, jargon and not ours, right? Before you
• 24:42
  Speaker 2: can actually touch your money. So if you think about it.
• 24:44
  Speaker 1: That's a very important point. That's right. If you're using
• 24:46
  Speaker 1: super and you probably are. Don't forget, you cannot get
• 24:51
  Speaker 1: at it until you reach the preservation age, which is roughly,
• 24:54
  Speaker 1: probably for most listeners, very late 50s, 58, 59. What
• 24:57
  Speaker 1: about just very quickly, Lionel, how about doing the whole
• 24:59
  Speaker 1: exercise outside of super? Does that make any sense since
• 25:02
  Speaker 1: we have the tax protection within super?
• 25:04
  Speaker 2: I think that you still need to look at it
• 25:06
  Speaker 2: outside of super. And we can explain to our listeners why.
• 25:10
  Speaker 2: I see it as a two-pronged approach. So, I mean,
• 25:14
  Speaker 2: from a money literacy perspective, I look at a 12%
• 25:17
  Speaker 2: rule like a cheat code, you know, for coast fire.
• 25:21
  Speaker 2: So the first thing is that with the super, it's
• 25:25
  Speaker 2: like automatic coasting, you know. So even if you don't
• 25:29
  Speaker 2: actually decide to do it in the traditional way, which
• 25:32
  Speaker 2: is the American way, Your employer, as James, you've explained,
• 25:36
  Speaker 2: your employer basically never stops putting that 12% in your
• 25:38
  Speaker 2: super every payday, but only as long as you work.
• 25:43
  Speaker 1: So that is very important.
• 25:44
  Speaker 2: If you're not working, you don't actually get super. So
• 25:47
  Speaker 2: that's where your cost fire by super... fails, right? Because
• 25:52
  Speaker 2: there is no more 12%. Yeah, so your retirement account
• 25:55
  Speaker 2: is not getting fed automatically as long as you stop working.
• 26:00
  Speaker 2: So that's something that we need listeners to be aware of, right?
• 26:03
  Speaker 2: And also because your super gets locked away until generally,
• 26:08
  Speaker 2: let's say just 60 for easy conversation, you should actually
• 26:11
  Speaker 2: look at your coast fire in a two-prong approach, as
• 26:15
  Speaker 2: I mentioned earlier, right? So I'll start with the outside
• 26:19
  Speaker 2: of the super approach is if you want to actually
• 26:22
  Speaker 2: use Coastfire and retire completely before age 60, then you
• 26:29
  Speaker 2: will need to look at actually creating a separate account,
• 26:34
  Speaker 2: whether it's a savings account, investment account, whatever you want
• 26:36
  Speaker 2: to call that. It basically acts as a bridge and
• 26:39
  Speaker 2: that will pay for your life until you're old enough
• 26:42
  Speaker 2: to unlock your superpower. bucket for those who are not
• 26:47
  Speaker 2: able to access their super at the preservation age or
• 26:51
  Speaker 2: their super's not large enough at that point and decide, okay,
• 26:53
  Speaker 2: maybe I'll try to access it later. Then also the
• 26:56
  Speaker 2: other situation where our fellow Aussies might be thinking of
• 27:00
  Speaker 2: retiring earlier. So they're not actually going to retire and
• 27:03
  Speaker 2: touch their super at 60. They might plan to retire
• 27:05
  Speaker 2: at 40. They might plan to retire at 50. So
• 27:08
  Speaker 2: then you have that gap between 40 to 60 or
• 27:11
  Speaker 2: 50 to 60, just for easy conversation where you need
• 27:15
  Speaker 2: a coast fire investment account to separate from your super.
• 27:22
  Speaker 1: Right. Yes. Very important point. So folks, again, it's little
• 27:26
  Speaker 1: that's necessary to adapt slightly here for our local situation.
• 27:30
  Speaker 2: Yes.
• 27:31
  Speaker 1: In that, if you put your efforts into super, that's
• 27:33
  Speaker 1: all fine, but you can't access it, unfortunately. When we
• 27:36
  Speaker 1: say the financial independence retire early, the retire early bit,
• 27:40
  Speaker 1: if the money's in super, there's guardrails around it. And
• 27:44
  Speaker 1: the law basically doesn't let you get at that money
• 27:47
  Speaker 1: until you are roughly 58, 59. However, if it's outside super,
• 27:52
  Speaker 1: there are no rules around that and you can do
• 27:54
  Speaker 1: what you like. But the tax, as you build that amount,
• 27:57
  Speaker 1: isn't quite as favorable. We'll just leave it at that.
• 27:59
  Speaker 1: I want to bring listeners up to date with some
• 28:02
  Speaker 1: of the responses and questions that came from the last
• 28:04
  Speaker 1: time Lionel was on the show. We'll be back in
• 28:06
  Speaker 1: a second. Hello, welcome back to the Australian's Money Puzzle podcast.
• 28:20
  Speaker 1: James Kerby with Lionel Lee. We are talking again about
• 28:24
  Speaker 1: the FIRE movement, Financial Independence Retire Early. This time, however,
• 28:28
  Speaker 1: we have brought you, I hope, up to speed with
• 28:31
  Speaker 1: a new twist, basically, on FIRE, which is called Coast FIRE,
• 28:34
  Speaker 1: which is taking off big time. But particularly in the US, where,
• 28:38
  Speaker 1: you know, very much you're on your own. As an investor,
• 28:41
  Speaker 1: the tax system is very useful, of course. For investors,
• 28:45
  Speaker 1: it's not like here, so we have to adapt to
• 28:47
  Speaker 1: some extent. But the principles remain the same. Getting more
• 28:50
  Speaker 1: money in early, saving early, allows you to retire or
• 28:55
  Speaker 1: find financial independence earlier in your life. The last time
• 28:59
  Speaker 1: you were on, a couple of things. Here's one from
• 29:00
  Speaker 1: Kim Lyon. He said, with all due respect to Lionel Leak,
• 29:04
  Speaker 1: and the FIRE movement. My experience tells me if you're
• 29:07
  Speaker 1: contemplating early retirement and you're relying on a financial advisor,
• 29:11
  Speaker 1: let me tell you, no financial advisor could have predicted
• 29:13
  Speaker 1: the GFC. If you're not very well off and you
• 29:17
  Speaker 1: need advice, the first call should actually be with a
• 29:20
  Speaker 1: psychiatrist to find out what sort of personality you have.
• 29:23
  Speaker 1: That's good, isn't it? I mean, I know what he's saying,
• 29:27
  Speaker 1: but in a way, FIRE demands a certain type of personality.
• 29:29
  Speaker 1: It doesn't matter what your personality is. It demands a frugal...
• 29:35
  Speaker 1: hard-nosed effort at a time when people might find it
• 29:39
  Speaker 1: quite difficult to do so. I mean, if you do
• 29:41
  Speaker 1: it in your 20s, it's fantastic because the compounding is wonderful.
• 29:45
  Speaker 1: You've got 40 years to retirement. In your 30s, your
• 29:49
  Speaker 1: life expenses probably go up. But really, to some extent,
• 29:52
  Speaker 1: it's a disposition, would you say?
• 29:54
  Speaker 2: Yeah. Firstly, thanks to Kim for the comment. And I
• 29:59
  Speaker 2: do agree. I think that one of the things that
• 30:02
  Speaker 2: is probably not paid much attention to in the FIRE movement.
• 30:07
  Speaker 2: And James, you mentioned, you know, it is essentially the
• 30:11
  Speaker 2: individual's psychology. So there's certain behaviors around money. And I
• 30:16
  Speaker 2: think that's something that needs to be focused on. So,
• 30:19
  Speaker 2: I mean, Kim's brought up an important point, which is
• 30:22
  Speaker 2: why I also mentioned that, you know, FIRE is not
• 30:25
  Speaker 2: a magic potion. It's not a magic wand. It doesn't
• 30:27
  Speaker 2: give you the outcome that you are looking for simply
• 30:31
  Speaker 2: by following it blindly. You need to look at how
• 30:36
  Speaker 2: FIRE works for you, adapt it to your individual situation,
• 30:41
  Speaker 2: but also importantly, your individual mindset and your behavior, which
• 30:46
  Speaker 2: is why, you know, I always say, look, financial literacy
• 30:49
  Speaker 2: is great. FIRE is essentially a financial literacy tool, but
• 30:53
  Speaker 2: you need to understand how money works. You need to
• 30:56
  Speaker 2: improve your relationship with money and that requires you to
• 31:00
  Speaker 2: understand the way in which you behave around and with money.
• 31:05
  Speaker 2: And also the other challenge with FIRE is that you
• 31:09
  Speaker 2: can remember, and in this case with Coast FIRE, if
• 31:11
  Speaker 2: you put all your eggs into the Coast FIRE basket,
• 31:15
  Speaker 2: that means that you are also missing out on two things.
• 31:18
  Speaker 2: Number one, you might be downshifting your career earlier, right?
• 31:23
  Speaker 2: Because once you hit that number earlier in life, as
• 31:26
  Speaker 2: in the younger age, then you just chill, right? So
• 31:29
  Speaker 2: you're walking away from your peak earning years. I mean,
• 31:31
  Speaker 2: the peak earning years in Australia, I mean, in general,
• 31:33
  Speaker 2: for everyone and not just for the rare few, you know,
• 31:37
  Speaker 2: in the service and tech-driven economy that we have in Australia,
• 31:40
  Speaker 2: the opportunities for pay raises are usually, you know, in
• 31:45
  Speaker 2: your late 30s to your late 40s. So you're missing
• 31:49
  Speaker 2: out on that. And not forgetting the 12% is on
• 31:51
  Speaker 2: your salary, right? right so if you're earning 50k it's 12%
• 31:55
  Speaker 2: on 50k if you're earning 100k it's 12% on 100k
• 31:59
  Speaker 2: the 12% doesn't change but the quantity changes and if
• 32:03
  Speaker 2: you're on 250k 12% i mean that's a big number
• 32:06
  Speaker 2: right it translates so you're losing on that plus also
• 32:09
  Speaker 2: you're losing on the housing opportunity as well so The
• 32:13
  Speaker 2: coast fire in this situation, the individuals, if you look
• 32:18
  Speaker 2: at it logically, it feels like individuals will just be
• 32:22
  Speaker 2: putting all of their dollar eggs into the coast fire
• 32:27
  Speaker 2: basket and they will not be buying a home. So
• 32:30
  Speaker 2: they will all be just renting.
• 32:31
  Speaker 1: Right. Very interesting point. Yeah, keep that in mind, folks,
• 32:34
  Speaker 1: that obviously first home buyer issue is crucial and you've
• 32:38
  Speaker 1: got to work that in and to some extent... Again,
• 32:41
  Speaker 1: maybe this movement, to some extent, assumes that you have
• 32:45
  Speaker 1: that sorted. I just want to quickly, two other pieces,
• 32:48
  Speaker 1: correspondence for you, Lionel. One was, David, this is funny,
• 32:51
  Speaker 1: one thought about the fire movement. Why bother? What is
• 32:54
  Speaker 1: the point? Firstly, you live a miserable existence, saving everything
• 32:57
  Speaker 1: you can, and then when you retire, you have no
• 32:59
  Speaker 1: friends because they're all still working. I'll just leave that
• 33:04
  Speaker 1: for people to savour. And the last one is Ben,
• 33:06
  Speaker 1: who says, Lionel pitches his... call on fire is just
• 33:12
  Speaker 1: earning more money as someone who's been energized by the
• 33:15
  Speaker 1: movement in the last few years the core idea of
• 33:18
  Speaker 1: fire is to save more and spend less and that
• 33:21
  Speaker 1: doesn't necessarily mean cutting costs to the bare minimum it
• 33:25
  Speaker 1: means being selective in how you spend your money yeah
• 33:29
  Speaker 1: and deciding making key decisions financially interesting point ben thank
• 33:34
  Speaker 1: you what do you think lionel Yeah, I.
• 33:36
  Speaker 2: Think Ben makes a couple of points within his comment.
• 33:40
  Speaker 2: I just need to clarify that I'm not actually an
• 33:44
  Speaker 2: advocate of stock picking. Yes. Yeah, so I recall we
• 33:49
  Speaker 2: did talk a bit about that in the previous FIRE shows.
• 33:51
  Speaker 1: Yeah, but you've made it clear today, you're very much
• 33:54
  Speaker 1: actually an advocate of passive investing, ETF investings.
• 33:57
  Speaker 2: Yeah, so I think that is an important point for
• 34:00
  Speaker 2: our listeners to note that we don't want them to
• 34:05
  Speaker 2: go out there and look at reckless high-risk stock picking.
• 34:09
  Speaker 2: So that's something that's important and glad that Ben mentioned.
• 34:12
  Speaker 2: raise that and also I think it's important that we
• 34:16
  Speaker 2: need to have an active take on Coast Fire the
• 34:20
  Speaker 2: challenge with Coast Fire is Coast Fire promotes passivity you
• 34:24
  Speaker 2: need to have an active take on building your net
• 34:26
  Speaker 2: worth you need to understand wealth mechanics rather than just
• 34:30
  Speaker 2: relying solely on aggressive frugality so you know I'm big
• 34:35
  Speaker 2: on long-term discipline. I'm big on patience and avoiding reckless
• 34:39
  Speaker 2: debt as well. And I think that's something that Coast
• 34:41
  Speaker 2: Fire doesn't really focus on because it's a single mathematical
• 34:46
  Speaker 2: formula approach. So while it has its upsides, therein lies
• 34:51
  Speaker 2: its massive limitation as well. And also, as we mentioned,
• 34:55
  Speaker 2: Coast Fire is a financial literacy tool, like learning how
• 34:59
  Speaker 2: to budget, about cutting costs. But it isn't enough, especially
• 35:03
  Speaker 2: for our younger generations, because inflation, there are institutional systems,
• 35:08
  Speaker 2: there are financial traps that are actually rigged against our
• 35:12
  Speaker 2: everyday Aussie earners. So they need to understand, apart from
• 35:17
  Speaker 2: just applying Coast Fire, apply Coast Fire with the understanding
• 35:22
  Speaker 2: of what their own financial footprint looks like. How to
• 35:28
  Speaker 2: manage their lifestyle inflation and how to also regulate their...
• 35:33
  Speaker 2: I think that's important as well. And I think the
• 35:36
  Speaker 2: last point I just want to clarify is that I
• 35:39
  Speaker 2: am not a financial advisor or I don't represent any
• 35:42
  Speaker 2: financial institution. So my approach to FIRE is... using what
• 35:47
  Speaker 2: makes sense to me as a user. So I'm not
• 35:51
  Speaker 2: just following FIRE, its movement and its mathematical formulas blindly,
• 35:55
  Speaker 2: but just using what works for me. And I encourage, again,
• 35:59
  Speaker 2: our listeners, our friends out there to do the same,
• 36:01
  Speaker 2: but always use it with an awareness of what is
• 36:06
  Speaker 2: happening in your world, in your life, your circumstances, your situation,
• 36:11
  Speaker 2: your job, what you're financial objectives and ambitions are as well.
• 36:17
  Speaker 1: Okay, very good. I think that rounds it off quite neatly, actually.
• 36:20
  Speaker 1: So folks, I think it's tremendous, this FIRE movement. It's
• 36:23
  Speaker 1: a great idea. And I think it's terrific for people,
• 36:27
  Speaker 1: particularly in their 20s and 30s, to get to grips
• 36:30
  Speaker 1: with it. Because in principle... It just opens your imagination
• 36:35
  Speaker 1: and it allows you to think forward, which most people don't,
• 36:38
  Speaker 1: but that's what investors do. They always look ahead. And
• 36:41
  Speaker 1: compound growth really is, you know, it's a thing and
• 36:44
  Speaker 1: it really works. And the earlier you start, the better.
• 36:46
  Speaker 1: So those messages are so strong. I think it's important
• 36:50
  Speaker 1: to gather them, but also to keep in mind, as
• 36:52
  Speaker 1: Lionel says, you're in particular individual circumstances. It's not all
• 36:56
  Speaker 1: about saving either. Crucially, part of it is about investing,
• 37:00
  Speaker 1: lifelong investing in wisely and actively. You don't set and forget.
• 37:04
  Speaker 1: There's no such thing, I think, as set and forget
• 37:06
  Speaker 1: in investing. Lionel, great to have you on the show
• 37:08
  Speaker 1: today again. Thank you very much for making the time
• 37:10
  Speaker 1: for us.
• 37:11
  Speaker 2: My pleasure, James. Always happy to help our listeners to
• 37:15
  Speaker 2: get ahead in their financial life.
• 37:16
  Speaker 1: Before you go, Lionel, you never got a chance to
• 37:18
  Speaker 1: mention the name of your new book. Ah, yes, yes.
• 37:21
  Speaker 2: Yeah, you know me. I'm not a promoter of my
• 37:23
  Speaker 2: own stuff.
• 37:24
  Speaker 1: You clearly didn't try that hard to mention it, but
• 37:27
  Speaker 1: let us know. What is it called?
• 37:29
  Speaker 2: Yeah, so I'm a Penguin author and recently released a
• 37:35
  Speaker 2: book on money literacy. It's called Into the Moneyverse. So
• 37:38
  Speaker 2: it explains why financial literacy alone is not enough to
• 37:43
  Speaker 2: save generations of our everyday Australians and why they need
• 37:48
  Speaker 2: to actually focus on money literacy as well.
• 37:51
  Speaker 1: Terrific. Okay, Into the Moneyverse from Penguin by Lionel Lee.
• 37:55
  Speaker 1: Thank you very much, Lionel. Talk to you again.
• 37:57
  Speaker 2: Yes, speak to you again soon. Thanks, James.
• 37:58
  Speaker 1: And thank you, folks. That was a special edition. I
• 38:00
  Speaker 1: wanted to do that for a long time. Lionel comes
• 38:03
  Speaker 1: and goes from Australia, so I needed to catch him
• 38:05
  Speaker 1: when he was here. Great to have him on the show.
• 38:08
  Speaker 1: Keep the emails rolling, themoneypuzzle at theaustralia.com.au. Today's show was
• 38:13
  Speaker 1: produced by Tiffany Dimak. Talk to you soon.