FIRE in 60 Seconds
Gone in 60 Seconds is one of the greatest films ever made. The movie features a pair of American cinema’s brightest stars in Nic Cage and Angelina Jolie. The plot demands Cage steal 50 cars in 72 hours lest his on screen brother be killed. If you have not seen this move, please stop reading and return here after rectifying your character flaw.
Gone in 60 Seconds proves that when under intense time constraints, humans can achieve great things. I reflect on the teachings of Gone in 60 Seconds often, and this week when a friend came to me asking about financial planning and retirement, I had a thought: How fast could someone build a plan to retire? Maybe note 60 seconds, but I think we can build a FIRE plan in well under 60 Minutes and we probably can distill the teachings to 60 seconds. Let’s go!
My friend is a astoundingly accomplished founder, CEO, and product manager, who does not invest her retirement savings outside of her 401k. She does not follow investing, markets or anything like that. She mentioned recently she needed to start planning for retirement and get an investment strategy together. Her question was straightforward : “How do I plan for retirement and what is my investing strategy?” Here was my reply and for your I will link out to other articles to explain in more detail the logic behind the simplified plan I present here.
Determine your retirement number
Your retirement number is the amount that you must save in order to retire and live comfortably. You can do this quickly by taking an estimate of your steady state retirement expenses and multiplying by 25. For example if you think your expenses will be $100k per year, your number is $2.5M. Here is a simple calculator to help you out. Update: Extensive backtesting shows this method holds up through a 50 year long retirement over 90% of the time.
Calculate your savings rate
Your savings rate is your expenses by your pre-tax income and this is what you have left over after your spending each year. For example, if you made $100k with a retirement number of $2.5M and you spent 90k, your savings rate is 10% (100k-90k/100k). This is important to calculate because if you saved 10K a year with a goal of $2.5M you would need ~250 years of savings to meet your number aka you would be screwed. You can check out a table of savings rate’s influence on retirement here.
Max out pretax retirement accounts
Max out your pretax contribution accounts to their IRS limits. The central pretax accounts are your IRA ($5,500), 401k ($18,500), and HSA ($3,500) accounts. If you do not have one, you can open one very quickly little to no fees online. These are all pre-tax deductions and will save you on your tax bill in the present year.
Determine your investment allocation
Your investment allocation is how you decide how to choose what investment instruments to hold and in what amounts. For most this is a decision between cash, stocks, bonds and possibly commodities like oil, gold silver etc. Focus on cash, stocks, bonds for your first cut. This allocation is a personal decision but you can follow some rules of thumb. For the one sentence version: John Bogle, founder of Vanguard has said “Your age becomes the percentage of your assets in bonds”
- Cash – keep 6 to 12 months of expenses in cash as an emergency fund, you never know when things can go south.
- Stocks – To achieve market diversification, which minimizes your risk and maximizes your returns, choose a low fee index fund or ETF to invest in stocks. At perfect example is VTSMX, VTI, or an ETF like SPY. For international exposure look at VEU which does not include US stocks. JL Collins discusses more ideas on portfolios here.
- Bonds – Bonds are debt instruments issued by federal, state, and local governments as well as companies. They borrow money from you today, and pay you back with interest later. Bonds are regarded as less risky than stocks as they must be paid back first in the event of a bankruptcy. VBTLX is a great bond market fund which captures all investment grade quality bonds in the US.
For the split itself, consider a “Lazy Portfolio” which is a 33% split between Bonds, US Stock Funds, and International Stocks.
As a rule consider these factors when choosing an allocation:
1) Be mindful of how soon you need the money. If you plan to buy a house in 3 years, make sure you have the savings to cover down payments and fees in safer instruments like cash and bonds.
2) How secure is your job? If you are in a volatile or seasonal type of work, consider holding more cash in case you are laid off.
3) Assess your needs for liquidity. Liquidity is the ease of which you can convert your assets into spendable cash. If you have many unexpected expenses that pop up, you should position your savings in such a way so you can access them quickly.
4) Your willingness to take risk. Retirement planning should be a source of strength and not stress. If you live in fear of a 1% decline in the markets, weight your portfolio accordingly so you are comfortable.
Now go forth and learn more about financial planning (if you want)
If you follow these 4 steps you are probably 90% of the way to a solid retirement plan. If you are in a place where you are paralyzed by planning and data, these steps should be straightforward enough to get you off to a strong start while you research more if you please.