Commentary by Paolo Costa, PhD, Vanguard Investment Strategy Analyst
When I think about retirement, the idea of quitting my job doesn’t appeal to me. This is the concept of financial freedom. I’m lucky I love my work. It inspires me, inspires me and challenges me.
So instead of focusing on “leisure”, I focus on the ups and downs, helping family members and taking time if needed. The need for security has been exacerbated by the economic consequences of the epidemic.
I’m not alone. Many investors are more motivated by “financial freedom” than by “retirement”. This is one reason why the fire movement – retired financial freedom – has grown out of a particular investment approach to become more mainstream. Fire helps investors set more motivational goals than retiring. And for many firefighters, achieving those goals doesn’t necessarily mean leaving the workforce forever. Instead, it’s about investing enough to gain flexibility and independence.
As an investment strategy analyst, I have studied various investment methods and drivers. Fire may not be for everyone, especially the idea of retiring early. But many of the fire investment strategies are similar to the strategies proposed by Vanguard. I have learned 3 main lessons from Vanguard and Fire investors.
1. It starts deliberately with your finances
The focus of the fire movement is the commitment to choose carefully what money to spend. Extreme Fire investors aggressively reduce costs in favor of investing. Some have written about living in an RV or small house so they can invest every penny. Most don’t take it that far. But they all insist on choosing what is important to them.
Jack Bogle, founder of Vanguard, ate peanut butter and jelly sandwiches for lunch. These sandwiches are still a staple in Vanguard Cafeterias today – one of its many legacies. Living a more modest life can provide peace and stability, as well as help reduce financial stress.
In fact, some vanguard investors are so absorbed in their lives that they struggle to adapt to their financial goals. Our advisors often have to encourage them to change from savings to spending after retirement.
2. You can’t control the market, but you can control your portfolio
Vanguard and fire investors also believe in concentrating on things you can control. Future market income is not under your control. But how much do you save and invest. To cite Vanguard’s principles for investment success, “Increasing risk exposure in a portfolio may be a stronger and more reliable factor in amassing higher contribution rates than trying to make a higher profit.”
Vanguard’s 4 investment policies outline a difficult path to wealth creation. These principles are strong because they focus on you To be able to Tax:
- Set clear investment goals.
- Adjust your portfolio to reflect your level of risk.
- Keep investment costs low. (Vanguard’s low investment cost always attracts cautious investors!)
- Resist temptation in response to market ups and downs.
3. Better a poor horse than no horse at all
Whether you want to be financially independent or retire in 5 years or 40, it all starts with a goal and a plan. Once you set your goal, you can figure out how much you need to save to meet it. The next step is to create a balanced portfolio – on your own, using a Robo-advisor, or partnering with a personal advisor.
Of course, there may be times when you need to change plans. But it is always better to adjust than not to plan at all. Fire investors have discovered that even if they don’t meet their aggressive initial retirement goals, they can still create enough cushions to feel safe.
If you decide to retire early, make sure you have enough savings to maintain your desired lifestyle in retirement.
It’s all about priorities
Investing is a personal journey. Your decisions depend on your risk tolerance, your personal goals and your financial situation. What is universal is that financial matters need to be deliberate.
Reading about different approaches has helped me set my own priorities and goals. I may not be interested in retiring early, but I wish security could bring financial freedom.
All investments are at risk, including the potential loss of money you invest.
Counseling services are provided by Vanguard Advisors, Inc., a registered investment advisor, or Vanguard National Trust Company, a federally chartered, limited purpose trust company.