• The FIRE movement is all about building up retirement savings to leave work earlier than traditional retirement age
  • Vanguard senior behavioural economist Dr Paulo Costa has five ways for investors to top up retirement savings
  • Costa believes it’s important to understand that life changes, so goals and plans need to be flexible

How was your weekend? Did you have a feeling of Mondayitis or jump out of bed excited to start the working week?

‘Personal exertion income’ basically means exchanging your time for money. You go to work, give your time and skillset in return for payment by your employer.

But there is a growing Financial Independence Retire Early (FIRE) movement worldwide, based on savings and investment to enable people to retire far earlier than the traditional average age people intend to retire,  which according to ABS figures is 65.5 years.

Basically FIRE frees up your time to follow your interests and in turn limit reliance on personal exertion income.

Vanguard senior behavioural economist Dr Paulo Costa has also co-authored a research paper based on the FIRE movement about what investors need to do to achieve early retirement.

Costa has been visiting from Australia from the US and of course at Stockhead we couldn’t resist catching up to hear his tips for retiring early.

“A lot of people are interested at the back of their mind in retiring early but when it comes to doing it (they) wonder is it even possible?” he said.

“People are always very curious about the FIRE movement but what I say to them is if you have considered retiring early then you are part of the FIRE movement.”

Costa said the broad idea is quite simple – if there is an amount you need to save to retire at a normal age, then you’ll need to save a little more to retire early.

The question then becomes how to save those funds, which is where Costa has thought of five ways to top up the retirement piggy bank.


1. Plan ahead set realistic goals

Costa’s first tip is to plan ahead, set realistic goals but understand that life changes.

“If you are thinking about starting this journey in your 20s, 30s or 40s, understand that life will change and your needs will change,” he said.

“At Vanguard our first principle for investment success is to set clear and appropriate goals and you need, for example, an understanding of how much do you want to spend in retirement.

“It may look very different for an early retiree in their 40s or 50s to 60, 70 or 80-years-old as your needs change over time.”


2. Avoid high interest debt

Costa said while financial experts love to discuss the wonders of compound interest in investing but it can also work against you.

“When you have high interest debt you have the extremely powerful force of compound interest actually working against you,” he said.

“For example credit cards tend to have high interest which if you leave unpaid it’s extremely fast how much that debt can increase.”

Costa said it’s incredibly powerful to pay down high interest debt as soon as possible and ensure credit cards are paid on time to avoid interest.


3. B is for budget

“Some investors love talking about this but others hate it but I will have to say the forbidden b word – budgeting,” Costa said.

“A lot of investors think of budgeting as something that controls you but it’s actually very much the opposite and is a way to take control of your finances.”

Costa said there are different budgeting strategies to match different personalities and goals which Vanguard uses to help clients achieve their goals.

“We understand that people have different priorities when it comes to budgeting and we want to match your budget style with your goals and personality,” he said.

“Some people love sitting in front of a spreadsheet while others hate it, so we need account for those differences.”

He said the goal of a budget is to see where money is going and coming from and for investors to retire early it is important to reduce spending and save more in their working years … and then think also about tip number 4.


4. Try to earn as much as possible

Costa said many people’s first thought will be that is easier said than done and everyone wants to make more money.

“The idea which the FIRE movement has done a lot is if you have a passion on the side, turn it into a side hustle,” he said.

“Lots of people love photography, some like teaching on the side and doing something which is pleasant for them but brings in additional income.”


5. Invest as much as possible and be consistent

Costa said investing as much as you can and consistently is really important to building long-term wealth.

“When we talk about discipline at Vanguard, one of the things we really think about is putting money into the market consistently because that’s really what moves the needle when it comes to achieving financial success,” he said.

Understanding the peaks and troughs of life

Costa said life does change and its important to realise you will have periods of greater expense than others.

“Someone in their 20s may not have kids yet and may have a goal of how much money you want to have to retire but without considering in the next few years you may have kids or ageing parents to take care of,” he said.

“When we think about the FIRE movement you need to take into account life changes; your family may change along with your needs over time.

“Being aware your cost of living may change is incredibly important.”