Updated: Oct 13
How did I stumble upon FIRE?
FIRE stands for “Financial Independence Retire Early”. The FIRE movement started to get its popularity around 2010 via online blogs. The FIRE concept is to have a frugal lifestyle and invest all your savings in the total stock market or the SP 500, which in the long run would help you achieve an early retirement lifestyle.
Why the SP500 index? What about diversification?
Well the SP500 Index fund is already diversified for you, it is a fund that consists of 500 stocks that meet the specific requirement and criteria to be in the SP500 Index.
By investing in the index funds, you are owning a small percentage of each of those 500 stocks.
For example, the Fidelity 500 Index Fund has 508 stocks! Even with the top 10 stocks below so you are well diversified.
After my struggles with trading stocks and crypto, I try to improve myself to achieve financial freedom by watching Youtube videos about people who have successfully completed their journeys. After seeing so many Youtube videos about people getting rich from the 2008 housing crash, the stock market, and/or real estate, I was tired and sickened from all that media consumption.
Then in late 2019, I stumbled upon FIRE when watching a Youtube video of a young family retired in their 30s. At first, I was skeptical and thought this was just another clickbait video. But I watched the video, and they talked about real estate back in 2008. I thought they were just like everyone else, but I decided to continue watching nonetheless. Then they started talking about FIRE and where to invest your money. I have heard about people discussing the SP 500 before, but I never really knew what actual funds to invest in. I became motivated and saw the probability that FIRE could work after running some calculations and doing more research on the subject.
In 2020, I started to make PowerPoint slides and shared them with all my family, but my siblings were skeptical because like everyone they don’t trust the stock market. The funny thing is, for all of us who have a company 401k and have investments in them, you are already invested in the stock market.
Later, I found out that one of my nephews already knew about FIRE, and he had been doing it for a year, we started to talk as he shared his strategies, his plans, and his FIRE number. This made me excited and motivated to have someone like-minded.
Let’s talk about my $1 million number and how I came to that.
First, let’s run some calculations of my family expenses with our calculator.
As you can see, below are my estimated monthly expenses and necessities for my family. We are just taking into account shelter, transportation, food, insurance, utilities, and phone/internet.
With a press of a button, my estimated yearly expense is $47,280 and my estimated FIRE number would be $1.4 million. However, I think our expenses will go down since I plan to pay off the house by then.
If I take out the mortgage expense and let’s say another $900 for property taxes, my FIRE number is only $842,400. Therefore, my FIRE number of $1 million should be sufficient. Whether it is sufficient or not, I can always reassess it when I get my $1 million.
Now that I have my FIRE # $1 million, what is my how-to plan?
So I started my FIRE journey beginning of 2020, I have a set goal to reach my FIRE number in 10 years. Now in 2021, I am in my 2nd year, and I am excited.
2020 is when I started to take FIRE seriously, I put 100% future 401k contribution into the total stock market fund and stopped contributing to other investments. You can see the performance stats for the fund below.
I maxed out my 401k limit contribution that the IRS allowed which is $19,000 for the year 2020.
From my balance history below, you can see my total balance started at $110K at the end of 2019, and at the end of 2020, I was at $169k. That is roughly an increase of $59k into my retirement account.
If you look at the chart during the COVID-19 pandemic in March 2020 where the whole market crashed and so did my account, it went from $110k to $93k. Yes, it was scary to see your investment drop in a blink of an eye. However, I did not stop investing, I left everything as is, with the same strategy of every bi-weekly when the money is automatically deducted from my paycheck then invested into the total stock market.
I figured this investment is a marathon, and I learned that from the 2008 crash, it will recover eventually it just takes time.
Some people saw this and moved everything to bonds and waited until the market recovered to put into the stock market again. However, with this strategy, you are trying to time to the bottom and the top. A lot will be missed out on the run-up for recovery gain because no one can call the bottom and the top.
What was the result of my 2020? Many think that 2020 was a fluke year because of the tech hype. Whether it was a fluke year or not, the Fidelity® Total Market Index Fund return was 20%, and with my 401k contribution maxed out, my account was able to grow really fast.
From this experience, I learned that by sticking to a long-term investment strategy and staying my course my account was able to grow fast, and in the worst case, I would still get 8% for a 10-year average return.
So how will I reach my $1 Million dollars?
This year, 2021, I continued to max out my 401k limit of $19,500 that the IRS allows. You can check the information here regarding limits for 401(k) plans.
However, I am taking a little more risk by putting my future contributions with the strategy below:
75% of the large-cap growth fund
25% into the total stock market.
Below is my current Investment for my 401k portfolio.
The reason I don’t put it into the SP 500 fund is that my company’s brokerage-of-choice (Fidelity) doesn’t have the SP 500 index fund so that is why I have the Total Stock Market Index.
Why do I take this risk?
Well, this is based on my goal of getting $1 million within 10 years (actually 9 years from now).
If you look at the past performance of Fidelity Growth Company Fund - Class K, as of the end of March the 10-year annualized return is 20%, and the life return is 14.83%.
That is really good for a set-and-forget investment strategy. So with the higher return, I can reach my $1 million faster.
If you look at the end of 2020, my 401k account was at $169,000 so if my portfolio manages to get a 15% return annually, I would have $985k in 9 years, which is very close to my $1 million dollars goal.
And if my portfolio manages to get to a 20% return annually for the next 9 years then I would have $1.4 million. That would be awesome if that is the case.
A side note on the fee of the Fidelity Growth Company Fund - Class K (FGCKX):
Exp Ratio (Gross) 0.75% or $7.50 per $1,000
I am fine with paying a small fee to get more returns. So if I have $ 1 million dollars invested in FGCKX, I would pay the fee of $7,500 a year, which sounds like a lot of money. However, If you pay $7,500 to get an extra 5% return, or $50,000, would you do it?
Will I have enough money?
Ok, let’s say I get my $1 million in the next 9 years I would be in my late 40s. Is it sufficient to support me?
With the assumption facts below:
the living cost is the same
I don’t have a mortgage
My annual expense is $ 28,080
Income tax is 25%
Let us caculate my FIRE life number which you live off the 4% of your investment.
As you see, if I don’t continue reinvesting my money, I would not have enough to cover my expenses on the 5th year after-tax living off the 4% rule, and my 4% amount is smaller each year.
If I take out $38,000 then the after-tax value would be $28,500, enough to cover my expense but this will only last me 26 years until I run out of money. By that time if I’m not dead, I will need to go back to work or beg my children for a hand-out.
Reinvesting my 1 Million.
If I continue to keep my investment in the market and if the market continues to give an 8% return, then I will be set until I die. From the calculation, you can see that the 4% is more than sufficient to cover my expense, and my yearly withdrawal grows each year as well. Then when I’m dead I still have money left over to give to my children or grandchildren.
All these estimated calculations are based on the market continuing to go up each year. There will be some years when the market is down and we have to take that into consideration as well. But as of now, this is my plan and calculation to get my FIRE # of $1 million dollars.
Another note is that my calculation does not include my company matching of 6% at the end of the year. If we include that I think I may get to the $1 million dollars mark faster.
People say “seeing is believing” so my goal is to document and blog my account progress as proof of concept so that other average Americans know that financial independence is achievable.
For those who are skeptical about the market is being high, if you look at the end of 2020, a lot of people thought that was high already. Now, if you look at the SP 500 index year-to-date, January 2021 to April 2021, the return is already up 11%, so if you have been sitting on the sideline, you have already missed out on an 11% run-up.
No one knows when the market will correct again or will it continue to go up. It may go down next month or 3 months later. Whichever the case, I will just continue with my contributions and invest in the funds I chose until I reach my $1 million. I am very excited about my journey since my account has recently crossed the $200,000 mark.
I hope that this has motivated you in starting your journey to financial freedom.
But before you go all-in with investing, make sure you plan out other financial tasks that I mentioned in the blog “Before Investing”, and the most important advice of all is having an emergency fund saved up.
Want to see other fund suggestions for Fidelity, please see this blog "Fidelity Funds To Invest In".
*Disclaimer. I am not a financial advisor. The contents on this site are referenced as opinions and are for information purposes only. It is not intended to be investment advice. Please seek a licensed professional for investment advice.