Why “financial independence” motivates me more than “retirement”

Commentary by Paulo Costa, PhD, Vanguard investment strategy analyst

When I think about retirement, it’s not the idea of leaving my job that appeals to me. It’s the idea of having financial independence. I’m fortunate. I love my job. It motivates, inspires, and challenges me.

So instead of focusing on “retirement,” I focus on being able to weather ups and downs, to help family members, and to take time off if I need to. Seeing the economic consequences of the pandemic has driven home the need for this security even more.

I’m not alone. Many investors are more inspired by “financial independence” than “retirement.” That’s one reason the FIRE movement—Financial Independence Retire Early—has grown from a niche investing approach to become more mainstream. FIRE helps investors set goals that are more inspiring than retirement. And for many FIRE followers, achieving those goals doesn’t necessarily mean leaving the workforce forever. Instead, it’s about having enough invested to gain flexibility and freedom.

As an investment strategy analyst, I’ve studied different investment approaches and drivers. FIRE may not be for everyone, especially the idea of retiring early. But many of the FIRE investing strategies are similar to those recommended by Vanguard. Here are 3 key lessons I’ve embraced from both Vanguard and FIRE investors.

1. It starts with being intentional about your finances

At the heart of the FIRE movement is a commitment to carefully choosing what to spend money on. Extreme FIRE investors cut costs aggressively in favor of investing. Some write about living in RVs or tiny homes so they can invest every penny. Most don’t take it quite so far. But they all place an emphasis on choosing what’s really important to them.

Vanguard’s founder, Jack Bogle, used to eat peanut butter and jelly sandwiches for lunch. These sandwiches are still a staple in Vanguard cafeterias today—one of his many legacies. Living more modestly can provide peace and stability, as well as help lower financial stress.

In fact, some Vanguard investors ingrain this mindset into their lives so completely that they struggle to adapt once they’ve reached their financial goals. Our advisors often have to encourage them to make the shift from saving to spending once they’re in retirement.

2. You can’t control the market, but you can control your portfolio

Vanguard and FIRE investors also believe in focusing on the things you can control. Future market returns aren’t within your control. But how much you save and invest are. To quote Vanguard’s Principles for Investing Success, “A higher contribution rate can be a more powerful and reliable factor in wealth accumulation than trying for higher returns by increasing the risk exposures in a portfolio.”

Vanguard’s 4 investing principles outline a solid path to building wealth. These principles are powerful because they focus on what you can do:

• Set clear investment goals.
• Adjust your portfolio to reflect your risk level.
• Keep investment costs low. (Vanguard’s low investment costs have always attracted careful investors!)
• Resist the temptation to react to market ups and downs.

3. It’s better to change plans than to not plan 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 creating a balanced portfolio—on your own, by using a robo-advisor, or by partnering with a personal advisor.

Of course, there may be times you need to change plans. But it’s always better to make adjustments than to not plan at all. FIRE investors have discovered that even if they don’t meet their aggressive early retirement goals, they can still build up enough of a cushion to feel secure.

If you do decide to retire early, make sure you’ve saved enough to sustain your desired lifestyle in retirement.

It’s all about priorities

Investing is a personal journey. The decisions you make depend on your risk tolerance, your personal goals, and your financial situation. What’s universal is the need to be intentional about finances.

Reading about different approaches has helped me define my own priorities and goals. I may not be interested in retiring early, but I do want the security financial independence can bring.

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Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.