If you are paying attention to financial information on the internet, you may have heard of #Fire, or Financially Independent Retired Early (FIRE). There is a large movement and many people blogging about FIRE; how they’ve done it; how they plan to do it; and why you should do it too.
What’s interesting, is many of the blogs talk about making more money online, saving money by austere actions, like packing your lunch, walking to work, skipping the morning or afternoon latte, etc. Like many diets (food austerity), it’s very hard to continue for a length of time, especially if you have already have gotten used to one of those creature comforts.
Some of the blogs do talk about investing and offer progressive, online investing websites where you put a small amount of money towards investing. Then, many tell you to invest conservatively. This advice is not necessarily going to satisfy the “Retired Early” part of #FIRE. It will, however, help with the #FI portion. So to balance both, you have to take on some risk or extreme investment in time. Both sacrifice of time without some assurance of profit/income, and an investment in the money you’ve already made without some sort of assurance of profit is the same issue at hand. How much risk for how much reward?
#FIRE followers like to think of themselves as people who think outside the box. They are entertaining a new way of making money; a new way of thinking and quite possibly could be changing how people work, invest, and live.
If you are interested in #FIRE, just Google it and see how many podcasts and blogs there are on the subject. I will talk about it on my site quite a bit, but try to get people thinking a little differently when it comes to this movement.
Everyone should do a gap analysis occasionally, to see where they are on the retirement path. Most people are told, “You need to save 1-2 million dollars to live safely into retirement.” I want to propose a different way of looking at this same issue. Simply, take the amount you need to live annually, deduct that reasonably certain income and the difference is your “Gap”. Once you know this number, the goal is simply to close the gap to zero, or even have extra income in retirement, so you never have to worry about how you will live once you leave the workforce.
If you have income that does not require you to work for someone else and can count on it with relative certainty into retirement, then you should list it. I’ve named a few here:
- Pension Income or Social Security Income
- Dividends on 401K’s, 457’s, and IRA’s. (90% of dividends)
- Monthly income on rental real estate (75% of net)
- Any income on non-depreciating assets (i.e. Annuities, paid settlements)
What I would not count towards your Gap Analysis:
- Blog Income
- Online Jobs (Fiverr, etc.)
- At-Will Jobs like Uber, Lyft, DoorDash, etc.
- Any income that someone else can take away from you for now reason
Many #FIRE aficionados love to tout the “Side Hussle”, which is a great way to earn money above and beyond your job. My argument is that money should not be in your Gap analysis, since it can be taken away from you with relative ease. I’m sure many people were making a few thousand a month with ad revenue from Youtube.com, however, in early 2017, many youtubers were no longer allowed to collect ad revenue unless they met a certain threshold. Recently, facebook.com changed their ads algorithm, making it harder to advertise on their site, as well.
Blogs are a little more stable, but could be just as risky. My brother-in-law started several websites in years past. One was doing very well and he had an offer for 1.6 million to buy the site. This was in 2007/2008, and he hesitated, thinking it may be worth even more. He further developed the site, but the recession hit and he suffered. Since the website catered to aftermarket modifications on pickup trucks, the first thing people stop paying for is “add-ons”. Although, the site still did very well and was income producing, he ultimately sold the site for approximately 60% of the original offer. Still, he made good money, but there is so many reasons a site can have large swings in revenue.
The other problem with a blog is you generally have to nurture it. I’m not saying don’t start a blog or try to monetize it. I’m working on that right now. What I’m saying is decide how much of the website can profit without your influence and maybe add that to your Gap analysis. Of course, if you develop and sell that site, then that is cold-hard cash and you can look at it differently.
Risk and Reward
Now that we understand that some things are risky, even if you think they are not, you may have another point-of-view on how you should go about thinking about retirement.
You notice, even on dividend paying stocks, I suggest only counting on about 90% of that income. Why? Well, if you save and reinvest that 10%, it creates a buffer and will allow you to maybe make a small increase to your dividend income to keep up with inflation. So, pay yourself 90%, reinvest 10% and never touch the principal.
You see on rental income, I have 75% of the net listed. Why? Well, that’s what the banks see as a fair vacancy factor. If you were to set that 25% aside and escrowed it for vacancy, repairs, etc., you could count on the 75% with more certainty. Is it making sense now? Essentially, you are setting a percentage of reliability for the income you are collecting. So, going back to the blog, maybe you can assess it at 50-60%? Maybe more, but just think how long will it last? Until you’re in your 90’s?
I won’t get into the percentage of Pension Income or Social Security Income. Those you can count on at 100%, however, those are even put at risk. Many government pensions have been stripped away by poor money managers in their pension systems. Or, government and politicians stealing the money away from their system. This too, may be worth setting a percentage, so you can have some reliability in your retirement.
Ah, Now to Options
Many people don’t understand options and there are many ways to learn about them. The reason I want to bring them to your attention is they satisfy a couple of these concerns. One, you can hedge off other risk with options. You can increase your dividend rate. In fact, many Closed End Funds (CEF)’s invest in companies, but create extra income for their investors through “an Options Trading Strategy”. Some of these strategies are very safe and everyone who wants to retire early should learn about them. For a very conservative investor, covered calls and short naked puts are a great way to get started. Both are safer than investing in stock alone.
There are other ways to invest in options. “Delta Neutral” investing can be done with options. This means the investor has no interest in the direction of the market and only seeks to make money with options expiring worthless (not exactly right, but more or less the point of it all). If you have an account which is positive theta and fairly neutral on delta risk (directional risk), you make money regardless of the market moves, assuming you adjust your portfolio with the moves, versus trying to predict the moves.
Warren Buffett, the most famous investor of all time used the covered call and naked puts to increase his revenue. It’s not well talked about, however, if you look at Berkshire Hathaway annual reports, you will see they have ‘derivative income’.
How you choose to invest is not why I wrote this article. My interest is exposing the reader to new ways to invest which are not in the mainstream. Why? Well, the mainstream media, for example, gets paid when they create fear, panic, controversy, etc. Similarly, mainstream brokers profit when you lose. Many take the other side of your trade. Or, they use options, and perhaps futures contracts, to hedge the risk of your portfolio. If they are using these derivatives to protect them from their customers (you), why shouldn’t you do the same?
My goal in this article was to get the #FIRE thinkers to think bigger than they ever have before! Many are trying to save $2 on a coffee or latte, however, if you could work a couple hours of overtime and have an account with a positive theta of 2, you could get your latte every day for the rest of your life without ever investing again (not 100% probable, but there is a probability of success with options).
If you’re interested in learning more about options, of course, I write about them and want people to learn. There are other sources.
ChristianMeadows.com Articles about Options