From the Handelsblatt archive: A lot can go wrong on the path to financial independence. An early retiree couple reveals how to avoid the biggest pitfalls - and make their dream come true.
Frankfurt. Many people want to become financially free - but very few actually manage to do so. Two who made it are the Romanian Rob and the Scottish Emma. Since 2015, the couple has been living entirely out of their own pockets. They started small.
The two met while studying in Stuttgart. Rob then worked as a freelance software developer, Emma in a large IT company. Together they earned around 6,000 euros gross back then - not a lavish amount even in 2006.
In 2009, shortly after the global financial crisis, the couple bought their first small apartment in Stuttgart, initially for their own use. Over time, five more were added. “An absolute no-brainer,” says Rob today. “At that time, two-room apartments in the city center only cost around 100,000 euros.” Since then, the properties have at least doubled in value and rental income has also increased.
The couple became financially free in their early 30s, emigrated to Romania and have lived in Timisoara with two children ever since. They don't want to read their real names in the Handelsblatt. Even family and friends believe that the early retiree couple is still working.
Rob and Emma are part of the FIRE (“Financial Independence, Retire Early”) movement. It brings together people who want to retire as early as possible and save a lot of money at a young age, live frugally, and invest specifically in rental apartments and ETFs. If the income from your assets - dividends, interest, rental income or investments - is high enough to live on permanently, you are considered financially free.
But getting there is becoming increasingly difficult due to inflation and the stock market downturn. Many FIRE disciples are already saying goodbye to the goal of retirement at 40 - like scene leader Oliver Noelting from the online blog frugalisten.de, who postponed his retirement indefinitely after starting a family.
Many frugalists also overlook other common pitfalls. That's why the Handelsblatt checked: What really matters if you want to become financially free? How do you get around the six biggest hurdles? And what do those people like Rob and Emma who have made it teach?
FIRE Mistake 1: Budgeting too little money
What can go wrong: Financial freedom requires being well prepared - especially when it comes to savings. Many FIRE supporters follow the four percent rule, which is based on the so-called Trinity study: In 1998, US researchers examined which withdrawal rates from a portfolio were sufficient for a lifelong pension. The result: If you withdraw four percent annually for over 30 years, the money would last that long in almost all cases.
Conversely, you need 25 times your annual expenses as assets. Anyone who needs 40,000 euros per year needs around a million euros for financial independence.
How to do it better: Privateer Rob advises a larger buffer. He says: "The four percent rule would be too tight for me. I wouldn't be able to sleep peacefully with that." What if things go bad on the stock market? He wants to remain flexible and not have to look at his stock portfolio every day to check whether there is still enough.
Therefore, he keeps more reserves than necessary. The gain in composure is worth it to him, says Rob: “If prices collapsed by 50 percent, I wouldn’t have to tremble, but would buy more.” However, this is an individual decision; other FIRE supporters also feel comfortable with less buffer.
Rob and Emma also rely on small additional income despite their retirement. Emma occasionally translates books, Rob runs a small online business that, as he says, is increasingly being replaced by AI. This makes his buffer all the more important.
FIRE Mistake 2: Incorrectly calculating living expenses
What can go wrong: Not only the credit side should be measured realistically, but also your own expenses. Many FIRE supporters calculate too tightly and underestimate unforeseen costs.
Rob and Emma also had to learn this the hard way. In 2019 they bought a hundred-year-old property in Timisoara, Romania: their dream house, 200 square meters, small garden, good location for just 180,000 euros. The children could now walk to school. “It greatly improves our quality of life,” says Rob.
But the dream of owning a home turned out to be more expensive than expected: the house was poorly insulated and hardly energy efficient, and the walls were too unstable. Rob and Emma installed solar panels on the roof, expanded the basement, and had to do a lot of repairs. All costs that the couple had not considered: “A house is a never-ending project and a money-waster,” says Rob today.
Despite the additional cost, he doesn't regret the purchase. The family feels very comfortable there, and that is also worth a lot. In addition, the value of the property has increased by 50 percent in the past five years.
How to do it better: Projects like building a house usually cause additional costs. According to a comprehensive survey conducted by the University of Erlangen-Nuremberg in recent years, 70 percent of private construction projects in Germany will be more expensive than planned. One in five owners exceeds their budget by more than 20 percent, and one in ten projects even costs 30 percent more.
Underestimated renovation expenditure is often the cost driver. You should therefore realistically calculate your own expenses and living costs in advance.
FIRE Mistake 3: Underestimating Inflation
What can go wrong: In Romania the situation is no different than in Germany and the entire euro zone: inflation has risen sharply in recent years - and with it the prices for food, energy and everyday life. Despite the government price cap, Rob now pays significantly more than he used to. While around 35,000 euros per year used to be enough for a family of four, today it is almost 50,000 euros. “Without our standard of living having changed,” says Rob.
These periods of high inflation occur again and again. When Rob graduated from high school in 1997, annual inflation in Romania was 150 percent. His father even took out a home loan in 1993 at 50 percent interest. If you want to become financially free in the long term, you should consciously price in these inflation phases - and protect yourself against them.
How to do it better: Rob consciously keeps his own standard of living low and lives frugally. The family doesn't own a car. At the supermarket, Rob looks for deals and also buys food that is about to expire. He buys clothes used in second-hand shops. He also keeps meticulous records of all expenses every month. All of this helps to mitigate the cost explosion caused by inflation.
Rob also relies primarily on stocks as protection against inflation. A third of his wealth is in them. Of all asset classes, stocks are considered to be the most reliable protection against inflation: companies can often pass on price increases to their customers, their profits increase in the long term with nominal growth and with them share prices.
His real estate in Stuttgart also offers Rob a certain level of protection against inflation. Rents are often linked to the consumer price index and rise with inflation in the long term - even without automatic adjustment. “But not as strong as stocks,” says Rob. “Because politics and regulation get involved.” For example with rent controls and energy requirements.
FIRE Mistake 4: Not diversifying your money
What can go wrong: Hardly anyone can build up a large fortune and become financially free without investing their own money. But what is the best way to invest?
The number one mistake in long-term investing is not diversifying. A few properties in the same micro-location lead to a high concentration risk, as do a few individual stocks. In order to limit your own risk of loss, you should definitely spread your assets across different asset classes, countries, industries and companies.
How to do it better: Rob has divided his assets: a third is in the two apartments in Stuttgart that he rents out. A third is in stocks, in a world ETF and a US ETF on the S&P 500. A third is in Romanian government bonds, which bring an unusually high return of around five to six percent per year for bonds.
Rob has also mixed in cryptocurrencies: he invests a small portion in Bitcoin and Ether. “It’s highly speculative,” he says, “so never more than five percent of the total assets.”
Rob does not take any money out of the deposit, but lives off the regular interest payments on the bonds and the monthly rental income from the apartments. If there are problems with the tenants, he sends a friend from Stuttgart, whom he pays per assignment.
FIRE Mistake 5: Sticking rigidly to your own strategy when investing
What can go wrong: What is the biggest mistake on the path to financial freedom? “Believing FIRE is an end state,” says Rob. Once you've invested a large enough fortune, you can't just put your feet up forever. As an investor, you should remain flexible and adapt your own strategy if necessary.
Just as prices in the country sometimes fall and sometimes rise sharply, the economic cycle also goes through cyclical phases of upswings and downswings, bull and bear markets. On average, the global stock market generates long-term returns of around five to seven percent per year. Of course, you should stick to your basic long-term strategy and not reorganize your portfolio every time there is a setback - but not at the price of inertia.
How to do it better: Rob stays informed and doesn't stick rigidly to his strategy. Since Trump took office, he has been checking the depot almost every day. He recently sold many shares of his ETF on the S&P 500 because he believes the US market is too valued and is expecting corrections.
In the past two years he has sold four of the six apartments in Stuttgart at a great profit. “Property prices have risen sharply since 2010,” says Rob. Given the economic situation in Germany and especially in Stuttgart, he does not believe that they will continue to rise. The automotive industry is in crisis, suppliers like Bosch and Mahle are laying off employees en masse. Rob’s conclusion: “Demand in the region will dwindle.”
He invested the proceeds from the sale in Romanian government bonds and hopes for higher returns than with the apartments.
FIRE Mistake 6: Ignoring currency risks
What can go wrong: Currencies in smaller or less economically stable countries often lose value in the long term compared to key currencies such as the euro or the dollar. The Romanian leu, for example, is considered to be quite stable, but in the long term it usually depreciates against the euro - thus reducing the returns on local bonds.
The risk is even greater with more volatile currencies: in some years, the Turkish lira or the Argentine peso have fallen so much that even double-digit bond interest rates have slipped into the red in real terms. Anyone planning for the long term should always keep an eye on the currency.
How to do it better: Rob deliberately does not hold any assets in the Romanian national currency, Leu. Instead, he holds Romanian government bonds equally in dollars and euros to protect himself from devaluation and currency risks.
