1 00:00:04,050 --> 00:00:06,900 Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Seann Aylmer. 2 00:00:07,170 --> 00:00:09,600 Sean Aylmer: One of the big financial trends in recent years has 3 00:00:09,600 --> 00:00:14,460 Sean Aylmer: been the FIRE movement, Financial Independence, Retire Early. A lot 4 00:00:14,460 --> 00:00:17,340 Sean Aylmer: of the headlines focus on pretty sensational stories of people 5 00:00:17,340 --> 00:00:20,310 Sean Aylmer: in their 30s and 40s retiring early and living off their 6 00:00:20,310 --> 00:00:23,520 Sean Aylmer: savings. But FIRE is a lot broader than that, and 7 00:00:23,520 --> 00:00:28,230 Sean Aylmer: it basically encompasses anybody who's considered retiring early, even if 8 00:00:28,230 --> 00:00:30,810 Sean Aylmer: they're not quite sure how to do it. Remember, this 9 00:00:30,810 --> 00:00:33,629 Sean Aylmer: is general information only. You should get professional advice before 10 00:00:33,630 --> 00:00:37,589 Sean Aylmer: making any investment decisions. Dr. Paulo Costa is a Senior 11 00:00:37,590 --> 00:00:41,430 Sean Aylmer: Behavioral Economist at investment giant Vanguard, and joins me this 12 00:00:41,430 --> 00:00:44,460 Sean Aylmer: morning from the US. Paulo, welcome to Fear and Greed. 13 00:00:45,060 --> 00:00:46,650 Dr. Paulo Costa: Thank you. Thanks for having me. 14 00:00:47,370 --> 00:00:49,620 Sean Aylmer: Tell me, you've done a lot of research into FIRE. 15 00:00:50,070 --> 00:00:52,380 Sean Aylmer: Tell me about it. Why has it become so big 16 00:00:52,380 --> 00:00:53,339 Sean Aylmer: in recent years? 17 00:00:53,970 --> 00:00:57,120 Dr. Paulo Costa: I think the pandemic helped in some ways with the 18 00:00:57,120 --> 00:01:02,970 Dr. Paulo Costa: evaluations, reevaluations about work- life balance. That's certainly one thing. 19 00:01:03,300 --> 00:01:07,139 Dr. Paulo Costa: I think from a financial professional standpoint, I actually find 20 00:01:07,140 --> 00:01:11,429 Dr. Paulo Costa: FIRE to be quite inspiring, in the sense that people 21 00:01:11,430 --> 00:01:14,940 Dr. Paulo Costa: are using what we do, which is finance and financial 22 00:01:14,940 --> 00:01:18,180 Dr. Paulo Costa: education, to really change their lives. And I find that 23 00:01:18,180 --> 00:01:21,690 Dr. Paulo Costa: actually quite beautiful. And I think the idea of empowering 24 00:01:21,690 --> 00:01:24,510 Dr. Paulo Costa: people to do what they want to do. So I 25 00:01:24,510 --> 00:01:28,050 Dr. Paulo Costa: think that's why it has been such a huge movement 26 00:01:28,110 --> 00:01:31,110 Dr. Paulo Costa: in the United States, in Europe, in Australia, because I 27 00:01:31,110 --> 00:01:33,959 Dr. Paulo Costa: think the idea is very easy to understand. If I save a 28 00:01:33,959 --> 00:01:37,110 Dr. Paulo Costa: little bit more, I may be able to retire earlier. 29 00:01:37,560 --> 00:01:40,410 Sean Aylmer: Okay. Is that what it's about, saving a little bit 30 00:01:40,410 --> 00:01:41,610 Sean Aylmer: more younger? 31 00:01:42,330 --> 00:01:45,690 Dr. Paulo Costa: Yeah, so I would say a couple of things. One, 32 00:01:46,050 --> 00:01:51,060 Dr. Paulo Costa: it's really about having a solid investment strategy that takes 33 00:01:51,060 --> 00:01:55,410 Dr. Paulo Costa: into account precisely how long you think you're going to 34 00:01:55,410 --> 00:01:59,520 Dr. Paulo Costa: be retired, having realistic assumptions about the returns you're going 35 00:01:59,520 --> 00:02:03,840 Dr. Paulo Costa: to have. And also very importantly, having a very fair 36 00:02:03,870 --> 00:02:06,240 Dr. Paulo Costa: assumption of how much money you think you're going to 37 00:02:06,240 --> 00:02:09,300 Dr. Paulo Costa: spend in retirement, and also how you're going to withdraw 38 00:02:09,300 --> 00:02:13,950 Dr. Paulo Costa: the money. Even though it's a very simple idea, retiring 39 00:02:13,950 --> 00:02:18,690 Dr. Paulo Costa: early, it doesn't really mean that it's a simplistic movement. 40 00:02:18,690 --> 00:02:22,050 Dr. Paulo Costa: There is a lot here to be unpacked, but in 41 00:02:22,050 --> 00:02:24,930 Dr. Paulo Costa: the end of the day, I still think, if you 42 00:02:24,930 --> 00:02:28,740 Dr. Paulo Costa: put in realistic goals and a solid investment strategy, I 43 00:02:28,740 --> 00:02:33,120 Dr. Paulo Costa: think there is a good chance that investors can achieve FIRE. 44 00:02:33,660 --> 00:02:36,120 Sean Aylmer: Okay. So before we get into the details of how 45 00:02:36,120 --> 00:02:38,940 Sean Aylmer: to do it, who is doing it? Is it something 46 00:02:39,360 --> 00:02:42,690 Sean Aylmer: that 40- year- olds are thinking about more than they 47 00:02:42,690 --> 00:02:47,820 Sean Aylmer: did previously? What's the age cohort that's thinking about FIRE? 48 00:02:48,240 --> 00:02:50,340 Dr. Paulo Costa: Yeah, so I think here there is a divide. There 49 00:02:50,340 --> 00:02:52,799 Dr. Paulo Costa: is what we see in the media and what actually 50 00:02:52,800 --> 00:02:55,919 Dr. Paulo Costa: happens. I think what we see in the media, we 51 00:02:55,919 --> 00:03:00,570 Dr. Paulo Costa: like talking about the people who retire at age 30, age 29. 52 00:03:01,080 --> 00:03:03,630 Dr. Paulo Costa: But I think really this is a movement of people 53 00:03:03,630 --> 00:03:11,100 Dr. Paulo Costa: between ages 40 to 55 that really decide to retire early because 54 00:03:11,340 --> 00:03:15,000 Dr. Paulo Costa: they figured out they have enough saved, or really that 55 00:03:15,000 --> 00:03:18,300 Dr. Paulo Costa: they want to do something else in life. We talk 56 00:03:18,300 --> 00:03:22,770 Dr. Paulo Costa: about FIRE, Financial Independence, Retire Early, but there is a 57 00:03:22,770 --> 00:03:26,220 Dr. Paulo Costa: big segment of these investors that they're not really retiring 58 00:03:26,220 --> 00:03:29,370 Dr. Paulo Costa: early, they're just doing something else with their life. So 59 00:03:29,370 --> 00:03:33,329 Dr. Paulo Costa: they are maybe changing careers. And so what I find 60 00:03:33,330 --> 00:03:38,490 Dr. Paulo Costa: really interesting counterintuitively is really the financial independence piece of 61 00:03:38,490 --> 00:03:41,280 Dr. Paulo Costa: it, because I think that's really the enabler of 62 00:03:41,280 --> 00:03:43,920 Dr. Paulo Costa: what comes after, which is whether you want to retire 63 00:03:44,010 --> 00:03:46,380 Dr. Paulo Costa: early or you want to do something else with your life. 64 00:03:46,380 --> 00:03:50,460 Dr. Paulo Costa: And I think, again, having the financial knowledge and learning 65 00:03:50,460 --> 00:03:52,860 Dr. Paulo Costa: about finance, because most of these people, they're not financial 66 00:03:52,860 --> 00:03:56,880 Dr. Paulo Costa: professionals. So getting that knowledge to go empower themselves to 67 00:03:56,880 --> 00:03:59,040 Dr. Paulo Costa: do it, I think is again quite beautiful. 68 00:03:59,550 --> 00:04:03,300 Sean Aylmer: Okay. Let's say someone decides that, " I would like to 69 00:04:03,690 --> 00:04:07,050 Sean Aylmer: either retire early or change my circumstances in life at 70 00:04:07,050 --> 00:04:10,230 Sean Aylmer: the age of 55," and they're a 40- year- old, 71 00:04:11,370 --> 00:04:13,770 Sean Aylmer: obviously they ... I mean, you made it clear that they 72 00:04:13,770 --> 00:04:17,640 Sean Aylmer: need a good solid financial strategy. But is it also 73 00:04:17,640 --> 00:04:22,020 Sean Aylmer: about having side hustles, about earning extra money, about being 74 00:04:22,020 --> 00:04:25,800 Sean Aylmer: more frugal in that 15 years than you were perhaps 75 00:04:25,800 --> 00:04:28,410 Sean Aylmer: in the previous 15 years? You must have to make 76 00:04:28,410 --> 00:04:30,779 Sean Aylmer: a bit more of an effort in a sense to 77 00:04:30,779 --> 00:04:31,289 Sean Aylmer: get there. 78 00:04:32,010 --> 00:04:35,160 Dr. Paulo Costa: Certainly. And I think you're pointing out something that is 79 00:04:35,190 --> 00:04:38,880 Dr. Paulo Costa: extremely important, which is to have the appropriate assumptions in 80 00:04:38,880 --> 00:04:42,360 Dr. Paulo Costa: place. And so, one thing is that is very hard 81 00:04:42,360 --> 00:04:45,690 Dr. Paulo Costa: is for you to estimate how your life is going 82 00:04:45,690 --> 00:04:50,730 Dr. Paulo Costa: to change in, say, 10, 15, 20 years, whether you're planning to have kids, 83 00:04:50,880 --> 00:04:53,880 Dr. Paulo Costa: you may have aging parents, so your circumstances may change. 84 00:04:54,000 --> 00:04:57,839 Dr. Paulo Costa: You certainly need to take that into account. I think 85 00:04:58,050 --> 00:05:00,330 Dr. Paulo Costa: what is really key, as you were saying, there are 86 00:05:00,330 --> 00:05:03,210 Dr. Paulo Costa: two ways to go about this, as you mentioned. One 87 00:05:03,570 --> 00:05:08,010 Dr. Paulo Costa: is to go the route of getting additional income. Because 88 00:05:08,430 --> 00:05:10,770 Dr. Paulo Costa: to make the math work, if you just want to 89 00:05:10,770 --> 00:05:14,460 Dr. Paulo Costa: work fewer years and still achieve a retirement goal, you 90 00:05:14,460 --> 00:05:17,190 Dr. Paulo Costa: have to save more. The other way is to cut 91 00:05:17,190 --> 00:05:22,740 Dr. Paulo Costa: expenses, cutting expenses is I think in some ways harder 92 00:05:23,010 --> 00:05:26,219 Dr. Paulo Costa: because there is only so much you can cut in 93 00:05:26,220 --> 00:05:30,599 Dr. Paulo Costa: the end of the day. You still have to survive and hopefully 94 00:05:30,600 --> 00:05:32,610 Dr. Paulo Costa: still get to enjoy life. In the end of the 95 00:05:32,610 --> 00:05:35,310 Dr. Paulo Costa: day, this is about achieving a goal, but I don't 96 00:05:35,310 --> 00:05:37,440 Dr. Paulo Costa: think it diminishes all the other goals you may have 97 00:05:37,440 --> 00:05:40,109 Dr. Paulo Costa: in life. So yes, there are these two ways of 98 00:05:40,110 --> 00:05:44,070 Dr. Paulo Costa: doing this. Basically either you can save more or you 99 00:05:44,070 --> 00:05:46,260 Dr. Paulo Costa: can cut your expenses, or you can do both. 100 00:05:46,830 --> 00:05:49,109 Sean Aylmer: Stay with me, Paulo, we'll be back in a minute. 101 00:05:55,110 --> 00:05:58,409 Sean Aylmer: My guest this morning is Vanguard Senior Behavioral Economist, Dr. 102 00:05:58,410 --> 00:06:02,730 Sean Aylmer: Paulo Costa. So what about the risks involved? Now I 103 00:06:02,730 --> 00:06:04,890 Sean Aylmer: have had a period of my life where I took 104 00:06:04,890 --> 00:06:07,260 Sean Aylmer: a 12- month sabbatical, shall we say. And what I 105 00:06:07,260 --> 00:06:09,810 Sean Aylmer: remember is after ... I mean, it was fantastic to begin 106 00:06:09,810 --> 00:06:12,150 Sean Aylmer: with and I had been paid a redundancy payout, I 107 00:06:12,150 --> 00:06:14,250 Sean Aylmer: had a lump of money, but you can really go 108 00:06:14,250 --> 00:06:18,510 Sean Aylmer: through that money pretty quickly. It must be, your mindset 109 00:06:18,779 --> 00:06:21,570 Sean Aylmer: I think needs to change when you stop earning income. 110 00:06:22,050 --> 00:06:26,220 Dr. Paulo Costa: Yeah. I think you're right. I think retirement in general, 111 00:06:26,250 --> 00:06:29,790 Dr. Paulo Costa: not only FIRE, is a really big change in mindset, 112 00:06:30,330 --> 00:06:33,210 Dr. Paulo Costa: because one thing that we see in the research in 113 00:06:33,210 --> 00:06:36,120 Dr. Paulo Costa: general is the case of the investor that is so 114 00:06:36,120 --> 00:06:39,870 Dr. Paulo Costa: used to seeing their money grow over the accumulation phase. 115 00:06:40,260 --> 00:06:42,450 Dr. Paulo Costa: And when it comes to retirement, the moment when they 116 00:06:42,450 --> 00:06:45,600 Dr. Paulo Costa: have to withdraw some of their money, they freeze because 117 00:06:45,839 --> 00:06:48,240 Dr. Paulo Costa: they're not used to seeing the balance of their accounts 118 00:06:48,660 --> 00:06:52,560 Dr. Paulo Costa: going down. But I think you are right in the sense that 119 00:06:52,560 --> 00:06:57,630 Dr. Paulo Costa: it's a huge change in mindset for folks. And having 120 00:06:57,810 --> 00:07:02,940 Dr. Paulo Costa: a solid investment strategy in place is incredibly important. In 121 00:07:02,940 --> 00:07:06,690 Dr. Paulo Costa: the US, the FIRE movement here used a guideline what's 122 00:07:06,690 --> 00:07:10,500 Dr. Paulo Costa: called the 4% rule, which is basically the idea that 123 00:07:10,500 --> 00:07:14,850 Dr. Paulo Costa: you have to save 25 times the amount of money 124 00:07:15,150 --> 00:07:19,080 Dr. Paulo Costa: that you'd spend in a year in retirement. So what 125 00:07:19,140 --> 00:07:23,520 Dr. Paulo Costa: our Vanguard paper talks about is actually how that rule 126 00:07:23,670 --> 00:07:28,440 Dr. Paulo Costa: is actually flawed for the US investors, and how we 127 00:07:28,440 --> 00:07:35,730 Dr. Paulo Costa: can make FIRE actually a better, more robust alternative by 128 00:07:36,030 --> 00:07:39,150 Dr. Paulo Costa: using some of the principles of investment success that Vanguard 129 00:07:39,150 --> 00:07:42,840 Dr. Paulo Costa: has championed to make FIRE more likely for these investors. 130 00:07:43,080 --> 00:07:45,600 Sean Aylmer: So it's not 4%, what is it? How many years' 131 00:07:45,870 --> 00:07:46,890 Sean Aylmer: savings do you need? 132 00:07:48,750 --> 00:07:54,989 Dr. Paulo Costa: What the 4% rule says is that 4% will work, if you are going 133 00:07:54,990 --> 00:07:58,230 Dr. Paulo Costa: to be retired for 30 years. But if you're retiring 134 00:07:58,290 --> 00:08:01,440 Dr. Paulo Costa: early, then that's very much not the case, you're going 135 00:08:01,440 --> 00:08:03,540 Dr. Paulo Costa: to be retired for longer than that. We are just 136 00:08:03,540 --> 00:08:06,300 Dr. Paulo Costa: talking about someone that may be retired at age 30, 137 00:08:06,300 --> 00:08:09,900 Dr. Paulo Costa: age 40. That person may be in retirement for 50, 60 138 00:08:09,900 --> 00:08:14,160 Dr. Paulo Costa: years. So certainly that rule wouldn't work. One thing that 139 00:08:14,160 --> 00:08:16,800 Dr. Paulo Costa: we talk about in the US by run running the 140 00:08:16,800 --> 00:08:20,700 Dr. Paulo Costa: numbers is that instead of four, something around three to 3. 141 00:08:20,970 --> 00:08:26,820 Dr. Paulo Costa: 3% withdrawal would work. But one key thing that actually 142 00:08:26,940 --> 00:08:32,130 Dr. Paulo Costa: helps substantially, would help investors substantially, is actually having flexibility 143 00:08:32,130 --> 00:08:34,679 Dr. Paulo Costa: in the way that they spend the money in retirement. 144 00:08:35,190 --> 00:08:38,760 Dr. Paulo Costa: So what do I mean by that? Imagine that you work in 145 00:08:38,760 --> 00:08:41,910 Dr. Paulo Costa: a job that pays you a end- of- year bonus, 146 00:08:41,910 --> 00:08:45,240 Dr. Paulo Costa: for example. Well, if the bonus is good this year, 147 00:08:45,330 --> 00:08:48,240 Dr. Paulo Costa: you spend a little bit more. If the bonus is 148 00:08:48,240 --> 00:08:50,400 Dr. Paulo Costa: not as good this year, you spend a little bit 149 00:08:50,400 --> 00:08:54,750 Dr. Paulo Costa: less. Now replace bonus with financial markets. So if the 150 00:08:54,750 --> 00:08:58,020 Dr. Paulo Costa: financial markets have done well this year, you get to 151 00:08:58,020 --> 00:09:00,089 Dr. Paulo Costa: spend a little bit more. If the financial markets are 152 00:09:00,090 --> 00:09:02,520 Dr. Paulo Costa: not doing so well this year, you spend a little 153 00:09:02,520 --> 00:09:06,630 Dr. Paulo Costa: bit less. Actually by doing that, in the research we 154 00:09:06,630 --> 00:09:11,819 Dr. Paulo Costa: found, by adding this flexibility, investors can actually start their 155 00:09:11,820 --> 00:09:16,440 Dr. Paulo Costa: FIRE journey by withdrawing the 4%. And in the numbers that 156 00:09:16,440 --> 00:09:19,559 Dr. Paulo Costa: we have run, that gives you an 85% probability of 157 00:09:19,559 --> 00:09:24,390 Dr. Paulo Costa: success if you're in retirement for 50 years. So adding 158 00:09:24,390 --> 00:09:27,449 Dr. Paulo Costa: a little bit of flexibility to your plan, and really 159 00:09:27,450 --> 00:09:31,260 Dr. Paulo Costa: to most things in life, helps a lot. And here 160 00:09:31,260 --> 00:09:34,199 Dr. Paulo Costa: is one case of that, by adding the flexibility in 161 00:09:34,290 --> 00:09:37,620 Dr. Paulo Costa: the withdrawal amount can really take you a long way. 162 00:09:38,490 --> 00:09:41,760 Sean Aylmer: Now just before you go Paulo Costa from Vanguard, you're 163 00:09:41,760 --> 00:09:44,640 Sean Aylmer: also very interested in financial advice and the value of 164 00:09:44,640 --> 00:09:48,569 Sean Aylmer: financial advice. We're constantly telling listeners on the podcast about 165 00:09:48,570 --> 00:09:51,689 Sean Aylmer: the need to get professional advice before making investment decisions. 166 00:09:51,870 --> 00:09:53,790 Sean Aylmer: You've looked at this around the world. How do we 167 00:09:53,790 --> 00:09:57,000 Sean Aylmer: make financial advice more accessible, more affordable? 168 00:09:57,570 --> 00:10:02,280 Dr. Paulo Costa: Yeah. It is true that advice can be expensive and 169 00:10:02,280 --> 00:10:06,270 Dr. Paulo Costa: it's not for everybody. So what Vanguard has done in 170 00:10:06,270 --> 00:10:09,059 Dr. Paulo Costa: that sense is that now we have started to talk 171 00:10:09,059 --> 00:10:14,160 Dr. Paulo Costa: about financial wellness to investors. And what that has allowed 172 00:10:14,160 --> 00:10:17,489 Dr. Paulo Costa: is that we are ramping up our education efforts to 173 00:10:17,490 --> 00:10:21,870 Dr. Paulo Costa: really help clients and really everybody, that's our mission, to 174 00:10:21,870 --> 00:10:25,590 Dr. Paulo Costa: give them the best chance for investment success. So expect 175 00:10:25,590 --> 00:10:29,160 Dr. Paulo Costa: to see more and more from us, financial wellness being 176 00:10:29,160 --> 00:10:32,640 Dr. Paulo Costa: delivered, to really ramp up the efforts on financial education. 177 00:10:32,820 --> 00:10:35,820 Dr. Paulo Costa: For the people who are not in a position to 178 00:10:35,880 --> 00:10:40,380 Dr. Paulo Costa: get advice yet we will be sharing more and more 179 00:10:40,380 --> 00:10:44,040 Dr. Paulo Costa: tips on how to make everyone more likely to have 180 00:10:44,040 --> 00:10:47,490 Dr. Paulo Costa: not an investment success, but financial success. Because in the 181 00:10:47,490 --> 00:10:51,569 Dr. Paulo Costa: end of the day, to achieve our financial goals, it's 182 00:10:51,570 --> 00:10:55,439 Dr. Paulo Costa: important to be well- educated, to know how we can 183 00:10:55,440 --> 00:10:55,980 Dr. Paulo Costa: get there. 184 00:10:56,550 --> 00:10:58,830 Sean Aylmer: I totally agree with that, Paulo, thank you very much 185 00:10:58,830 --> 00:11:00,150 Sean Aylmer: for talking to Fear and Greed. 186 00:11:00,929 --> 00:11:03,390 Dr. Paulo Costa: Oh, thank you very much for having me. This has 187 00:11:03,390 --> 00:11:03,960 Dr. Paulo Costa: been a pleasure. 188 00:11:04,410 --> 00:11:08,699 Sean Aylmer: That was Vanguard Senior Behavioral Economist, Dr. Paulo Costa. This 189 00:11:08,700 --> 00:11:11,220 Sean Aylmer: is The Fear and Greed daily interview. Remember, this information 190 00:11:11,220 --> 00:11:13,710 Sean Aylmer: is general in nature and you should seek professional advice 191 00:11:13,980 --> 00:11:16,710 Sean Aylmer: before making any investment decisions. Join us every morning for 192 00:11:16,710 --> 00:11:19,620 Sean Aylmer: the full episode of Fear and Greed, Australia's most popular 193 00:11:19,620 --> 00:11:22,380 Sean Aylmer: business podcast. I'm Sean Aylmer, enjoy your day.