For many, the standard retirement timeline looks like this: Work hard at your career until around age 65, then finally stop working and start enjoying life. But some are challenging this narrative by pursuing FIRE – Financial Independence, Retire Early.
The FIRE movement is about achieving financial freedom on your own terms, so you don’t have to stick to the usual retirement path. It originated in 1992 with the book “Your Money or Your Life” by Vicki Robin and Joe Dominguez, which encouraged readers to examine their relationship with money and consumption.
Contrary to popular belief, achieving financial independence is not about amassing great riches. It revolves around understanding one’s personal needs and having the financial security to liberate oneself from the traditional nine-to-five grind. It involves purposeful and intentional spending, rather than mindless consumption.
FIRE enthusiasts strive to accumulate sufficient wealth to retire early on their own terms, with enough income to cover their needs and comforts without the need for continued work. Many FIRE pursuers set their sights on retiring between the ages of 30 and 50.
But who is the FIRE movement for? It appeals to those yearning for financial independence and early retirement. It caters to individuals who desire control over how they allocate their time and money and who are committed to reducing expenses and saving as much as possible. While achieving early retirement is undoubtedly easier with a substantial income, anyone can embark on the path to financial independence, choosing when and what type of work they engage in.
How does the FIRE movement work? The first step is designing a personalized FIRE approach, which involves determining the income required to sustain one’s desired lifestyle in retirement and deciding on the desired retirement age.
For example, if one needs $80,000 per year to support their retirement lifestyle and aims to retire by the age of 40, their plan will differ significantly from someone who can live comfortably on $55,000 per year and wishes to retire at 50.
The FIRE strategy can be envisioned as a two-pronged approach. Early retirees typically aim to minimize expenses while maximizing savings. To reduce costs, strategies such as buying used instead of new, distinguishing between wants and needs, and embracing do-it-yourself projects to avoid outsourcing expenses are commonly employed.
On the savings side, many FIRE enthusiasts aspire to save and invest 50% to 75% of their income. Increasing income can involve taking on a part-time job or launching a side hustle. Investment strategies differ, but a significant portion of FIRE participants opt for passively managed index funds or exchange-traded funds (ETFs). Implementing tax-efficient strategies through IRAs and 401(k)s is also crucial. Furthermore, individuals can keep cash accessible for emergencies by saving in high-yield savings accounts (HYSAs) while allowing it to grow.
When estimating the necessary retirement funds, two rules are often considered: the Rule of 25 and the 4% Rule. The Rule of 25 provides an estimate of the savings required to retire early. By multiplying the annual retirement expenses (minus other income sources) by 25, one can ascertain the necessary savings. However, this rule does not account for inflation or unforeseen circumstances such as healthcare expenses.
The 4% Rule, another popular guideline, determines how much money one needs to save to sustain a 30-year retirement. Many FIRE followers adopt this rule to determine annual withdrawal rates from their investment portfolios. Adjusted for inflation, the initial withdrawal is typically 4% of the portfolio’s value, with subsequent adjustments made accordingly. However, critics argue that this rule may not suffice for those desiring an early retirement spanning several decades.
As the FIRE movement gains momentum, various variations have emerged to accommodate different goals and preferences:
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Lean FIRE: This approach caters to minimalists who strive for financial independence by embracing a frugal lifestyle both pre- and post-retirement.
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Barista FIRE: Barista FIRE adherents save diligently to work less in later life rather than retiring completely at an early age. Many choose to continue working, but in less demanding or part-time positions.
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Coast FIRE: This variation entails having enough savings or investments to sustain retirement without additional contributions. People following Coast FIRE often continue working to cover their current expenses, using their savings as a safety net to ease into retirement.
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Fat FIRE: For those aspiring to live lavishly during retirement, Fat FIRE involves maximizing earnings and savings to ensure a comfortable lifestyle without financial constraints.
The FIRE movement challenges the traditional concept of retirement, encouraging individuals to reconsider the possibilities and redefine their relationship with work, money, and personal fulfillment. Whether one chooses to pursue financial independence, retire early, or find a unique path, the key lies in crafting a life aligned with personal aspirations and values.