The Financial Independence, Retire Early movement, or FIRE, is a group of people trying to gain financial independence by amassing enough wealth and cutting their expenses so that they can retire extremely early. Many FIRE proponents are looking to retire in their 30s or 40s.
So how do people in the FIRE movement achieve their goal, and what are the drawbacks?
How Financial Independence, Retire Early works
The FIRE movement centers on taking control of your finances, and proponents focus on earning more and spending less. FIRE participants focus on two areas, which are really two sides of the same coin:
Saving and investing more of what you earn.
Spending less of what you earn.
By saving and investing their money, participants grow an amount of money that can generate enough income to sustain their lifestyles. They use detailed spreadsheets and financial plans to model how they’ll be able to meet their needs based on their income and the rate of return they can expect from their savings and investments in stocks or stock funds.
To meet their goals, FIRE participants must take on extra risk by investing in stocks, and that means understanding how the stock market works and having a brokerage account. They won’t be able to rely on the low returns and absolute safety of a bank account to amass their fortune.
And by spending less, they reduce the level of savings they need in order to retire early. While some FIRE critics say that FIRE participants live a too-frugal lifestyle to reach their goal, many proponents say that they’re not making extraordinary sacrifices. In fact, they say by spending on what they really love that they actually derive more enjoyment from those things. Plus, they enjoy moving toward independence, when they can do what they truly love.
But however they approach it, FIRE participants see the lifestyle as a way to spend their time doing what they really want to do rather than what society tells them they should want.
Because of their desire to retire early, many participants won’t be able to take full advantage of employer-sponsored retirement plans such as a 401(k). They may or may not be able to take advantage of plans such as an IRA, depending on whether they earn income in retirement. Instead, they’ll need to save in taxable accounts or in accounts such as a Roth IRA, both of which offer access to cash (at least at some level with the IRA) without any penalties.
To achieve FIRE, followers adhere to two key principles: the rule of 25 and the 4 percent withdrawal rule.
The rule of 25
The rule of 25 serves as a helpful tool in planning for retirement. It recommends that a person should have 25 times their yearly expenses saved up for their retirement. To use the rule of 25 to figure out your FIRE number, begin by estimating your annual expenses in retirement, and then multiply that number by 25. To put it in perspective, if your yearly expenses amount to $40,000, you should strive to save $1,000,000 for your retirement, according to the rule of 25.
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