Table of Contents:
- Understanding how FIRE retirement works
- FI/RE Variations
- Misconceptions of the FIRE financial plan
- Financial independence FIRE characteristics
- FIRE investment strategy benefits
- FIRE movement risks
- The bottom line
If you’ve ever thought about what it would be like to ditch your job for financial independence, retire early and live the good life, you’re not alone. But is it actually possible?
According to Vicki Robin and Joe Dominguez, the authors of Your Money or Your Life, it’s not only possible, but they did it. Dominguez, who worked on Wall Street, decided to retire early at just 31 years old and never looked back.
They created a movement and coined the term FIRE. The FIRE acronym stands for “Financial Independence Retire Early”. Their ideology is that we can all live a balanced and happy life while consuming less, ultimately buying back our freedom to live as we please without the constraints of a job.
In their 1992 book, Robin and Dominguez aim to educate people about how we mindlessly go through life working our jobs and spending that money on things that ultimately don’t matter. They stress that the most important thing we have is time, and we give that up to work until we reach retirement age. We do it without a thought that there could be a better way.
Although the FIRE movement has been around for a long time, it became popular in 2010 as bloggers and websites promoted the idea of living simply and saving aggressively.
Of course, there’s no one-size-fits-all approach to how you get there, but the FIRE lifestyle doesn’t buy into the idea that we need to own more stuff to be happy. On the contrary, living on less offers freedom in itself, so putting money away to leave our jobs behind before retirement age allows us to take back our time and do with it what we please.
- Financial independence retire early (FIRE) has been around for a long time but is making a comeback as more younger people are taking notice due to blogs and articles on the subject.
- The 1992 book, Your Money or Your Life, by Vicki Robin and Joe Dominguez, created a movement that coined the term FIRE.
- FIRE proponents aim to live modestly and save aggressively to become financially independent before retirement age by investing in stocks, a 401(k), or an IRA.
- The FIRE movement has variations that offer different ways to accomplish financial goals and still save for retirement.
Understanding how FIRE retirement works
What is FIRE retirement? Those who follow the FIRE lifestyle believe in extreme saving and investing and pay close attention to everything they spend. They evaluate all expenditures in relation to the number of hours worked to determine necessity with the goal of saving more than would be traditionally needed for retirement at 65.
What does the FIRE investment strategy look like? It’s a plan that promotes saving and investing 50%-70% of annual income and about 30 times of annual expenses, with a goal of saving $1 million or more before leaving the workforce.
Achieving the goal of becoming a millionaire means cutting expenses and finding ways to increase income. This could be by investing more, starting a side hustle, or creating passive income streams.
The thought of working for 30 or more years has many younger people adopting the FIRE philosophy. By setting goals to save aggressively and retire much younger than the traditional retirement age, they are taking control of their futures. The aim is to quit their jobs and live off the money from their portfolios by taking small withdrawals as needed.
Small is the operative word, meaning about 3% to 4% of the balance annually. Of course, the amount of money needed could be more, depending on the lifestyle you want to enjoy. Traveling full time will incur more finances than living in a small town and staying close to home, so planning is key.
Over time, the meaning of the FIRE movement has evolved from the focus on early retirement to the goal of financial independence with the option for, but not the goal of, retiring early.
Those who subscribe to the FIRE way of life think about what’s most important to them and set financial goals to position themselves to live in a way that lights them up without worrying about the need for a job.
This can be done with a few FIRE variants that include:
- Fat FIRE – This FIRE lifestyle is aimed at a more traditional lifestyle, where the focus isn’t on changing the current standard of living but instead saving more than the average person saves for retirement. Those with a high income and who can save diligently can make this work.
- Lean FIRE – This approach focuses on minimizing spending and living lean, which means reducing all unnecessary spending and living frugally to save most of your income to achieve financial independence sooner.
- Barista FIRE – This method includes the goal of saving enough to leave your full-time job but not with the intent to retire, but to change the way you work. This means transitioning to freelancing or part-time work that you love instead of working for a paycheck.
Misconceptions of the FIRE financial plan
Like most things, the FIRE finance movement has a variety of myths surrounding it. Although financial independence does require some work and knowledge of personal finance, it’s not as impossible as many people would like to believe.
Here are a few of the most popular misconceptions about the FIRE retirement plan.
- To reach financial independence, you have to give up all spending – While living modestly can help you reach your goals sooner, you don’t have to give up all the comforts you enjoy. Of course, if you have a high income, and the ability to save much of it, you won’t have to give up much. For those with average incomes, yes, you may have to make some sacrifices. Many people start a side hustle to earn more to add to savings, but if you’re not interested in that option, then scaling down living expenses may be necessary.
- You need a 6-figure income to make FIRE work – Although high-income earners can reach financial freedom faster without a complete overhaul in lifestyle choices, they still need to be sure to keep their standard of living reasonable and set goals for saving to stay on track.
- Early retirement means you’re done being productive – FIRE retirement isn’t about giving up and no longer being productive; it means that your retirement plans don’t include the 9 to 5 corporate grind. The FIRE movement is about being free to do what you want instead of trading time for dollars. Many FIRE enthusiasts start passion projects, travel, volunteer, or pursue a career that’s meaningful to them.
- FIRE participants aren’t all IT guys – Those who want to achieve a FIRE lifestyle work in every industry and come from all walks of life. For some reason, many skeptics of the FIRE lifestyle want to attach tech as the industry of choice when it comes to those wanting financial freedom. Still, people in all types of careers strive to achieve it to reach their own version of the American dream. It’s not about what you make but what you save that matters.
- You can’t have financial freedom if you have kids – There’s no doubt that having kids is costly. However, you can still achieve FIRE with careful planning by setting goals and starting early. Kids can bring unexpected expenses that can derail savings if you don’t have a plan that includes a safety net to handle them.
Retiring in your 30s and 40s is a challenge, and not everyone can save enough to make that happen. However, that doesn’t mean you can’t make the FIRE principles work for you, even if you’re investing as a beginner. Remember, it’s not a one-size-fits-all plan. Instead, it can be altered to meet each individual’s financial goals, timeline, and circumstances.
Financial independence FIRE characteristics
The question most frequently asked about the lifestyle is what is FIRE movement, and how can I do it? After all, doesn’t everyone think about leaving their job behind to pursue the things they love?
The primary focus of FIRE is about living the way you want without the financial stresses of everyday life. That sounds great, but how do you make it a reality? It’s all about FIRE planning and learning how to save enough to become a millionaire.
First, let’s get real. There’s no easy way to achieve financial freedom. It takes a lot, so you probably won’t have much luck if you’re not totally up for it. The upside is that you’ll be in a better financial situation if you follow these FIRE steps:
- Understand your FIRE personality – as listed above, there are 3 variants of FIRE.
- Fat FIRE
- Lean FIRE
- Barista FIRE
Each method has its own approach and goals, so knowing which one closely resembles the goals you have for the lifestyle you want can give you a road map on how to proceed.
- Start planning – To achieve FIRE, you’ll need to take a close look at your financial situation and evaluate what you earn and your expenses, and create a plan to achieve your goals.
- Reduce expenses – You first need to know where your money is going, so paying attention to every dollar you spend is an important step. Using a money management program, such as Quicken, can simplify the process by graphing all income and expenses to see what you may be able to cut. For most people, housing, cars, and eating out are their most considerable expenses, but pay attention to the small ones too, such as a coffee shop habit, as they can add up.
- Boost income – Whether it’s asking for a raise, switching jobs for a higher salary, consulting on the side, or starting a side hustle, any additional income you can put toward savings and investments will offer a significant boost.
- Prioritize saving – The 2 parts of the plan that make it work are FIRE saving and investing. You’ll need to commit to your plan and not allow yourself to go off course. It takes work and some sacrifice, but keep in mind why you’re doing it, and you’ll get there.
The simpler you make savings, the more likely you are to stay on track to reach your financial goals. These FIRE movement tips can help.
- Take advantage of the benefits from your employer – Make sure you’re enrolled in a 401(k) and contribute the maximum. Some employers match contributions, so be sure you’re putting in enough to qualify.
- Automate savings and investing – You may be able to automate your savings through payroll deductions.
- Maximize retirement savings – Not all employers offer retirement savings, so you may need to open an investment account on your own. Put it on automatic draft, and contribute the maximum amount available to you.
- Filter additional income into savings – Add salary increases, commissions, bonuses, tips, and tax refunds to investments or savings accounts.
- Reduce expenses – Downsizing, moving into a less expensive area, or renting out a room in your house can add a significant chunk to contributions to your savings.
- Shop around for better quotes on recurring bills – Bundling services and lowering costs on car insurance, cable, and internet can add up fast.
- Pay off debt – Debts with high interest rates can limit what you have available to save every month, so paying them off can be significant.
FIRE investment strategy benefits
Although financial independence means something different for everyone, a few common benefits lead people to strive for a lifestyle they love beyond the fantasy of drinks on the beach.
- Financial security – FIRE can give you the freedom from being dependent on a paycheck to live a life you enjoy with enough wealth where finances no longer dictate how you spend your time. Investments cover all your expenses and enable you to live comfortably with the freedom to do what you please.
- Working at a job that means something to you – Not all FIRE followers want to stop working entirely. Many would like to do something that gives them meaning, whether it’s a part-time job that pays or not. Being financially free allows you to do that.
- Taking your time back – The one thing that can’t be replaced is our time, so spending it the way we want is a big plus. Whether you want to spend more time with family and friends, pursue a passion project, or travel the world, the freedom to do so is invaluable.
FIRE movement risks
Although the FIRE program has many benefits, there are also downsides to be aware of as you pursue financial independence.
- Missing out on the present – As discussed, there are variations in achieving FIRE retirement. While some pursuing the frugal lifestyle may find a good balance, not everyone does. Aggressive savings can get out of control. Restricting things you enjoy to the extreme can affect well-being, relationships, and overall health.
- Overworking – Having a job and a side hustle can lead to burnout. We all need time to relax and recharge. To be focused on work all the time to save can have a reverse effect and make you want to give it all up. It doesn’t have to be an all-or-nothing approach.
- Unclear expectations – When you choose to pursue the FIRE lifestyle, you want to be clear on what type of future you want. Jumping in with vague goals won’t give you the motivation to continue.
- Not allowing yourself to be flexible – It’s essential to have a detailed financial plan to follow for FIRE retirement. Still, it’s also just as important to allow for some flexibility. Life doesn’t happen in a straight line, and being flexible will make the process a more enjoyable one. A detour doesn’t equal derailment.
The bottom line
The FIRE lifestyle is a movement with the goal of attaining financial independence and retiring early by minimizing expenses and saving aggressively, from 50% to 70% of your income.
There are variations in the FIRE strategy that allow for different incomes and lifestyle choices, but the goal is to be able to say goodbye to the 9 to 5 job to pursue the things you love before retirement age—whether it’s to spend time with family, travel, or start a business.
The FIRE lifestyle isn’t easy and requires commitment, perseverance, and detailed planning. It’s not for everyone, and that’s okay.