What is Financial Independence Retire Early(FIRE)?

Financial independence, retire early (FIRE) has taken the personal finance world by storm over the last decade. Although you'll come across a few types of FIRE, the goal of this frugal – and sometimes extreme – movement is to grind hard enough that you can retire earlier than traditional retirement models allow. But for all the potential benefits of financial security and early retirement, FIRE isn’t without its sacrifices. 

The Roots of a Movement

Financial independence, retire early traces its roots to the 1992 bestseller Your Money or Your Life by Vicki Robin and Joe Dominguez. The movement embraces a core tenet of the book: people should evaluate their expenses by the number of hours required to pay for them. Out of this message was borne a lifestyle wherein followers try to save as much and as early as possible. 

What is FIRE Investing?

The final goal of “financial independence, retire early” is to shave a few years off the average retirement age. This allows followers to step out of the workforce at their leisure and spend more time on what matters. 

To achieve this goal, FIRE adherents aim to raise their income and lower expenses as much as possible. The general idea is that the more you make and less you spend, the faster you’ll become financially independent. Once you meet your “FIRE number,” the theory goes, you can retire early. 

But the “RE” in FIRE doesn’t always mean leaving the workforce to live on a beach or fancy golf resort. Instead, reaching “FI” means that you can live your life without fear of failure. Whether you start a new business, turn your passion into passive income, or travel the globe, your portfolio is there to catch you if life happens. 

How Does FIRE Finance Work?

Nowadays, the FIRE movement has split into several “factions,” with each achieving different goals or lifestyles. But the original FIRE finance method is simple – if difficult to obtain for many. 

The math behind the FIRE lifestyle relies on retirement planning trick known as the 4% rule. The 4% rule states that you should save enough to comfortably withdraw 4% of your savings in your first year of retirement. Then, in your second year and beyond, you adjust your withdrawals for inflation to maintain your standard of living. 

In theory, with enough assets, you should be able to live off your portfolio for decades. 

To actually follow the 4% rule, you need to save enough to make this level of withdrawals sustainable. As such, the FIRE method recommends saving at least 25x your projected annual retirement expenses. Many FIRE adherents invest as much as 50-75% of their annual income to hit this “FIRE number” as soon as possible. 

How to Calculate FIRE Numbers

You’ll need three data points to calculate your FIRE number:

• Your annual savings potential
• Projected investment returns
• Your expected withdrawal rate

First, determine what percentage of your income you can save and invest each year. This number includes retirement contributions, employer matches to your 401(k), and your taxable brokerage accounts. 

Then, calculate your FIRE retirement number by multiplying your projected annual expenses by 25. (Some people multiply by 30 to give a bigger financial cushion in retirement.) For instance, if you spend $50,000 per year, you’d need $1.25 million to $1.5 million saved to achieve FIRE.

Lastly, calculate how long it will take to reach your FIRE number based on your savings and investment returns. You may find an investment calculator helpful to find how much you’ll save based on different rates of return. 

Financial Independence, Retire Early Example

Let’s look at some simple examples to illustrate how to calculate your FIRE numbers. 

For instance, say that you earn $100,000 per year after taxes. Your annual living expenses generally come out to about $50,000 per year, leaving you $50,000 in disposable income. Your FIRE goal is to save at least $1.5 million before you retire. 

To reach your goals, you start saving $4,170 per month, or $50,040 per year. Under these assumptions, earning 7% interest, it would take you about 16 years to reach your FIRE number. 

Source: Calculator.net

Now, let’s say that you earn $75,000 per year after taxes. Your expenses come out to $50,000 per year, leaving you just $25,000 in disposable income. Your FIRE goal is to save $1.5 million in retirement. 

In this example, you start saving $2,100 per month, or $25,200 per year. Under these assumptions, earning 7% interest, it would take you about 24 years to reach FIRE. 

Source: Calculator.net

The Main Types of Financial Independence, Retire Early

The FIRE movement is often portrayed as a movement full of frugal livers and extreme savers. And while that can be true, the original FIRE has given rise to multiple pathways to financial independence. 

Lean FIRE

Adherents of Lean FIRE generally live on under $25,000 per year (some live on less than $10,000). Following this lifestyle means they can save more money faster. And, assuming their standard of living remains the same, they can retire sooner – or keep saving and enjoy a lavish lifestyle come retirement. 

Fat FIRE

Fat FIRE is for those who want to retire without compromising their standard of living. Most people within this lifestyle aim to spend at least $100,000 or even $200,000 per year in retirement. 

Due to its high income and savings requirements, Fat FIRE is usually only attainable for high-earning households. Even so, adherents may find that hitting their savings goals takes longer than other FIRE methods. 

Barista FIRE

Barista FIRE (and its cousin Coast FIRE) is for people who don’t want to retire completely. Instead, you save up until you reach your FIRE goals. Then, with your portfolio to back you up, you can quit your 9-5 job and use a combination of savings and part-time work to live a semi-retired lifestyle. 

Those who live Barista FIRE often take on part-time work that offers healthcare to cover their basic expenses. Entering semi-retirement with a safety net means that Barista lovers can job-hop and follow their passions to their hearts’ content. 

What Does it Take to Achieve FIRE?

Many savers believe that FIRE is meant for rich people who make 6+ figures a year. And while having a large income makes reaching financial independence easier, it’s not required. It all comes down to your dedication to saving and a more minimalist lifestyle. 

Starting Sooner Rather than Later

Starting your portfolio at 18 isn’t required to achieve FIRE – but it sure makes it easier. The younger you begin, the more you’ll save over time, and the longer your money works in the markets. In fact, time in the market is a crucial component of achieving FIRE before 65. 

Planning Ahead

Planning for retirement is an essential part of the financial puzzle. But FIRE adherents take it a step further. Retiring early (especially on lower incomes) takes meticulous planning around your:

• Income
• Expenses
• Time horizon
• And investment returns

Having a detailed plan and sticking to it are the underacknowledged keys to succeeding in your FIRE-y dreams. 

Financial Discipline

All that planning does little good if you don’t have the discipline to stick with it. But in the FIRE lifestyle, you may have to give up more than weekly date night. Many minimalists cut out all extra expenses, which may mean:

• Few or no vacations
• Not having children
• Living with roommates

But saving money is only half the battle. Living FIRE is easier when you boost your income through climbing the corporate ladder, starting a side hustle, or investing in passive income streams. At the same time, you’ll want to avoid “lifestyle inflation,” which occurs when you increase your expenses as your income grows.  

Wise Investments

Unless you’re born wealthy or are a high earner, achieving FIRE is impossible without passive income streams. For most FIRE lovers, that begins with building a well-diversified portfolio. But you don’t just want to put money aside; it’s important to choose the right combination of growth, value, and defensive investments. The goal is to maximize your passive income while hedging against a sudden market downturn.  

Pros and Cons of Financial Independence, Retire Early

Achieving financial independence or early retirement sounds appealing – but the road to get there is full of struggles. Here’s what to consider if you’re looking into the FIRE lifestyle. 

Pros of FIRE

Inspiration

Even if you don’t follow the FIRE lifestyle, it can inspire you to start taking your retirement goals seriously. 

Living Below Your Means

A crucial component of FIRE is learning to let go of materialism. For many people, a more frugal lifestyle is more emotionally fulfilling. Plus, as your wealth grows, you’ll experience less financial stress. 

Flexibility

Retiring early means you can enjoy your hobbies while you’re young and full of energy. You’ll also have more free time in your schedule to visit family, take vacations, or just enjoy a good book.  

Time for Your Passions

If you don’t have to spend your days working, you have more time to explore your hobbies. (And maybe even turn them into a source of passive income.)

Cons of FIRE

It Might be Out of Reach

Many anti-FIRE-es assert that FIRE is based in classism. “Work hard,” “invest smart,” and “make more money” are all great advice…unless you’re already living paycheck-to-paycheck working 60 hours a week. And without family wealth or a high-paying job to fall back on, reaching your FIRE number isn’t always possible.  

Consider that the median U.S. household income sits around $67,500 as of 2020. Meanwhile, the average cost of living (which admittedly varies between states and rural/urban areas) is about $61,000 per year. That doesn’t leave a lot of investable income left over! 

Many FIRE-es Don’t Fully Retire

Because many FIRE practitioners come from higher-paying fields, they often do freelance or consulting work to support their incomes. Even if you achieve your FIRE, you may find yourself living a less glamorous lifestyle than some proponents enjoy.

The Lifestyle Can be Difficult

Even dedicated FIRE advocates acknowledge that living FIRE involves lots of sacrifices. And it doesn’t end when you retire: FIRE calculations assume you’ll stay on a fixed income for your whole life. 

Unpredictability

Your FIRE number assumes that your income and expenses won’t change after retirement. But if social structures or tax brackets shift or you experience a medical event, your plans may go awry. Not to mention, your portfolio growth heavily depends on market cycles and your asset allocation.

Boredom

Retiring early is great…if you can fill your spare time. Without a career, hobby, or retired friends, you may find your life empty and unsatisfying.  

Fewer Professional Opportunities

If you do go back to work after early retirement, you may struggle to fit in. Reintegrating after an extended vacation is difficult. (Just ask anyone who vacations in the Bahamas!) That aside, losing years of resume- and skill-building can leave you seriously behind. 

You Can Use FIRE Finance to Strengthen Your Strategy

Remember: the FI in FIRE stands for “financial independence.” Even if you don’t achieve your ideal FIRE number by 30, reaching financial independence is nothing to scoff at. And even if you don’t desire to live a “true” FIRE lifestyle, there’s still plenty to learn from FIRE finance. 

For instance, FIRE teaches you to be conscious of not just how much you spend, but why. While money “smooths over” transactions, you’re still trading time for goods. 

FIRE also helps you set clear savings targets based on your income. Because it focuses on cash flow against expenses, you can use FIRE’s ideas to adjust your lifestyle to meet your goals. 

Similarly, FIRE illuminates the importance of creating a passive income stream to reach your goals. Don’t let your body do all the hard work for you! 

And finally, FIRE shows us that achieving financial independence is doable. And once you get there, you can spend your days doing what you love, even if you don’t retire completely. Ultimately, that’s one of the true secrets of the FIRE lifestyle: it’s not just about retiring early, but learning to consume less while living more.