You may have heard the term from Silicon Valley tech devotees or cryptocurrency enthusiasts, and you probably haven’t given it that much thought. But for better or for worse, Financial Independence Retire Early or FIRE is a movement that’s gained both exposure and traction in recent years.
It’s a system that claims to help people build their savings extremely quickly, with the intent to leave the workforce and enjoy an early retirement. If you’ve been working all your life, it might be easy to see the appeal!
But how does FIRE work? Can anyone make FIRE work for them – regardless of their income, or the current state of their savings? And in today’s economy, is it even possible to score that comfortable, coveted early retirement?
In this article, we’ll cover the following points:
FIRE stands for ‘Financial Independence Retire Early.’ It’s a term taken from 1992 self-help book Your Money or Your Life, by Vicki Robin and Joe Dominguez. As a rule of thumb, FIRE movement adherents aim to maximize their income, minimize their expenses, save significant portions of what they earn, and retire by the age of 40.
It’s a movement known for its extreme frugality and its commitment to saving and investing. FIRE movement proponents might aim to save up to 70% of their annual income, so they can retire at a young age and live by making small withdrawals from their savings portfolios. When their savings reach roughly 30 times their annual expenses, FIRE proponents will often – but not always – retire completely, or at least quit their day jobs.
FIRE is underpinned by two ‘rules’, which help guide would-be early retirees in developing their savings goals and retirement plans.
The 4% rule is a measure of how much of your retirement portfolio you can safely withdraw at a time. It was devised by financial advisor William Bengen in 1994, and it claims that in your first year of retirement, you can withdraw up to 4% of your retirement portfolio’s value.
After the first year, you should adjust this amount according to the rate of inflation. If you withdrew $40,000 in your first year, and inflation in your second year was at 2%, you would withdraw $40,800 in year two – your previous year’s withdrawal, increased by 2%. Every year of your retirement, you would adjust the previous year’s withdrawal to account for inflation, and then make the new withdrawal.
The 4% rule is underpinned by a lot of assumptions, and as always, we strongly recommend doing thorough research before taking it to heart. It’s safe to say that the state of the economy has changed a lot since 1994! And more importantly, it is designed to ensure that your retirement portfolio will last for up to 30 years – if you’re planning a very early retirement, the 4% rule may not be a useful metric.
However, while the results are not guaranteed to be consistent, Bengen’s initial analysis of the 4% rule stood up to a number of historic market shifts, including the Great Depression. It may not be perfect, but it can be used as a starting point for gauging how much you can spend in your retirement.
The 25x (‘multiply by 25’) rule helps you to estimate how much you’ll need to save for your retirement. It takes the approximate amount of money you hope to set aside as savings from your yearly income, then multiplies that amount by 25.
Say you’ve set yourself an annual retirement budget of $75,000. $25,000 of that amount will be covered by Social Security, pensions, or other sources of income, so your savings and investments will need to cover the remaining $50,000. Multiply $50,000 by 25, and you’ll get the amount you would need to save in order to make that withdrawal safely in your first year of retirement – that’s $1.25 million.
The 25x rule is derived from the 4% rule: if you multiply 4% of something by 25, you get the original value. $50,000 is 4% of $1.25 million, hence our example.
As we mentioned when explaining the 4% rule, though, these rules are actually designed to accommodate a retirement of roughly 30 years. Depending on the income you hope to live on during your retirement, you may need to account for saving even more before you leave the workforce.
While ‘Retire Early’ is right there in the acronym, not everyone interprets FIRE quite so literally. In fact, the acronym has become more of a starting point for people whose main priority is ‘Financial Independence.’ Whether or not they choose early retirement, the system gives them the structure and goal-oriented approach they need to build their savings and plan for their financial future.
In fact, Vicki Robin – author of the book that coined the term FIRE – has said that FIRE isn’t just about retiring early. It’s a way to consume less while living a better and more fulfilling life. Done right, the financial independence you get from FIRE can enable you to work at something you love, instead of doing what you have to in order to stay on top of your expenses.
When you approach it this way, FIRE starts to feel a lot more flexible. In fact, a number of variations on FIRE and its goals have evolved over time. Depending on your current situation, your goals, and your willingness to commit to frugality, you may find that one of these approaches is right for you.
If you want to retire early, but don’t want to compromise your lifestyle, you’ll probably be aiming for a Fat FIRE approach.
Fat FIRE adherents aim for early retirement without any reduction in their current standard of living – at any stage. They don’t want to compromise now, and they certainly don’t want to compromise after their retirement. Needless to say, this means they need to save more in order to live comfortably, both now and later on.
Anyone taking this route to FIRE will probably need a high income, as well as an aggressive investment strategy. For regular people, with a correspondingly regular income, this is likely to be the most prohibitive approach.
Lean FIRE is all about cutting back your budget. It relies on extreme frugality – with the goal of making extreme savings as a result.
Needless to say, proponents of the Lean FIRE approach are committed to a minimalist lifestyle. Some even report living on an income of $25,000 or less per year. The reward of this approach isn’t personal comfort; it’s independence, stability, and freedom from the obligation to work, as well as the satisfaction of maintaining a pared-down and simple lifestyle.
This approach is pretty extreme, and it isn’t for everyone. Lean FIRE can make it difficult or even impossible to live in major cities, build a family, or own a comfortably-sized home. If you have responsibilities to other people – especially children – you will probably find Lean FIRE to be a serious struggle.
Barista FIRE is a compromise between the two extremes of Fat and Lean FIRE. It involves leaving the regular 9-to-5 workforce while still maintaining other sources of income – usually part-time or gig-based work, hence ‘barista’ – to supplement the money you withdraw from your savings.
There are some real benefits to the Barista FIRE approach. A part-time job that offers health insurance can offer you serious savings on healthcare, for one thing. Plus, with this approach, you don’t need as much money saved up in order to retire – and you don’t need to go all-in on minimalism, either.
The appeal of Barista FIRE lies in having more time to spend on what you love, without having to compromise your lifestyle. Whether or not it strictly counts as early retirement is up for debate – but there’s no denying that it offers a much more moderate approach to financial independence.
That is, is it possible for anyone who isn’t already earning six figures?
As we’ve explained, FIRE is actually pretty flexible. As such, depending on how you personally define FIRE, it can be considered an attainable set of goals for almost anyone. Particularly if you’re not in a hurry to retire early – if your main aim is to know that you could leave the workforce if you chose to – FIRE is more achievable than you might think.
However, in practice, there can be major barriers to building up savings in the way that FIRE suggests. The most obvious obstacle is student debt, a problem shared by over half of all young adults who attended college. Typical monthly payments can range between $200 and $299 every month – a serious burden on any monthly budget.
It’s also worth noting that literal interpretations of FIRE rely heavily on investment and portfolio income. In theory, anyone can invest; in practice, markets can be volatile, and all investment activity carries an element of risk. Getting ahead of the game with FIRE involves an element of luck; it isn’t impossible, but it might be unlikely to work in the way that you hope.
FIRE can look intimidating if you aren’t already invested in it, but that’s no reason to write it off completely. In fact, the basic ideas behind FIRE are pretty widely applicable, no matter your current financial situation.
Here are some ways you can apply FIRE in your own life, without the risk of burning yourself out.
A common driving force for people committing to FIRE is the dream of an early retirement – getting out of the rat race with enough savings to stay comfortable. They know what they want to do with their savings, and so saving becomes less of a chore.
So what do you want to do with your own savings? What would you do if you could afford it? Whether it’s international travel, owning your own home, or retiring comfortably (no matter the age), you’ll get there much more easily if you know what you’re trying to achieve.
Retirement is a particularly smart goal to keep in mind. Studies show that one in four Americans have no retirement savings whatsoever, and that 36% of Americans who do have savings feel their savings goals aren’t being met. With a detailed plan and the discipline to maintain it, you could put yourself in a great position for your later years.
FIRE involves maximizing income and minimizing expenses. For most people, there’s no harm in the occasional meal out or weekend getaway! But we can still learn from FIRE when it comes to maintaining a smart, consistent monthly budget.
It’s important for anyone to look closely at their expenses and think about where they can save a little cash. It might seem like small potatoes compared to the amounts of money needed for an early retirement, but limiting the amount you spend every month can really add up over time. Even if you aren’t thinking as far ahead as retirement, you can set aside that spare money into an emergency fund, so that if you’re hit with an unexpected expense, it won’t necessarily wipe you out completely.
FIRE also encourages people to think more practically about their income. Part of making your budget bulletproof might be aiming for a promotion at work, or even a better role elsewhere. Obvious as it sounds, a higher income means more opportunities to save!
Unless you’re prepared to invest your money and generate passive income – a recurring income stream that doesn’t demand much of your time or effort to maintain – FIRE is likely to be an unattainable goal. But passive income isn’t just for FIRE adherents! It can be a way for anyone to enhance their income and build up their savings.
Rental income is the most popular form of passive income; by letting out property, or even just a room in your home, you can earn money from things you already own. Likewise, investing in stocks and bonds can generate dividend income over time – though as with anything investment-related, there are potential financial risks involved. You should also be aware of your tax obligations when collecting income from your portfolio.
Particularly for younger people, who may themselves be renters rather than homeowners, this isn’t always an accessible income stream. However, if you can make it work for you, passive income can change the game when it comes to saving up for retirement.
FIRE is less a prescriptive method than a loose, adaptable approach. Even if the idea of investing aggressively or cutting your expenses to the bone is intimidating, you can still build your budgets and your financial plans around the basic principles of the movement.
It’s good to think ahead, financially speaking, and it’s good to keep tabs on your income and expenses. You can do all of that without making overly-radical changes to your lifestyle, and doing it will help you live more comfortably in the long term.
More than any promises of early retirement, that’s what FIRE can do for you.
Content Writer + Resume Expert
Waverly is a freelance writer, former HR officer and current international traveller. They believe in doing your research, showing up prepared, and bringing your passions with you to work. They've helped countless job seekers create better resumes and cover letters to improve and grow their careers.
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