If you’re like most people, you have been programmed into finding a well-paying job and striving to thrive until you reach the traditional retirement age. The idea is to put something aside from each paycheck so you could build up a reasonable retirement fund to cater to your needs when you’re no longer working.
But what if you didn’t have to subscribe to this traditional notion? Could you really retire early and enjoy financial stability while living your dream life (enjoying your hobbies and focusing on the things you love)?
FIRE is a new concept that prioritizes saving and investing so you secure the freedom of retiring before you reach your 60s.
This guide explores the FIRE movement in detail, explaining how it works, who can benefit, the pros and cons, and everything else you need to know to shape your financial future.
What is the FIRE movement?
The FIRE movement is an acronym for Financial Independence Retire Early. It’s a way of life that focuses on achieving financial independence by making smart decisions with your money, such as investing and saving, living below your means, and avoiding debt. It’s based on several principles that are designed to help your gain control over your finances and earn the privilege of early retirement.
Important Statistics on Early Retirement & Savings Based on Recent Research
- 25% of Gen Z respondents plan to retire before the age of 55 – Goldman Sachs survey.
- 70% of Gen Z adults emphasized savings and attaining financial literacy during the pandemic – Ban of America survey.
- Followers of the FIRE movement are setting aside 50 to 75% of their income for saving and investing so they can retire early.
How Does it Work?
The basic idea behind the FIRE movement is simple: save as much money as possible and invest in assets that will generate passive income over time.
The more money you save, the faster you can reach financial independence and retire early. To maximize your savings, many FIRE proponents are focusing on reducing their expenses to the bare minimum while investing their income into low-cost index funds or real estate. Ideally, this allows you to save more money faster than someone who has high expenses or doesn’t invest at all.
|Case Study / Example|
Let’s say that you have an annual income of $50K per year and spend $30K on living expenses such as housing, food, and entertainment. That means you have $20K leftover after taxes.
You could take this extra $20K every year and invest it into low-cost index funds or real estate investments.
Over time these investments will grow in value and generate passive income for you which can eventually be enough for you to live off without having to work anymore!
Using the compound interest calculator from Investor.gov, we can see that a $500 per month investment in an index fund will grow to $967,000 over 30 years with a 9.85% return.
You can reach $1,000,000 sooner with a higher saving rate than $500 per month. The more you have in your investment, the higher the income you can earn from investment per year. With a goal of $1,000,000 saved, invested and compounding, FIRE folks can potentially start living off as much as $40k per year as predicted based on the 4% safe withdrawal rule if their current investment amounts to one million.
Sounds like something you might be interested in? Read on…
Who Is FIRE Designed for?
The FIRE movement is for anyone who wants to achieve financial independence and be able to retire before the traditional age of 65. It isn’t just for those who have a lot of money saved up; it applies to people of all incomes. The key concept is to maintain a frugal lifestyle so you can save and build up a nest egg that you can use to retire much earlier. FIRE encourages you to find alternate sources of income, such as side hustles, passive income, and freelancing. This will help to supplement your income and allow you to save more money to reach your goal of financial independence.
What is your FIRE number? 🔥
In a nutshell, your FIRE number is the amount of money fire devotees need to retire early while living off a passive income.
It can also be described as the number you need to attain in annual investment returns to sufficiently cover your living expenses.
If you plan to withdraw 4% of your portfolio each year (which is a reasonable reference for most people), an equation that lets you calculate your FIRE number is to multiply annual expenses by 25.
The Risks of FIRE
The idea behind FIRE is to save a large portion of your income and invest it while living a frugal lifestyle. But pursuing a lifestyle of extreme saving and investing can have hidden downsides that could jeopardize your entire financial future.
Many FIRE followers stretch themselves thin in their quest to reach early retirement, unknowingly putting themselves in riskier situations where they lack proper emergency savings and are exposed to higher levels of risk when it comes to investing. To get the full benefits of the FIRE lifestyle without making any big mistakes, make sure you do enough research, plan out your investments wisely, and be realistic about what you can achieve financially.
How much sacrifice does FIRE involve?
The saying ‘nothing good comes easy’ can be said to apply to the FIRE lifestyle as it does to many other areas of life. If you want to succeed with this approach to financial success, you must be willing to make some sacrifices so you can save up a significant portion of your income. You may need to give up luxuries like expensive vacations and new cars. Furthermore, you may have to work extra hours and take on freelance work to increase your income and reach your annual savings goals. It’s important to keep in mind though that even though there are a lot of sacrifices involved, the rewards you can reap are worth it.
The benefits of FIRE
Who wouldn’t enjoy the benefit of retiring earlier so they can enjoy more time with their families and hobbies? Not to forget ditch stress and increase satisfaction in life. Retiring early gives you more control of your time and allows you to decide how you want to spend your days. In addition to the obvious satisfaction, this could also lead to improved mental and physical well-being and a higher quality of life.
- 😎 Financial Freedom
This is perhaps the biggest advantage of the FIRE lifestyle. You get to earn financial independence much earlier in life. By living off investments instead of working a regular job, you can use your time to focus on other things such as pursuing hobbies or starting up a business. In addition, with financial freedom comes more time to travel, which many consider to be one of life’s most rewarding experiences.
- 💸Tax Benefits
By following the FIRE movement, you can take advantage of tax benefits when investing. You may not even realize how much money you can save over the long term by taking advantage of tax-deferred savings like 401 k s or Roth IRA accounts for retirement funds. With these types of accounts, taxes on your investment earnings are deferred until withdrawal at retirement age, allowing your money to grow without losing any value due to taxes.
- 🏦Financial security
FIRE promotes financial security in that you are able to build up an emergency fund that can be used in case something unexpected happens such as a medical emergency or sudden job loss. This fund can give you peace of mind knowing that you have something to fall back on if needed.
How can you retire early with the FIRE movement?
To be able to retire early with money, you need to build a clear plan for your finances. This means a solid understanding of budgeting, annual expenses, investing, and tax laws (and the whole financial education package by extension).
Step 1: Understand Your Spending Habits
Calculate your current expenses and identify areas where you can cut back on spending in order to save more money each month.
Step 2: Create a Budget
Create a budget that will allow you to reach your retirement goals faster by saving more each month while still allowing yourself room for occasional indulgences.
Step 3: Invest your Savings
You want to invest some of your savings into stocks or other investments that will help grow your wealth over time.
Step 4: Understand Tax Laws
Make sure that you understand how taxes work so that you can minimize any potential penalties or fees associated with early retirement.
What are some FIRE variations?
While the basic concept of the FIRE movement is simple, there are several variations of the approach that individuals and families can choose from, depending on their goals and preferences.
→ Lean FIRE 🔥
This is the most common form of FIRE. It entails living on a much lower budget than most people and investing the surplus money into stocks, bonds and other investments. The goal of Lean FIRE is to reach a point where the investments are providing enough income to cover basic living expenses, meaning you can become financially independent and retire early.
→ Fat FIRE 🔥
This FIRE variation entails a more relaxed approach to budgeting, allowing for a higher level of spending and a more comfortable lifestyle. The goal of Fat FIRE is to have enough money invested so that it covers all your monthly expenses and lifestyle choices.
→ Barista FIRE 🔥
With this variation, FIRE adherents focus on maintaining a low-stress or part-time job to help generate residual income or pay for health insurance. Like other FIRE variations, the goal of Barista is to have enough passive income from investments to cover all of your living expenses, allowing you to retire early and live off of your investments.
→ Coast FIRE (a.ka. Coast FI or Slow Fire) 🔥
The Coast FIRE method cuts out the ‘retire early‘ part altogether and is more focused on peace of mind. Your FIRE journey is focused on attaining a certain threshold where your investment portfolio has enough money to let compound interest propel you to your goal. Once you have reached your magic number, you can stop contributing to your retirement accounts and free up your monthly income.
→ Real Estate FIRE 🔥
This variation of FIRE involves investing in real estate in order to build a passive income stream that can sustain your lifestyle. The idea here is to buy rental properties, flip houses, or invest in real estate crowdfunding platforms.
→ Career FIRE 🔥
Career FIRE involves pursuing a higher-paying career in order to build your savings and reach your financial goals faster. This could mean taking a higher-paying job, creating a side hustle, or pursuing a career move that will allow you to make more money.
→ Entrepreneur FIRE🔥
Entrepreneur FIRE variation involves starting a business in order to generate the income necessary to achieve your financial goals. This could mean launching an online store, starting a consulting business, or developing a new product.
How much money do you need to retire?
The amount of money you need to retire early depends on a variety of factors, such as your lifestyle, geographic location, and the age you plan to retire.
A good approach is to accumulate money saved to cover at least 10 to 12 times your current annual salary.
For instance, if you make $50,000 a year, you should aim to have at least $500,000 saved before you retire. If your annual income is $150,000 per year, then you should have between $1.5 and $1.8 million set aside for retirement.
In addition to saving enough money, it’s important to think about your investments. Aim to have a diverse portfolio with a mix of stocks, bonds, and cash that can provide income for you in retirement. Consider purchasing annuities or investing in dividend-paying stocks to help supplement your income.
Purchasing a comprehensive healthcare insurance policy is another important consideration because medical costs can easily balloon out of control and threaten your entire plan.
The best way to save money
Saving money is central to the success of your FIRE lifestyle plan. Here are some quick ideas that can help you put more $$ away each month.
- Set a budget and stick to it – one of the most important steps in saving money is to create a budget and stick to it. Establishing a budget will help you identify your income and expenses so you can have a better idea of how much you can save.
- Pay yourself first – before you start spending your paycheck, put some of your money into savings. This is a great way to ensure that you are saving for the future.
- Cut back on unnecessary spending – it’s easy to get carried away with impulse buys or unnecessary purchases. Before you make a purchase, ask yourself if it is something that you really need. If not, then look for ways to save money.
- Make a list before you shop – make a shopping list and let it stick. This is a great way to prevent overspending. Plan your meals ahead of time and write down the items you need so you can save money at the grocery store.
- Look for deals and discounts – before you make any big-ticket purchases, do some research, and compare prices. You almost always can find deals and discounts that help you save money on items such as electronics, furniture, and appliances.
- Use cash instead of credit cards – use cash instead of credit cards so you can stay within your budget and prevent impulse purchases. If you spend cash, you’ll be able to easily track how much you’re spending and make sure you’re not overspending.
- Automate your savings – automating your savings is an effective way to enforce your savings plan. Set up automatic transfers from your checking account to your savings account so you don’t have to worry about forgetting to save.
The 4% rule for safe withdrawal rates
The 4% rule is a commonly accepted rule of thumb for retirement (and also used to calculate your FIRE number).
It suggests that retirees should withdraw 4% of their portfolio annually, adjusted for inflation each year.
For example, if a retiree has a $500,000 portfolio, they should withdraw $20,000 (4% of $500,000) in their first year of retirement. In subsequent years, they should adjust that amount for inflation.
This rule is intended to help retirees maintain the purchasing power of their retirement savings by ensuring they don’t withdraw more than they can afford and deplete their savings too quickly. The 4% rule was developed using historical stock market data, which shows that a retirement portfolio invested in a mix of stocks and bonds has a 96% chance of lasting at least 30 years if withdrawals are kept to 4% or less of the initial balance.
The pros and cons of the 4% rule
|Provides a simple and straightforward guideline for retirees to follow when deciding how much money to withdraw from their retirement savings each year.||Based on historical data and may not be a reliable indicator of future market performance.|
|Conservative in that it helps to ensure that retirees do not outlive their savings.||Assumes that retirees will adjust their withdrawal rate each year according to inflation. This may not be feasible or desirable for all retirees.|
|Assumes a reasonable rate of return – this should help retirees make more accurate estimates of how much they can safely withdraw each year.||Does not take into account a retiree’s individual circumstances or risk tolerance.|
Which is better, a 401k or a traditional IRA?
Knowing how retirement savings accounts work best based on your individual financial situation and goals. One question that may come to mind when planning your retirement is deciding what is better between a 401k and a traditional IRA. The first thing to keep in mind is that each of these has its pros and cons.
|A traditional IRA is a retirement savings account that is tax-deferred, meaning that you won’t pay taxes on the money you contribute until you withdraw it. The contributions are also tax-deductible, meaning that you can deduct them from your taxes. Additionally, contributions are flexible, and you can change how much you contribute as your financial situation changes.||On the other hand, a 401k is an employer-sponsored retirement savings account. Contributions are typically made through payroll deductions, and employers may match contributions up to a certain percentage. Like a traditional IRA, contributions are tax-deferred, and the money grows tax-free until you withdraw it.|
When it comes to deciding between a 401k and a traditional IRA, it depends on your individual needs and goals. If you’re employed and your employer offers a 401k, this may be the better option since you’ll be able to take advantage of employer contributions and tax savings. However, if you’re self-employed or not eligible for a 401k, a traditional IRA may be a better option. The best way to decide is to assess your current financial situation and goals and determine which option will help you reach your retirement goals most effectively.
9 steps to cut your expenditure so you can save more for your FIRE strategy
Succeeding with the FIRE movement means cutting down on expenditure and saving money at every opportunity. Here are a few ordinary things you could do to ramp up your savings.
Spend less on groceries 🛒
Start by making a list of everything you need and stick to it. Avoid buying pre-packaged and convenience foods as they are usually more expensive and contain more preservatives. Buy in bulk when possible and stock up on non-perishables like canned and frozen items.
Look for sales and coupons and consider shopping at discount stores or online retailers. Buy store-brand items when possible and try generic brands as they are often cheaper than name brands. Apps like Ibotta, Flashgood & Too Good To Go are great for discounted food! If available in your area, get the Safeway, Kroger, or Target app and grocery shop there. By downloading your regular grocery store app, you may be able to save anywhere between 10-50% depending on the week, especially if you are planning meals around what’s on sale in the store that week!
Lastly, buy fresh fruits and vegetables in season as they are usually cheaper than out-of-season produce.
Spend less on restaurants 🍴
In April 2020, the average family was spending $1,141 a month on food. By January 2021, that figure was $1,299.Americans Spending More at Restaurants, on Takeout | LendingTree
Eating out at restaurants can be a fun and enjoyable experience, but it can also be expensive. To save money when eating out, you should look for specials and discounts, such as early bird specials, happy hour specials, or two-for-one deals. You can also look for coupons, rewards programs, and loyalty programs that may offer discounts or freebies.
Additionally, look for restaurants that offer a fixed-price menu or family meal deals, which can offer more value for your money. Finally, you can choose to order smaller portions and share meals with friends or family to save money.
By following these tips, you can enjoy eating out without breaking the bank.
Spend less on shopping 🛍️
Comparison shopping online and in stores can help you find the lowest prices. Additionally, taking advantage of sales, coupon codes, loyalty programs and cash-back offers can help you save even more. Whenever possible, try to buy in bulk to get the best value. Buying generic brands instead of name brands can also help you save money.
Lastly, planning ahead and creating a budget can help you stay within your spending limits and avoid impulse purchases.
Spend less on transportation 🚗
Consider carpooling with coworkers or friends to save on gas costs. If possible, look into public transportation—bus, train, and subway systems often have discounts for those who purchase passes.
Additionally, your city almost certainly has ride-sharing or bike-sharing services. Take advantage of these services to cut down on transportation costs.
Finally, consider walking or biking when going short distances. This helps save on gas, as well as improve your physical health.
Spend less on utilities 💡
Start by turning off lights and electronics when you are not using them and unplug them when you leave the room. Consider using energy-efficient bulbs and appliances that can reduce energy costs significantly.
Additionally, you may use natural light whenever possible, and keep windows and doors closed to prevent heat loss. Insulating your home with weatherstripping and proper window treatments can also help to reduce energy bills.
Finally, investigate utility company discounts or programs that offer incentives for reducing energy usage.
Spend less on housing 🏠
There are several strategies that can help reduce the amount of money you spend on housing. Start by thinking whether it may take sense to downsize to a smaller apartment or house. This will reduce the amount of rent or mortgage you must pay.
Also look for housing in less desirable neighborhoods, where rent or mortgage prices are much lower. It may also be possible to find a roommate or housemate to split the costs with. Make sure to shop around and compare prices to find the best deal possible.
Finally, look for incentives such as rent discounts or application fee waivers offered by landlords. With some research and smart decision-making, you can save a significant amount of money on housing.
Spend less on insurance 📝
Compare quotes from different companies to find the best price when shopping for insurance. You may also consider raising your deductibles as this can lower your premiums. Bundling different types of insurance will help you save money.
What’s more? Look for discounts that you might be eligible for, such as those for being a safe driver or having a good credit score. You could also talk to your insurance provider to make sure you’re not paying for coverage that you don’t need.
Spend less on entertainment 🎉
Look for ways to be entertained without spending money. Many cities offer free or discounted admission to museums, concerts, and other events that you can take advantage of. Watching movies or TV shows on streaming services like Netflix or Hulu is often much cheaper than going to the theater.
You may also host game or movie nights with friends so that everyone can enjoy each other’s company without spending too much money.
Spend less on healthcare 🧑🏽⚕️
Research health insurance plans carefully to ensure you are getting the best coverage for the best price. Consider opting for a higher deductible plan to reduce monthly premiums, but make sure to have a savings account ready to cover the costs of the deductible if needed.
Additionally, try to take advantage of preventative care and health screenings when available, as these services are often covered at no or low cost. Also make sure to compare costs for services at different providers, as prices can vary significantly from one location to the next.
By taking these steps, it is possible to save money on health care without sacrificing quality.
FIRE may be just what you need to retire early
Retiring early may seem like an impossible dream but with the right strategy, it is a realistic and achievable goal! The FIRE movement is one great way to fashion your path toward financial freedom or early retirement. It’s worked for many other people and there’s no doubt it can get you the results you want.
See how Grow Today can help you get your money to work for you.
By focusing on saving as much money as possible and investing in assets that generate passive income over time, you can slowly build up your nest egg until it’s big enough to sustain you without having to work anymore! So if you want to take control of your finances and retire early then give the fire movement a try! It might just be what you need to achieve your goal!
Who are the leading proponents of the FIRE movement?
Some of the best-known proponents of the FIRE movement include Chris Reining, Mr. Money Mustache, J. Money, and Jim Wang. The roots of this approach to financial independence can be traced back to Vicki Robin and Joe Dominguez (who wrote the book Your Money or Your Life in 1992).
Are there alternatives to FIRE?
Different people may have varying opinions and strategies on how to achieve financial independence and early retirement. For instance, some individuals argue that instead of saving enough money to go from a “Full-time job” to “Fully Retired”, one can simply target a lower savings amount, and go to “Partially Retired” so you work part-time on something you consider to be purposeful, (while also going for asymmetric – high risk and high rewards – activities). Nonetheless, FIRE is an incredibly reasonable strategy.