If you’re looking for a chance to step away from work before the traditional retirement age, you may have heard of FIRE, which stands for “financial independence, retire early.” The movement, which consists of saving enough to leave a job before age 65, has been highlighted in blogs, books and the media, telling stories of those who have accumulated enough wealth to support their lifestyle for the next several decades without having to bring in a salary.
However, there is more to the FIRE movement than doing simple calculations and mapping out a timeline to retirement. A good starting point is to understand what is involved in achieving financial independence and what issues may arise during the saving and retirement steps.
Consider the following before you embrace the FIRE movement:
— Introduction to the FIRE movement.
— The principles behind the FIRE movement.
— How to get started with the FIRE movement.
— Key components of the FIRE movement.
— Challenges and controversies of the FIRE movement.
— Is the FIRE movement right for you?
[Related:Can I Retire at 50 With $2 Million?]
Introduction to the FIRE Movement
The FIRE strategy essentially has two components: financial independence and retire early. “It’s about saving and investing aggressively during your working years in order to create a portfolio along with passive income that enables you to step away from full-time work well before traditional retirement age,” says Gary Grewal, a financial planner and author of “Financial Fives.” For those involved in the FIRE movement, the goal might be to stop working in your 30s or 40s.
The Principles Behind the FIRE Movement
The motivation for the FIRE movement tends to stem from a desire to be free from the need to work. Individuals can create a source of income for themselves, and then dedicate their time as they choose. Parents with young children might opt to be more involved in their activities and help out in the classroom or on the sports field. Others may choose to travel the world or focus on a hobby close to home.
Those with an entrepreneurial spirit might use their time on new ventures. “Many early retirees make more money in early retirement than they did while traditionally employed since they embrace their unique passions and launch small businesses without the fear of financial instability,” says Cody Garrett, a financial planner and owner of Measure Twice Financial in Houston.
How to Get Started With the FIRE Movement
The FIRE process begins by looking at how much you spend each year. Your total annual expenses can then be multiplied by 25. “That money, invested in mostly equities, will be enough to allow a person to live off the proceeds for at least the next 30 years,” says Jordan Grumet, who retired early as a member of the FIRE community. Grumet is the author of “Taking Stock” and host of the Earn & Invest podcast. “This allows a safe withdrawal rate of 4% of total investments, inflation-adjusted, each year.” If your annual expenses are $80,000, you could aim to set aside $2 million ($80,000 x 25). Once you have that amount, you could retire and withdraw 4% of $2 million annually, which would be $80,000 each year.
Having a goal in place can help you rework your budget. You might choose to live as frugally as possible and set aside as much as possible every year. If you get a raise or bonus, you can put the funds toward your early retirement plans. It could take several years or a decade (or more) to save enough.
[Related:What Is the Average Retirement Savings Balance by Age?]
Key Components of the FIRE Movement
The FIRE movement requires a strong focus on money management, budgeting and investing. There are different approaches, depending on the type of lifestyle you would like to have in retirement. Some of these include:
— Fat FIRE: refers to having higher levels of savings and income than FIRE.
— Barista FIRE: involves saving enough to quit a full-time salaried position while continuing to bring in funds from a part-time position such as a coffee shop barista.
— Slow FI: the concept of setting aside funds at your own pace.
— Coast FIRE: consists of having sufficient money in your retirement accounts so you don’t have to make any more contributions. The amount will grow during the coming years and be able to support your lifestyle when you do retire.
As you save, you might allocate funds to stocks, bonds, mutual funds and other investments. You could purchase real estate or use a side hustle to generate passive income that will grow and eventually cover your monthly expenses.
[Read: How to Invest If You’re Starting Your Retirement Savings at 40.]
Challenges and Controversies of the FIRE Movement
There are several drawbacks to consider when planning to retire early. Individuals might have to pay for their own health insurance before they are eligible for Medicare. There is also a concern that investments might perform poorly and not generate the expected return.
“The worst thing that can happen is you retire at 45 and by 60 you realize you will run out of money in a couple years and must re-enter the workforce,” says Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan.
Even if your finances support you, there can be issues related to leaving the workforce at a young age. “Often early retirees are running away from what they don’t like,” Grumet says. They may not have thought about their true purpose and interests. “It is not uncommon for a FIRE advocate to reach their financial milestones and quit work to find out that they are more anxious and depressed than ever,” Grumet says. “Once a job is removed as a reason for unhappiness, often we have to face our true fears, anxieties and confront who we really want to be in life.”
Is the FIRE Movement Right for You?
If you enjoy living frugally or have dreams of spending years pursuing hobbies and other interests, the FIRE movement might be an appropriate path to follow. “You must know your numbers — everything from what kind of rate of return you need to average to what age you want to retire and how much you need to live comfortably in today’s dollars,” Tallou says. If it’s hard to make ends meet, you might choose to first increase your income and then save as much as possible for the future.
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A Guide to the FIRE Movement originally appeared on usnews.com
Update 11/01/23: This story was published at an earlier date and has been updated with new information.
