Those who dream of quitting their jobs before the traditional retirement age 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 garnered significant media, often highlighting the stories of those who have accumulated enough wealth to support their lifestyle without relying on a salary.
However, the FIRE movement involves more than simple calculations and mapping out a retirement timeline. Those interested in FIRE should first understand the sacrifices required to achieve financial independence and what issues may arise during saving and retirement.
Here’s what to know before you attempt to follow 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?
Introduction to the FIRE Movement
The FIRE strategy has two essential 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,” in Sacramento, California. For FIRE devotees, the goal is often to stop working in their 30s or 40s.
[Related:Can You Retire at 65 With $0 Saved?]
The Principles Behind the FIRE Movement
The FIRE movement is motivated by a desire to be free from the need to work. FIRE followers with young children can be more involved in their children’s activities, while others may choose to travel the world or focus on new hobbies.
Those with an entrepreneurial spirit can use their time to begin new business 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 examining 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, an early retiree and host of the Earn & Invest podcast in Evanston, Illinois. “This allows a safe withdrawal rate of 4% of total investments, inflation-adjusted, each year.” Based on this 4% withdrawal rate, a person with annual expenses of $80,000 should aim to set aside $2 million.
Having a goal in place can help you rework your budget. Live as frugally as possible and set aside as much as possible every year. If you get a raise or bonus, put those additional funds toward your early retirement plans. As you save, consider allocating funds to stocks, bonds, mutual funds and other investments. Purchasing real estate or having a side hustle can also help to generate passive income to cover monthly expenses. It may take several years or more than a decade to save enough.
[See: 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. Depending on the type of lifestyle you want in retirement, there are different approaches to achieving FIRE. These can 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 earn money from a part-time position, such as a coffee shop barista.
— Slow FI is 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 retire.
[Read: What Is a Good Monthly Retirement Income?]
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 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 of years and must reenter 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 and anxieties and confront who we really want to be in life.”
Is the FIRE Movement Right for You?
If you enjoy living frugally and dream of pursuing hobbies and other interests instead of work, the FIRE movement path is worth considering. “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, look for creative ways to 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 01/31/25: This story was published at an earlier date and has been updated with new information.
