What’s retirement fire?

The FIRE movement has grown in popularity in recent years, with many Americans opting to retire earlier than traditional retirement plans allow. Proponents of this movement are often seen as people who take extreme frugality to achieve financial independence. So, what makes the FIRE movement stand out?

FIRE (Financial Independence, Retire Early) is a movement of people that advocates for extreme frugality by prioritizing savings and investing. The proponents of this movement aim to retire early and live off small systematic withdrawals from their accumulated savings. Many followers plan to retire in their 30s or 40s.

What is FIRE?

FIRE is a concept of achieving financial freedom at a young age, usually in your 30s or 40s, and retiring earlier than retirement plans allow. 

The goal of the FIRE movement is to build enough wealth through extreme frugality so that you have enough retirement income to finance your lifestyle without having to work a full-time job. The concept originated from the 1992 Book “Your Money or Your Life” by Vicki Robin and Joe Dominguez.

The FIRE movement advocates for aggressive savings and investing, usually from 50% to 75% of your annual income. Proponents of this movement aim to achieve financial freedom by cutting down on expenses and finding ways to earn additional income. In its extreme form, some proponents minimize expenses by giving up some comforts like out-of-home meals, air conditioning, vacations, etc.

What are the variations of FIRE movement?

Over the years, FIRE followers have modified the original FIRE principles to align the concept to their life situations and retirement goals. Some of the FIRE variations you can come across include:

Fat FIRE

This variation is for a person with a traditional lifestyle who wants to save more than the average worker, but without reducing their current standard of living. Hence, you will need a high salary and aggressive savings and investing to build wealth fast.

Lean FIRE

This variation advocates for minimalist living by cutting down on your expenses to the extreme so that you have enough earnings remaining to save and invest. It requires proponents to live a more restricted lifestyle so that they have more money to save and invest.

Barista FIRE

FIRE proponents who want a mix of fat and lean principles can follow the Barista FIRE approach. They can quit their full-time jobs, but use a combination of part-time work and savings without tapping into their retirement funds. This allows them to raise additional income and get health insurance.

How does FIRE work?

Individuals who use FIRE to retire early aim to reduce their expenses and find ways of increasing their income. FIRE proponents target to save at least 50% of their annual income, but not everyone can afford it.

To implement the FIRE concept, proponents may use two rules of thumb.

Rule of 25

The rule of 25 requires that you save 25 times your current annual expenses to retire. Start by adding up your monthly expenses for the year to know your annual expenses. Next, multiply the annual expenses by 25 to get the amount you will need to retire.

For example, if your monthly expenses total $6,000, it means that your total annual expenses will be $72,000. To know how much you will need to retire, multiply $72,000 by 25. The amount you will need is $1,800,000.

You can determine how close you are to achieving the target savings by deducting the current retirement savings and investments from your FIRE number. For example, if you have saved $800,000, it means that you will need to save or invest $1,000,000 ($1,800,000-$800,000) more to achieve the savings target.

The 4% rule

The 4% rule allows retirees to withdraw 4% of their accumulated savings in the first year. In subsequent years, they can adjust the annual withdrawals for inflation, and not run out of money over a 30-year period.

For example, if you have accumulated $1,800,000 in savings, you could withdraw $72,000 in the first year. In subsequent years, you can adjust the withdrawals for inflation. For example, if the rate of inflation in the second year is 3%, you can withdraw $74,160. In the third year, you can use the prior year’s withdrawal as the base amount and adjust it for inflation.

A common misconception of the 4% rule is that individuals can withdraw 4% of their savings each year. The 4% withdrawal rate should only apply for the first year, and subsequent withdrawals will be based on inflation.

What lessons can you borrow from FIRE?

While FIRE may not be for everyone, there are certain lessons you can borrow from the movement.

Start planning for retirement early

You should plan and set a specific retirement goal. Start by outlining what your dream retirement looks like and create a concrete plan on how to attain it. Evaluate your current savings rate, spending rate, and retirement savings, and create a timeline of how much you want to save.

Avoid debts

If you have debts, you should make a plan of paying them off. You can choose to cut down your expenses and redirect the extra savings towards debt repayments. You should also avoid taking high-interest debts.

Keep expenses low

Keep track of your monthly spending, and cut down any discretionary spending that does not make sense to you. If you trim unnecessary expenses, you can save or invest the money to move closer to your retirement goal.

Boost your income

Get creative about finding ways to make extra cash. You can seek a higher-paying job, find a part-time job, or use your spare time to start a business. An extra stream of income will help you increase your savings and move closer to early retirement.

Prioritize saving and investing

You should adopt a habit of saving and investing every month so that your money has enough time to grow through compounding. While saving 50% of annual income may not be feasible for most people, start by saving 10% to 20% into your retirement plans, and gradually increase the saving rate to reach your retirement goals.

Why FIRE may not be for everyone

Taking an early retirement can free up your time to focus on a passion project, start a business, or tour the world. However, FIRE may not be for everyone, and it comes with certain risks.

FIRE advocates savings 25 times your annual expenses based on the 4% withdrawal rule. This withdrawal rule is considered a safe withdrawal rate so that the retirement savings last for a 30-year period. If you retire at age 35, you risk outliving your savings if you live longer than age 65. In such a scenario, you would be forced to go back to employment to pay your living expenses.

Further, if you stop working earlier than 65, you will have to pay the cost of medical expenses. Medicare starts from age 65, and you won't get access to this federal benefit if you retire earlier. You would need to raise the withdrawal rate or be forced to re-enter the workforce to afford the medical expenses.

Additionally, FIRE requires individuals to have a large income to cover basic needs and still save aggressively. Saving enough to retire early requires a large income, likely in the six-figure range. If you are making minimum wage, FIRE may not be a viable plan for you.