If you’ve ever dreamed about say adios to your 9-5 and being financially independent, you may have heard of the FIRE movement. FIRE stands for Financial Independence/Retire Early), and the concept involves:
- Saving a massive amount of your income (usually 50% or more)
- Living well below your means
- Investing heavily in low cost index funds
Using these principles, FIRE proponents are able to for shave off years, and even decades, off the traditional retirement age, which is usually 65.
How Did The FIRE Movement Start?
The main ideas behind the FIRE movement originate in the 1992 best-selling book Your Money or Your Life written by Vicki Robin and Joe Dominguez. They popularized the idea of achieving financial independence rather than spending the best days and years of your life working in a 9-5 to make money.
The core concept of their book is that most of us float through life unknowingly exchanging our time for money. Time, as our most precious and scarce resource, is spent earning money so we can buy fancy purses, the latest electronic gadgets, the big house, and the new car. Robin & Dominguez made the argument that people are trading their lives to buy things that don’t actually bring them value. And thus, a movement was born.
The FIRE Community Today
While Your Money or Your Life fueled momentum as a grassroots movement, it was another 25 years before the FIRE movement began to really take shape.
The Great Recession of 2008 created an entire subset of people that were disillusioned with the status quo. People began to understand the true cost of American consumerist culture and keeping up with the Joneses. Some began to realize that traditional financial advice simply fed the idea that you work for 40+ years, set a side a little money, and hope to enjoy a few years of “living the dream”.
One of the most well known FIRE advocates is Mr. Money Mustache. After retiring at 30, Pete Adeney started a blog, Mr. Money Mustache, to spread his ideas of using a frugal lifestyle to buy your freedom. He and his now ex-wife saved over 60% of their incomes during their brief careers and they both retired shortly before their son was born.
His blog gained momentum and he built a dedicated following of readers, or “Mustachians”. Much of the attention now paid to FIRE can be attributed directly to his blog. The current FIRE community has expanded to include a wide array of writers, bloggers, and podcasters — normal people pursuing a not-so-normal life. Our very own host Jannese is one of these FIRE weirdos, and she’s damn proud of it!
Some of the most well known books on FIRE include Financial Freedom, How to Retire Early with Real Estate, Work Optional, ChooseFI, Quit Like a Millionaire, The Simple Path to Wealth, and The Millionaire Next Door.
Why Do People Pursue Fire?
Financial independence isn’t easy to achieve. It’s a long road, taking many people a decade or more to achieve. What do people get when they reach financial independence? What drives them to create a plan and stick with it?
Freedom To Pursue Work You Love
For many in the FIRE movement, financial independence isn’t actually about retirement — it’s about having the ability to choose work that you enjoy doing. Financial independence gives you the chance to choose the work that you do, without worrying about how much you make. It’s more about freedom than anything else.
Spending More Time With Family
Financial independence means you can spend as much time with family as you want. You can stay home with your kids while they’re young, enjoy time with your spouse, and spend extended time visiting your parents without worrying whether your boss will care. FIRE proponents are acutely aware of the finite nature of their time, and they’re determined to make the most of it.
Freedom To Travel, Live and Work From Anywhere
On average, private-sector employees get 10 days of paid vacation after one year of employment. Worse, 1 in 4 private-sector employees doesn’t get any paid vacation or holidays. With FIRE, you can travel as much as you want, with complete disregard to how much PTO your boss wants to give you. Financial independence provides the opportunity to explore, travel and move around the world, without having to worry about being constrained by traditional employment.
For some who reach FIRE, they take advantage of geo arbitrage: the difference in the cost of living between two areas. Often, those pursuing FIRE live in high cost of living areas (and areas where they are paid well) and then retire to low cost of living and low tax areas.
Others who reach FIRE choose to travel full-time or nearly full-time, focusing on staying in countries where the cost of living is low. Those countries include places in South America, southeast Asia, or Eastern Europe.
And extended travel isn’t just for people who have reached FIRE. Many people on their path to FIRE choose to take a sabbatical for an extended period of time (like a year), to travel and enjoy the FIRE lifestyle.
What is your FIRE Number and How to Calculate It?
If you want to pursue financial independence, your first step is figuring out what your FIRE number is. This number represents the amount of money you need to save/invest in order to achieve financial independence and become work optional. Broadly put, the rule of thumb for retirement planning of any type (but especially FIRE) is to save 25 times your expected annual retirement expenditures.
If you plan to spend $30,000 annually in retirement, you’d need $750,000 in your portfolio. If you plan to spend $50,000 annually, you’d need $1.25 million.
There are a few very important details to the 25x rule:
- It does not factor in Social Security, pensions, or any type of earned income in retirement (such as a part-time job, side hustle, or rental property).
- Also, it assumes a 7% annual return on stock investments. (The historical annual S&P 500 returns are about 7%)
- It estimates only how much you need in your investment portfolio to retire, not how much you can withdraw during retirement(the 4% rule, more on that below).
- It doesn’t include inflation, so you’ll have to manually include those calculations.
Does the 25x Rule Work?
As we always say, personal finance is personal, and determining your FIRE number requires a good amount of personal reflection. You should consider the 25x rule as a goal-setting tool, rather than a precise prediction. Since it’s not very specific, it can give you a starting retirement number to work toward.
The 25x rule can help you refine your retirement plans. But you probably shouldn’t hang your entire retirement on this formula alone. You’ll want to ask yourself questions like:
- Where will you live and what does the cost of living look like?
- How will I pay for health insurance?
- Who else is relying on me for income?
- Do I expect to travel a lot or be a homebody?
- What does my post FIRE life look like?
- Will I pursue other income sources once I’m FIRE?
All of these questions will help you determine if 25X is a good amount to save, or if you need more or less.
The 4 Percent Rule in Retirement
The principle of the FIRE number is based on the Trinity Study, which is the origin of something known as the 4% rule. The 4 percent rule started to circulate after the publication of a 1998 paper titled Retirement Savings: Choosing a Withdrawal Rate that is Sustainable, often referred to as the Trinity Study.
The 4 percent retirement rule refers to your withdrawal rate: the amount of money you might withdraw each year from the starting value of your portfolio of stock and bonds in retirement.
For example, if you have $1,000,000 when you retire, the 4 percent rule would say that you could withdraw about 4% of that amount—or $40,000—the first year of retirement.
You could then increase that amount with inflation and have a probability of almost 95% that your money would last for at least 30 years, assuming your portfolio allocation was 50% stocks and 50% bonds.
If you’re serious about achieving FIRE, you’ll need help along the way. That will start with one or more top-level investment platforms. After all, while half the FIRE effort is saving an outsized amount of money, the other half is investing it successfully. The right investing platform can make all the difference.
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New Street Advisors Group – a commission free, fee-only fiduciary Registered Investment Advisor (RIA). Their mission is to provide transparent financial planning, portfolio management and investment advisory services to their clients. Check out our episode with their lead advisor, Delano Saporu!
Are you interested in pursuing FIRE? Are you already on the path to FIRE? Check out some of our favorite FIRE podcast episodes below!
- Episode 58: How To Retire Early and Live An Intentional Life | A Purple Life
- Episode 56: How To Stop Sabotaging Your Financial Goals And Start Pursuing Financial Freedom | Cinneah El-Amin, Flynanced®
- Episode 31: Why Achieving Financial Independence Matters For Communities of Color | Julien and Kiersten Saunders of rich & REGULAR