FIRE Fundamentals: Financial Independence and Early Retirement
Financial independence? Sounds great! Retire early? Sign me up. The FIRE (financial independence, early retirement) movement is committed to the concept of saving the majority of your income at the age of 20-30 so that you can retire at the age of 30-40, but this elusive goal requires good, stable income and the utmost commitment. to savings. …
While it is true that the cost of compound interest on an investment in the early 20s can be very rewarding, FIRE’s seductive package also has its fair share of detractors. The movement has been criticized for being overly optimistic about saving, ignoring parenting, promoting unrealistic long-term consumption habits, and simply out of reach for those without wealth. You may want to be suspicious of early retirement.
What is FIRE?
When you think of retirement age, you are probably thinking of someone between the ages of 50 and 60, and there is a reason for that – this is the norm. After all, Social Security payments start at age 62 , and you can withdraw from your IRA without penalty at age 59.5. FIRE adherents typically want to retire much earlier, in their 40s, 30s, and sometimes 20s. (You’re probably thinking something like, “Sounds great, but what if I only make $ 35k a year and drown in student loan debt?” .)
While early retirement is a common goal of the FIRE community, philosophically the emphasis is on financial independence. “It’s not so much about early retirement, but about having the freedom to pursue your dreams and ambitions,” says Deacon Hayes , author of You Can Retire Early! “. Hayes adds that FIRE is really about “the freedom to choose whether to work or not.”
What is known as Rule 25 is a more specific definition of financial independence: when your net worth is 25 times your annual spending, you are considered financially independent. (For example, if your annual expenses are $ 40,000, you are financially independent when your total net worth is $ 1,000,000).
Who is FIRE for?
If you have a high paying job that sucks, FIRE probably sounds good right now. However, Tanya Hester , author of Choice Work: Retire Without a Penny, warns against this:
“Early retirement because you don’t like your job is a bad reason to do so, and it’s a recipe for boredom or aimlessness when you fall for it,” she says. “Achieving FIRE is a big undertaking that requires a lot of focus and determination. This is not for those who want to get rich quick or those who just hate their jobs. “
This is not a career escape, but a long-planned all-round lifestyle update. “A good reason for early retirement is that you have an alternative vision for your life that you aspire to, but that you cannot achieve by working full-time,” says Hester. “Achieving financial independence has allowed us to leave this career chapter of our lives out of gratitude and appreciation and move on to the next chapter that we control.”
While financial independence requires cost cuts, it also requires a decent income, as many in the FIRE acknowledgment community do.
“ Being able to do this is a tremendous privilege,” says Liz Thames , author of Introducing the Frugalwoods: Achieving Financial Independence Through Simple Lifestyles . “We have a real problem with income gaps and people who do not earn a living wage. So I want to make sure we understand that being able to keep the distance between our income and expenses is often a privilege. ”
Hester adds that it’s unrealistic to think that “everyone can save enough to retire early in a country that does not value many professions and does not live up to the living wage. So while many people have become financially independent without earning six figures, more earnings will certainly help speed up the process, ”she says.
FIRE rules
The basic math behind FIRE is simple: Spend less than you earn and save the difference on low-commission investments like index funds. Other investments, such as property rentals and passive income sources, are also an important part of achieving financial independence. Like frugality: the less money you need to live, the less money you have to save to finance the rest of your life.
So, although the rules are simple, getting there is, of course, a different story. Achieving FIRE involves the same concepts of achieving any financial goal, and ultimately comes down to behavior and privilege, not an exercise in denial.
For example, the Thames leads a modest life that many would consider sacrificial, but its frugality has nothing to do with self-restraint. “I’m not missing out on anything in my life because of frugality,” she said. “I spend money on what is important to me. I just don’t have to buy so much to live a fulfilling life. “
First steps to FIRE
If any of this sounds appealing and realistic to you, all the experts pretty much agree that the first step is to figure out your why.
“If you want to retire early, you need to have a clear why,” says Hayes. “Do you want to quit your job to start the business that you’ve always talked about with your friends? Do you want to have more than two weeks of vacation a year? Want to spend more time with your loved ones? Whatever your “why” may be, keep it motivating to create a plan and execute it in difficult times. Once you understand why, you will want to define your path. “
Second step? Track your expenses. Check your bank statements, credit card statements, online budgets and decide which purchases are significant or necessary.
“Most of us are shocked to find out how much we are actually spending,” Hester said. “Once you’ve started tracking, figure out how much your lifestyle costs per year, look for what you can cut back to reduce that number, and then work to increase your savings rate. These are the hardest parts of the journey, and the rest is just a matter of waiting for the money to add up and increase. “
After you’ve conquered your spending, it’s time to look at your bottom line and compare. Thames said that you should deduct your fixed compulsory expenses from your income and then adjust your discretionary expenses as necessary.
Hence FIRE comes down to mathematics and mechanics. In one episode of his podcast, Mendonza offers ten “pillars” of financial independence. These pillars:
- Reduce housing costs
- Drive used cars
- Cut the cable cord
- Reduce your tax liability by maximizing the number of tax deferred vehicles such as 401 (k), 457, 403 (b), IRA, HSA, etc.
- Switch to a cheaper cellular service
- Use credit card rewards and smart financial habits to help fund your trip
- Reduce your grocery bills
- Increase your income and consider adding multiple sources of income
- Invest with low cost index funds
- Use the 4% Rule: If you can safely remove 4% of your nest egg every year to cover your expenses, and you still have enough money in the future, you have achieved financial independence.
Like any other financial goal, the math is simple, but it takes ingenuity , diligence, and patience . However, how realistic FIRE is is up to you.
This story was first published in 2017 and has been updated on October 19, 2020 with more recent information.