Retiring with financial independence is deeply embedded in the American dream. Yet millions of young Americans see their parents and grandparents struggle to reach the traditional retirement, living with minimal fixed income or having to work far longer than they wanted.
As a result, the FIRE, or Financial Independence Retire Early, movement has become increasingly popular. The goal is to attain enough wealth to retire early through a combination of a very high savings rate and a frugal lifestyle. And we aren't talking about retirement at 55: Most FIRE practitioners aim to retire in their 40s, or even earlier.
Does FIRE make sense for you? If you're frugal, able to divert a very large portion of your income to retirement savings and investments, and have a do-it-yourself spirit, then adopting a FIRE lifestyle could be perfect path to financial freedom. Chances are, even if you're not interested in going full-on FIRE, elements of the movement can help you reach your financial goals more quickly.
What is Financial Independence Retire Early?
Many people who've heard of FIRE think it's just living like a pauper and socking away every spare penny beyond the basic human needs. Some FIRE practitioners do go to extremes, but it's not a one-size-fits-all approach by any means. FIRE, at its core, is a lifestyle that people live to maximize their savings rate while living comfortably today.
Some main principles behind FIRE:
- Aggressive saving, often of more than half of earnings, and maximizing retirement plans at a rate far higher than typical.
- Developing spending habits that prioritize cutting expenses where possible and practical.
- Developing professional skills or side hustles that can increase earnings.
Retiring early requires having enough assets saved to predictably cover your needs. A good starting point is to set a savings goal based on the 4% withdrawal rule, which works out to needing a nest egg equal to about 25 times your annual spending requirements. For example, someone who needs $50,000 per year would need to have $1.25 million.
How you get there depends on a lot of individual factors. And while it may not be easy, especially when you're just getting started, it's probably simpler than you expect. Popular FIRE advocate and blogger Pete Adeney, better-known as Mr. Money Mustache, summed it up succinctly in an interview with The Motley Fool:
It depends solely on your savings rate, which is the proportion of your take-home pay that you can save, while living happily on the rest. If you double your salary, and then double your spending, you are not a single day closer to retirement, even if you are saving a higher number of absolute dollars. But if you can learn to be happy with less spending, things get interesting very quickly.
What are some different FIRE strategies?
Like other wealth-building strategies, FIRE isn't just a single approach. Each person has to determine the right mix of cutting expenses and earning more money that works for their lifestyle and retirement target. As Adeney put it, it's not just how much you can save: It's how much you can save while living happily on the rest.
The most important first step is to determine what your ideal retirement will look like, and most importantly how much it will cost. Once you've determined this, you can decide whether you fall in the Fat FIRE or Lean FIRE camp or somewhere in between.
A focus on accumulating the most wealth possible, in order to retire early without having to live frugally in retirement. Fat FIRE practitioners often live far more frugally today than they anticipate living in retirement. The biggest goal here is to accumulate as much wealth as possible so they are more free to spend in the future.
While Lean FIRE practitioners still aim to save as much as possible, their retire-early goals are also underpinned by a lifelong commitment to a frugal lifestyle. The idea behind this strategy is that by living frugally during the accumulation phase, you can develop spending habits that will allow you reach financial independence more quickly and also mean that you don't need a large nest egg. This is the ultimate trade-off of a simple, low-cost life in exchange for more years of financial independence.
Many people drawn to FIRE either aren't interested in completely retiring in their 30s or 40s or acknowledge they won't be able to build enough wealth to fully retire at that point.
In this case, the goal is to accumulate as much as possible early via FIRE practices including frugal lifestyle and aggressive saving, and then transition to part-time work that covers basic expenses. For these people, trading those early years of maximizing their savings rate and cutting expenses will allow them to move to working far fewer and less strenuous hours in their 30s or 40s while their aggressive savings from their working years continues to compound and grow. These assets will then fund a more traditional retirement, or early retirement depending on a person's needs and goals.
Finding the right mix of FIRE strategies for you
There's a wide range of ways to reach your desired FIRE outcome, but they're all underpinned by cutting spending and maximizing your earnings so that you can set aside as much of your earnings as possible to quickly build wealth.
How to use the FIRE method to retire early
It starts with asking yourself some basic questions, then doing the math to figure out how much you'll need to save (or if you need to adjust your goals).
- How much income will you need to live the lifestyle you want when you retire?
- When do you want to retire?
Once you've answered these two questions, you can start working to determine if your goal is feasible. Let's start with the first number: How much you expect to spend each year in retirement.
As mentioned earlier, a helpful rule of thumb is the "4% rule," which says your retirement savings will need to be large enough for you to withdraw 4% per year. In other words, your nest egg needs to be 25 times the amount you'll withdraw the first year.
In the example earlier, we used this concept to show that someone anticipating $50,000 in annual living expenses would need to accumulate $1.25 million; if your expectations for annual expenses in retirement aren't quite so frugal -- the median U.S. household income is closer to $60,000 per year now -- then you may need to accumulate even more.
Let's use $1.25 million as a starting point, along with the next question: When do you want to retire?
If someone who's 25 wants to retire at 40 with a $1.25 million nest egg, they'd have to stick $83,000 per year in a savings account at current interest yields. Needless to say, that's out of the reach of many people who don't earn a significant income. However, there are ways to boost how much you save and to maximize how much your savings grow so you're not doing all the hard work on your own.
For instance, if you can capture a 5% annualized rate of return on your savings, you'd need to save and invest $56,500 per year over that 15 years to reach $1.25 million. Still a very high savings rate, but far more attainable. If you can capture a 10% annualized rate of return -- about what the stock market has averaged over the past century -- you can get to $1.25 million with less than $40,000 per year in contributions.
Of course, these are simple numbers to illustrate the point: Saving a lot of money is much harder than growing wealth by investing a portion of that savings over the long term.
Once you've figured out how big your nest egg needs to be, you can start working to get there. Use every tool at your disposal, including the following:
- Maximize employer matching in retirement plans like a 401(k). Every dollar an employer matches is a dollar you don't have to earn or cut from spending to save.
- Use tax-advantaged accounts like a Roth IRA to reduce taxes on retirement income.
- Invest in stocks -- mainly low-cost index funds -- to generate higher long-term returns than cash savings.
- Invest in assets like commercial real estate or rental property that can generate income.
- Pay off expensive debt like credit cards and higher-interest student loans as soon as possible.
- Take advantage of credit card points programs, so long as you can be disciplined with spending and don't carry a balance
- Be more frugal
- Buy a used car and keep it as long as possible instead of opting for a new car lease every three years
- Ride a bike or other low-cost transportation to further cut travel expenses
- Learn how to make household repairs instead of buying a new appliance or paying a handyman
- Cut back on recurring expenses like cell phone, cable, internet, and other services where possible
- Take advantage of free entertainment options
- Learn a new skill or take on a side hustle that will increase your earnings
How much sacrifice does FIRE require?
The reality is that the FIRE lifestyle does require people to give things up; the delayed gratification of putting aside as much of your income as possible so you can attain financial freedom as soon as possible doesn't happen easily. Reaching that goal requires cutting back on living expenses and discretionary spending, including nights out with friends, expensive vacations, and driving in a nice, new car in exchange for more years of financial independence. For many FIRE practitioners, it also comes at the expense of less free time now and more work to earn as much as possible.
Yet many FIRE practitioners say the lifestyle can be deeply gratifying. Sure, there are sacrifices, but learning basic plumbing to fix a leaky faucet can not only save you hundreds of dollars versus hiring a handyman or plumber, it can unlock your potential to do far more things on your own.
Many FIRE devotees also describe the lifestyle as being physically and emotionally healthy. Instead of a pricey resort vacation -- often with the added stress of air travel -- a camping or backpacking trip with family and close friends not only costs less, but can result in more meaningful experiences.
But how much sacrifice FIRE requires you and your family to make really depends on your goals, your disposable income, and what you're prepared to give up or cut back on to get your savings rate as high as possible.
It's also possible to find, over time, that many of the things that were hard to give up are things you're better off for having left behind. A simpler, less expensive lifestyle that prioritizes experiences over things, especially when it helps you achieve financial independence as young as you can, is worth striving for.