11 FIRE Method Tactics to Help You Retire Early

FIRE stands for Financial Independence, Retire Early. The movement first appeared in the late 2000s. It's been gaining popularity since, as FIRE proponents share their stories in blogs and online communities.

The success stories tell of burned-out professionals amassing enough wealth to leave the workforce in their 30s and 40s. Their methods, however, are not for the faint of heart. FIRE proponents practice what can only be called extreme saving -- which takes commitment and discipline.

Think you have what it takes to cut ties with your paycheck early? Read on for 11 FIRE tactics that'll help you retire early.

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To set a course for early retirement, you must know the cost of the lifestyle you want. From there, you can estimate the savings you'll need to support yourself.

FIRE proponents often target a savings balance equal to 25 times their annual expenses. This comes from the 4% rule. Under that rule, your wealth will last several decades if you cap your withdrawals at 4% per year, with an annual adjustment for inflation.

In other words, if your preferred retirement lifestyle costs $100,000 annually, you'd need $2.5 million on hand to leave work for good.

ALSO READ: How Much Do I Need to Retire?

With a savings target in mind, you can build a plan. This will take some experimentation with a compound interest calculator like this one. You'll use the calculator to project scenarios based on how much you can save and when you plan to retire.

The unknown factor in the calculation is your savings growth rate. You can use 7% if you invest mostly in stocks or stock funds. That rate is in line with the stock market's long-term average annual performance, adjusted for inflation.

If you invest more conservatively -- mostly in bonds -- you'd use a lower rate. Investment-grade corporate bonds average closer to 3% to 4% after inflation. Government bonds will yield less.

High-rate debt is a budget killer. Every dollar you spend on interest is $1 less for your retirement savings. Debt is also tough to manage as a retiree on a fixed income. In short, paying off revolving debts is a requirement if you plan to retire early.

Mathematically, it's better to pay down higher-rate debts before you start investing. This is because you'll pay more in interest on credit card balances than you'll earn in an investment account.

Still, how much you allocate to debt payoff versus investing is a personal choice. Go with the plan that motivates you most. If you love watching your debt balances drop every month, for example, focus there. If you want to invest some while the market's down, that's all right, too.

When you start projecting how quickly your wealth will grow, you're likely to realize something important. The amount you want to save may not support your goal.

Maybe you'd like to retire in 15 years with $1 million. Your budget says you can save $500 monthly, but the compound interest calculator delivers a discouraging result -- that you must save $3,200 monthly to reach your goal.

Living simply closes the gap between what you can afford to save and what you need to save. FIRE followers take living simply to the extreme, essentially trimming their lifestyle back to include only the essentials. They might move into a tiny home or travel trailer, for example, and forgo all discretionary spending.

ALSO READ: 5 Extreme Downsizing Strategies to Help You Retire Early

Come to grips with the concept of living simply and it'll be easier to accept this piece of FIRE wisdom: When in doubt, strive to save 50% of your take-home pay.

If that's unrealistic today, you can always work toward that benchmark. It's a straightforward process. First, trim back your lifestyle now as much as possible. Then, avoid spending more as your pay rises. Your pay raises will cover inflationary spending increases only -- no new cars, bigger houses, or fancier vacations. You'd send any excess income into your retirement savings.

Stick with that habit and you can make big strides increasing your savings as a percentage of your income.

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Retirement accounts have tax perks that help you save faster. In 401(k)s and traditional IRAs, for example, your contributions are tax-free and taxes on your earnings are tax-deferred. Rather than pay taxes annually on your investment gains and dividends, you pay taxes on your withdrawals. This allows your money to stay invested and grow faster over time.

Roth IRAs have a different tax structure. You contribute to a Roth with after-tax money, earnings are tax-deferred, and qualified withdrawals are tax-free.

Consider maximizing the value of tax-deferred earnings by using these accounts to hold income-producing assets -- like dividend stocks.

ALSO READ: What Does It Mean to Be Pre-Tax or Tax-Advantaged?

401(k)s and IRAs have contribution and withdrawal limitations -- and those limitations don't align well with early retirement. Specifically, the IRS caps what you can contribute to these accounts each year. Also, you probably won't qualify for penalty-free distributions until age 59 and a half.

You can manage through those limitations by also saving to a taxable brokerage account. The goal is to accumulate enough funds there to pay your bills in the gap years -- between when you retire and when you're old enough to withdraw from your 401(k) or IRA.

Stick with non-dividend-paying growth stocks in your taxable account. If you don't earn dividends or interest in the account, you'll owe taxes only when you sell stocks and realize gains.

There are two main ways to fund your lifestyle without working income. You can earn passive income -- like stock dividends or real estate rents. Or you can sell assets to raise cash. Most retirees do some of both.

Passive income is preferable to an early retiree. This is because asset liquidations reduce your future earnings power and shorten the life span of your savings. If you can live entirely off stock dividends, your portfolio won't gradually shrink over time.

Start working now to build a passive income stream. Popular options include dividend stocks, real estate investment trusts (REITs), crowdfunded real estate investments, and real investment property. You may also explore starting a business you can later hire someone else to run.

ALSO READ: 2 Dividend Stocks for a Lifetime of Passive Income

To live simply without regret, you must be clear on what's important to you. Quality time with time with family? You can achieve that while living in a tiny house in the woods. But traveling the world with your kids to experience new cultures? That one's harder to accomplish on a slim budget.

Defining your lifestyle priorities can point you to the right level of sacrifice, for your life today and for your future. You may realize that your material needs are minimal -- and saving half your income to retire at 40 is realistic. Or, you may feel more comfortable taking a less extreme approach.

Engaging with FIRE blogs and subreddits can provide great insight into the FIRE lifestyle. You'll learn from real people what sacrifices they're making to secure their future.

You could also start your own in-person savings club with people you know. Share your plan to save aggressively for retirement with a few trustworthy friends. Float the idea of a savings support group -- where you can share challenges, ask questions, and generally motivate one another to stick to your savings plans.

Chances are, you have some like-minded friends who'd love to join you on that journey.

Life is anything but predictable. Even the most detailed plan for early retirement doesn't account for unexpected or changing circumstances. As a personal example, my spouse and I were saving half our income in the 2010s so we could retire early. We subsequently both switched jobs and decided working wasn't so bad after all.

Your plans and goals can change. Don't get married to one outcome and one timeline. Instead, reevaluate your situation every year and adjust accordingly.

And remember this: No matter what happens with your early retirement plan, you won't regret building your wealth.

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Learn to live below your means, pay down your debts, and save for retirement. These are the principles of FIRE -- a movement that's enabled so many to achieve financial independence before traditional retirement age.

While FIRE in its original form can be extreme, you can (and should) implement the principles on your own terms. Controlling your spending and investing in your future are smart money moves, even when your retirement timeline is more conventional. The more wealth you build today, the more flexibility you'll have in the future to live the way you want.

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