Two people jumping over a bonfire

How does retiring in your 40s sound? Or 50s? Probably too good to be true, right?

Even though Social Security benefits can kick in at age 62, most Americans don’t expect to leave the workforce until years (or even decades) after that. A big reason why: The need to save a significant amount of money for retirement.

But the FIRE movement — Financial Independence Retire Early — is empowering people to quit full-time work and retire earlier than that … like, way earlier. Sometimes in their late 20s or 30s.

Not surprisingly, there are some pros and cons to building wealth this way, like living a bit more frugally than you’d like to now, so you can save more money for later. But it’s an intriguing lifestyle that’s gathering momentum.

Is it right for you? Read on to learn more.

Who started the FIRE movement?

As mentioned, FIRE stands for Financial Independence Retire Early. But we didn’t start the FIRE.

The movement can be traced back to the early 1990s and is attributed to Vicki Robin and Joe Dominguez, co-authors of “Your Money or Your Life,” a book that details how to live a modest life and reduce your dependence on money, freeing you from a life spent on the 9-to-5 work clock.

Robin and Dominguez created a lifestyle and grassroots movement aimed at reducing consumerism and teaching people about how simple living could help them gain financial independence.

Then, in 2011, Mr. Money Mustache, a blog written by Peter Adeney, helped the movement further grow in popularity. In his blog, Adeney detailed how he and his wife each earned about $67,000 as software engineers and lived frugally, spending only about $27,000 a year. They socked away the rest in savings or investment accounts and retired at 30. Since then, the blog has seen over 35 million unique visitors and launched FIRE into the zeitgeist.

The movement continues to grow with thousands of FIRE blogs, annual conferences, retreats, and millions of FIRE practitioners all over the world.

What is this FIRE lifestyle?

Participants rely on a simple formula to reach financial independence within a short time period:

  • Saving 50 to 70% of their income
  • Living frugally
  • Investing in low-cost stock index funds

But how can you know you’ve built up enough of a cushion to retire so early? FIRE practitioners use a formula known as the 4% rule.

What is the 4% rule?

This ultra-conservative framework, traced back to a few professor’s from Trinity University in the late 90s, provides the foundation for the FIRE movement’s investment strategy. Here’s how it works.

To make sure your money lasts through your lengthy retirement, the FIRE community sticks to what it calls the 4% safe withdrawal rate (or 4% rule for short).

It assumes that you’ve invested the majority of your money in stocks and other assets that grow at a rate of 7% each year (a.k.a. your passive income) before inflation. Inflation reduces that by 3% on average, leaving you with 4% to withdraw and spend without touching your principal, which continues to grow.

Want to visually see the power of your savings rate and the real possibility of early retirement? Go to Playing with Fire Retirement calculator.

Common misconceptions about the FIRE lifestyle

Everyone’s financial situation is different, and the rules of the FIRE movement aren’t set in stone. If you can only sock away 20% of your income one month but circumstances allow you to put aside 50% another month, it’s all good.

Remember: This is about YOUR financial independence. Spending more now to pay off high-interest credit-card debt could leave more of your money earning interest in the long-term.

And just because FIRE has “retire early” in its name doesn’t mean you can’t work. A big part of the movement is about flexibility, making full-time or part-time work optional since you don’t necessarily need the money. In turn, it can make the work more enjoyable.

A part-time gig or starting your own business are just a couple of the ways you can supplement your retirement income while still in living the retirement lifestyle.

If you do this though and are closer to the standard retirement age, you’ll want to first see how it impacts your Social Security, as additional income could affect benefits.

Does the FIRE movement allow for flexibility based on my personal financial situation?

The FIRE movement isn’t for everyone. But if you focus on ways to reduce your living expenses by even a few percentage points (and redirect that money into an investment account), it can reap long-term financial benefits.

Whether you’re interested in going all in on FIRE, lean FIRE, or no FIRE whatsoever, there’s still an important lesson to take from the concept: Thinking about retirement early can get you on the right financial path for whenever your post-work time comes. Setting financial goals, investing your money in a retirement account, making smart investment decisions, and living within your means can pay dividends to your future self.

Playing with FIRE

We’re always on the lookout for innovators who can provide new ideas, tips, and strategies to help you make sense of the today’s digital world and achieve your best financial future. To that end, we are excited to support Playing with FIRE — the first documentary about the financial independence movement. This documentary captures the truths and dispels the myths of what it feels like to embrace FIRE and follows one family’s journey to acquire the one thing that money can’t buy: a simpler — and happier — life.

Watch the documentary today!