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Financial Independence Retire Early (FIRE) - explained

What we'll cover

  • What is the FIRE movement

  • Exploring FIRE lifestyles

  • Different ways to achieve FIRE

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 because they need to save a significant amount of money for retirement.

The financial independence retire early (FIRE) movement empowers people to quit full-time work and retire earlier — like, way earlier. There are some pros and cons to building wealth this way.

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

What is FIRE?

FIRE is an acronym that stands for "financial independence retire early" and a growing number of people are retiring decades earlier.

Put simply, individuals use a simple formula to pursue earlier financial independence: 

High Savings Rates + Frugal Living + Index Fund Investing 

When you can live off the money you earn from your investments, you can choose whether or not you want to continue working. At that point, you can make your own choices about how you spend your time.

Who started the FIRE Movement? 

How did FIRE become a movement? You can trace the FIRE movement back to the early 1990s, 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 nine to five at work.

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.

Present-Day FIRE community

The "Your Money or Your Life" book fueled momentum as a grassroots movement, it was another 25 years until the FIRE movement took shape.

After the Great Recession, some individuals were tired of believing that life is all about clipping coupons, spending beyond your means and stressing about saving enough for retirement.

This growing unrest spurred a new lifestyle. In 2011, Mr. Money Mustache , Peter Adeney began a blog to help the FIRE movement grow in popularity. Adeney's blog 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.

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

What is the FIRE lifestyle? 

Participants rely on a simple formula to pursue financial independence within a short time period using the following methods:

  • Saving 50 to 70% of your income

  • Living extremely 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 provides the foundation for the FIRE movement’s investment strategy. 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 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 possibility of early retirement? Check out the 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.

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 could reap long-term financial benefits. However, there is also flexibility in the FIRE movement through the following:

  • Lean FIRE: Lean FIRE means you live a minimalist lifestyle and cut expenses exponentially during retirement.

  • Fat FIRE: Fat FIRE means you'll retire without altering your current standard of living, which means you put together the most aggressive saving and investment strategies possible.

  • Barista FIRE: And just because FIRE has “retire early” in its name doesn’t mean you can’t work. Barista FIRE means that you'll build a portfolio to support yourself in retirement and then plan to work part-time to make up the missing income. A part-time gig or starting your own business are just a couple of the ways you can supplement your retirement income while still living the retirement lifestyle.

Playing with FIRE

Franklin D. Roosevelt's Social Security Act of 1935 was the beginning of the age 65 , workers could retire and receive Social Security benefits. The idea of retirement and the retirement age was brought about by politicians, so it's important to remember that it's arbitrary and our traditional views of retirement are outdated. FIRE allows you to do what you want to do.

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.

We’re always on the lookout for innovators who can provide new ideas, tips, and strategies to help you make sense of 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.

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