The Basics of FIRE (Financial Independence and Early Retirement)
FIRE is having a moment, and it's not hard to understand the appeal.
What Is FIRE, Exactly?
When you think retirement age, you probably think of someone in their late 50s or 60s, and there's a reason for that: it's the norm. The Social Security Administration allows you to start taking benefits at age 62 , for example, and you can start withdrawing money from your Individual Retirement Account without a penalty at age 59 ½.
While this is the standard age in which most people start thinking about retirement, people who strive for FIRE retire much earlier than this, usually in their 40s, 30s, and sometimes even in their 20s.
(Chances are, you're skeptical right now. You're probably thinking something along the lines of, "This sounds great, but what if I only make 35k a year and I'm drowning in student loan debt?" Don't worry, we'll get to that. Many FIRE enthusiasts wholeheartedly acknowledge the privilege of the FIRE movement.)
Early retirement is the literal definition of the FIRE movement, but there's a much more robust meaning when you start digging into the principles behind FIRE. Namely, it's about flexibility.
"Financial independence ultimately means that you can shape your life without taking money into consideration," said Tanja Hester, a recent FIRE graduate and founder of the website Our Next Life . "Most of us have to consider our finances in nearly every decision we make, or maybe even make decisions solely based on money. But once we reach financial independence, we get the freedom not to be bossed around by what we earn or what we have saved."
Contrary to our traditional view of retirement, FIRE doesn't necessarily mean you have to quit your job, either. (The movement works on a loose, non-traditional definition of what it means to be "retired.")
"It's less about retiring early and more about having the freedom to pursue your dreams and ambitions," said Deacon Hayes, author of You Can Retire Early! Hayes adds that FIRE is really about "the freedom to choose to work or not."
In fact, the FIRE community seems to focus less on the "retire early" aspect of the movement and more on the financial independence component, "which is a powerful aspirational goal that is readily achievable if people are willing to make some small, but important, optimizations in their lives," said Jonathan Mendonsa, co-host of the ChooseFI podcast.
Mendonsa is currently pursuing financial independence and explains there's a concrete definition of it: when your net worth is 25x your annual expenses, you're considered financially independent. "So if your annual expenses are $40,000, you are financially independent when your total net worth is $1,000,000," he said.
Who Is FIRE For?
If you have a high-paying but soul-sucking job, FIRE probably sounds pretty good right now. Hester warns against this, however:
"Retiring early because you don't like your job is a bad reason to do it, and is a recipe for being bored or aimless when you get there," she said. "Achieving FIRE is a big deal, and it takes a lot of focus and determination. It's not for those who want to get rich quick, or for those who just hate their job. The better solution then is just to find a new job, or a new career path. I'm a huge believer that you can love your job and still want to retire early or just achieve financial independence! That was true for us. We loved our work, the people we worked with, and our clients, but we didn't love the pace of it, the pressure or the constant travel."
Hayes would agree. He says that if you're willing to develop and stick to a plan, it really doesn't matter whether or not you quit your job to pursue financial independence.
"Many people who achieve financial independence, do so as a W2 employee," he says. "Also, financial independence doesn't mean that you have to quit your job. It just means that your job needs you more than you need them. This gives you an upper hand to be able to negotiate things like your hours, vacation time, etc."
Early retirement is less for people who hate their jobs and more for those who have a clear idea of a different lifestyle or goal they may want to pursue.
"A good reason to retire early is that you have an alternate vision for your life that you are eager to pursue, but which you can't pursue while employed full time," Hester said. "Achieving financial independence allowed us to leave that career chapter of our lives from a place of gratitude and appreciation, and move onto our next chapter that we're in control of."
Yes, some people who have achieved FIRE firmly believe that anyone can do it-if you can't, they argue, it's because you're not saving or cutting back enough. That doesn't quite make logical sense when job growth is still lagging in some states and wages are stagnant nearly everywhere, though.
While financial independence does require cutting back on expenses, it also requires a decent income. That said, many others in the FIRE community acknowledge this.
"There's a huge element of privilege to being able to do this," said Liz Thames, author of the forthcoming book, Meet the Frugalwoods: Achieving Financial Independence Through Simple Living . "For many people, asking these questions is outside of the realm of their day to day life. We have a real problem with income gap and people who do not make a living wage. So I want to make sure that we recognize that the ability to put distance between your income and your spending is often a privilege."
Hester adds that it's not realistic to think that "everyone can save enough to retire early in a country that doesn't value a lot of professions or commit to a living wage."
"So while plenty of folks have become financially independent without earning six figures, earning more certainly helps speed things along," she said.
The Rules Behind FIRE
The basic math behind FIRE is ridiculously simple: spend less than you earn and "save the difference in low-fee investments like index funds," Hester said.
Other investments, like rental properties and passive income streams, are a big part of achieving financial independence, too. And so is frugality. The less money you need to live, the less money you need to save in order to fund the rest of your years.
"To highlight the value of cutting expenses, for every $100 per month you can trim, it means you need $30,000 less to achieve FI ($1,200 yearly expense x 25 = $30,000)," Mendonsa said.
Thames breaks it down this way - there are three basic elements to FIRE: time, expenses, and income. The goal is to put space between expenses and income . "How much space you put is how much time it takes you," she said.
So while the rules are simple, getting there is, of course, another story. Reaching FIRE involves the same concepts of reaching any other financial goal, and it ultimately comes down to behavior.
For example, while Thames lives a frugal lifestyle that many would view as sacrificial, her frugality has nothing to do with depriving herself.
"It's also true for me that frugality is not a question of deprivation. I don't miss out on anything in my life being frugal. I spend money on things that are important to me. There's just not a lot that I need to buy to live a very a fulfilling life," she said.
As Hayes puts it, "it's more about being intentional with your money and less about being frugal."
The First Steps to Reach FIRE
If any of this sounds appealing and realistic to you, the experts all pretty much agree: the first step is figuring out your "why."
"If you want to retire early, you need to have a strong 'why,'" Hayes said. "Do you want to quit your job so that you can start that business you always talked about with your friends? Do you want to have more than two weeks per year of vacation time? Do you want to spend more time with your loved ones? Whatever your why, let that be the motivating factor to create a plan and stick to it during the tough times. Once you have that why, you want to determine your path."
Thames suggests being as specific as possible in figuring out your "why."
"The first step is to identify what you want to do in 5, 10, 20 years," she said. "Where you want to be geographically, what you want to do, what you want your family to look like. Once you know that, you can mold your money to match what you want. Why do you want FI? I would write it down. And if you have a family or a partner that you live with, bring them in the conversation."
The second step? Tracking your expenses. Check out your bank statements, credit card statements, online budgets, and make note of what exactly you're spending money on and whether or not those purchases are meaningful or necessary.
"Most of us are shocked to realize how much we actually spend," Hester said. "After you've started tracking, figure out how much your lifestyle costs per year, look for what you might be able to cut out to shrink that number, and then start working on increasing your savings rate. Those are the hardest parts of the journey, and the rest is just a matter of waiting for the money to add up and compound."
The key is to spend more mindfully, and Mendonsa says spending more mindfully means taking stock of the expenses that actually matter to you.
"We don't promote a message of extreme frugality, he said. "Instead our message is based on 'value' being the guiding light behind purchasing decisions. We want to cut out the excess in our lives because it enables our monthly expenses to be lower and thus speeds the path to FI. In summary, it comes down to value, and I think it is a useful exercise to go through all the lines items in your budget and ask "Is this adding value to my life?"
Once you've conquered your spending, it's time to look at your net income and compare. Thames says you have to subtract your fixed mandatory expenses from your income and then adjust your discretionary expenses as necessary.
From there, FIRE comes down to math and mechanics. In an episode of his podcast, Mendonsa suggests ten "pillars" of financial independence. Those pillars include:
Lowering your housing costs
Driving used cars
Cutting the cable
Lowering your tax liability by maxing out your tax-deferred vehicles such as your 401k, 457, 403b, IRA, HAS, etc.
cheaper cell phone service
Use credit card rewards
and smart financial habits to help fund your travel
Cut your grocery bills
Increase your income and consider adding multiple income streams
Low-cost index fund investments
The 4% rule: The ultimate equation behind achieving financial independence. (The 4% rule involves how much you can safely withdraw from your nest egg each year in order to make sure you still have enough money down the road.)
Like any other financial goal, the math is easy and everything else requires resourcefulness , diligence, and patience . As Thames says, you can start your goal at any point and then move forward. How quickly you'll reach your goal will depend on those three basic variables: income, spending, and time.