Welcome to FIRE: Financially Independent, Retired Early
I have a secret to share with you. I’m part of a group of people all over the world using this secret and I’m going to let you in on it. People outside of our group might think we’re a little weird but if you wholeheartedly join us, I guarantee it’ll change your life.
Let me introduce you to FIRE.
Oxford dictionary defines a cult as “a relatively small group of people having religious beliefs or practices regarded by others as strange.” Using that definition, we kind of are a cult (minus the religious beliefs). Don’t worry, you don’t have to wear any weird robes or perform any rites of passage.
The idea behind FIRE is to break away from the social norms of consumerism and plan/spend in a way that allows you to eventually do what you really want. Being part of the FIRE community means thinking about your financial habits in radically different ways than most of society.
Take retirement for example. 65 is the age most people think of when they think about retirement. Many more think they’ll retire even later than that. But the FIRE community regularly has people retiring in their 50s, 40s, and even 30s! We (my wife and I included) are not one percent-ers. We’re just thinking about our financial futures differently than the majority. In turn, we act a little differently as well.
There are two parts to FIRE: Financially Independent, Retired Early.
The first part is Financially Independent, or FI for short. To achieve FI means to be able to sustain your lifestyle without the need to work.
You might be thinking that sounds great! How do you get FI? Unfortunately, it’s not something that you can just go out to the store and buy. In order to have the ability to choose whether or not to work, you need to have funds saved up. Lots of them.
How much is enough? Those of us in the FIRE community have a nice little shortcut we like to use. All you have to do is multiply your annual expenses by 25. If you have this amount invested, your funds will last the rest of your life (or close to it).
So how do we get to this number? It all comes from the 4% rule. The 4% rule says that if you have an investment in the general stock and bond markets and withdraw 4% each year, the funds will last almost indefinitely. If you start with the 4% withdrawal per year and do some arithmetic, you can figure out that you need 25 times your annual expenses in funds.
So if your yearly expenses are $100,000, you would need $2,500,000. That may seem like a daunting task. But if you can lower your expenses to $40,000 per year, you would only need $1,000,000. Still not chump change, but much more manageable. Once you’ve reached $1,000,000 in investments and savings, you could theoretically retire for the rest of your life living on $40,000 per year.
Many people in today’s society are living paycheck to paycheck. How are you supposed to save $1,000,000?! Financial experts will often suggest that you save 10%-15% of your income for retirement. Compare this to the paltry 2.5% national savings rate and you can see why people are struggling to have enough for retirement. Saving 10%-15% enables you to retire in 35 years or, in FIRE-speak, reach FI after 35 years.
In the FIRE community it’s not uncommon to see people reaching FI after 20, 15, or even 10 years of working! How are they doing that? There are three basic tenets that all FIRE-ers follow.
The first is to slash your expenses. Cut the cable. Stop eating out. Stop buying new just because. Get serious about getting your costs down and keeping them there. If you can live off of less, then you can retire earlier because you’ll need less saved up. Remember, reaching FI is a function of your expenses. If you’re like the majority of the population, your expenses are much higher than they need to be.
Second, save your surplus. After you’ve cut your expenses down, you’ll have a lot more left over to put towards reaching FI. When I say a lot, I mean a lot. FIRE-ers often save over 50% of their income! With that kind of savings rate, you could retire in 11 years.
But a high savings rate doesn’t get you there by itself. The third and final tenet is to invest your savings. The most common thing the fire community invests in is low cost index funds or ETFs. Investing allows your money to grow over time and accelerate your timeline to reaching FI. In addition to getting to your goal faster, it’s crucial to have your funds in investments to make them last. The 4% rule is based on looking at returns for the overall stock and bond markets. If you simply kept your funds in cash, you would need a lot more money before you could reach FI.
All three of the steps above are crucial to reaching FI, but if I had to pick one, it would be saving your surplus. Not so much the actual saving part, but looking at your savings rate. I wrote a whole article on this topic previously but it’s a concept that so few people know about, I think it bears mentioning again. Simply understanding how savings rate impacts retirement opened my eyes to exactly how my spending was pushing back my retirement. It’s a good idea when you think about it in the abstract. But it’s a great idea once you actually put some numbers to it. For more details, see my original article, What Your Savings Rate Says About When You’ll Retire.
This might sound like a lot of work, and indeed for some it can be. For my wife and I, it’s just our way of life and we love it. We don’t buy a lot of new stuff simply because we don’t need to. We eat at home at least 6 out of 7 days a week and we’re always looking to reduce our spending/costs. It’s easy for us because we approach almost all of our spending decisions as a choice between what we’re spending on and reaching FI faster. A lot of times, it’s just not worth putting off FI.
So what do you do once you reach FI? You might say retire. After all, that’s the second part of FIRE, right?
In reality, although the RE of FIRE does stand for Retire Early, FIRE retiring doesn’t necessarily mean retiring outright. Indeed, there are plenty who retire in the traditional sense and leave the workforce entirely. But most FIRE-ers are drawn to the movement not for retiring early, but because of what retiring early gets them.
I consider myself a pretty good example of the FIRE psychographics (don’t worry, I didn’t know what that meant until recently either). I actually enjoy working for the most part. I’m not one to just sit around and do nothing. I like being engaged and staying busy (more like I dislike being bored). But what’s drawn me to the FIRE philosophy is the idea that instead of working in a job because I have to pay the bills, I’m working in the job because I want to. And if one day I decide I no longer like the job, I can leave to work on something else. That freedom to do what I want to with my time is the motivation that gets me FIRE’d up. I simply want the ability to retire early if I want to.
Reaching FI isn’t about being rich. Just because you have a million dollars doesn’t mean you need to live like a millionaire. It’s about freedom. It’s not about getting more money, it’s about getting more time.
The typical FIRE retiree isn’t living a lavish life of luxury. They’re continuing to cut coupons and buy used. But they get to choose what to do with their time. Whether that’s continuing to work in a job that they love or pursuing their passion for a hobby, a FIRE retirement gives you control over your time.
Do you want to FIRE?
This may sound like hocus pocus to you, but if you’ve been following my article, you know the numbers add up. If you start diligently saving in your 20s, you can easily retire in your 30s. My wife and I currently plan to retire in our 50s at the latest. But don’t take my word for it. Look at this couple who retired in their 30s and travel the country in an RV. One of the most popular examples is Mr. Money Mustache who also retired early and now runs his blog to advocate radical rejection of consumerism to live a happier life.
One of the critical questions to ask yourself before starting on your FIRE journey is “what would you do if you didn’t have to work for money?” Whatever the answer to that question is, that then becomes your guiding light each and every day when faced with a purchasing decision.
At the heart of the FIRE philosophy is the idea that buying stuff doesn’t make you happy, it’s being able to choose what to do with your time that makes you happy. And the quicker you can get that ability the better. Finding out what you truly want to do with your time allows you to reduce your unnecessary expenses while increasing your quality of life by allowing you to focus on the things that will actually make you happier.
Let me know if you have any questions on how to start your FIRE journey!