When you're looking at how to invest money, it can feel tough to be faced with putting money aside while still needing to cover your everyday expenses. Even among adults in their sixties, only 45% say their retirement savings are on track, and 13% have no retirement savings at all.
But saving for retirement is a necessary part of our personal finances. Americans are now spending an average of 20 years in retirement, which means we need a nest egg to stay afloat as we age.
In a growing movement, some people are taking their savings strategies to the next level with the ultimate goal of financial freedom. Instead of merely budgeting, they’re setting aside as much as they possibly can. Instead of just maintaining a job, they’re looking for ways to increase their income while they can. For many Millennials, the goal is to retire very early, even while they’re still in their 30s or 40s.
This early retirement craze is called the FIRE movement, and it’s gaining popularity across the United States. Here’s what you need to know about it — and how you can work toward achieving it too.
What is the FIRE movement?
FIRE is an acronym that stands for “financial independence retire early.” People who are a part of the movement take extreme measures to make sure they can retire as early as their 30s or 40s. This is accomplished through a combination of boosting income and cutting costs.
The FIRE movement appeals to all kinds of people, since early retirement is a common dream. You don't actually need a high net worth to achieve early retirement, but the aggressive savings tactics have downsides that are not for everyone. Some people would rather strike a balance between spending on the things they enjoy and building wealth for the future. And some people simply don’t want to retire early because they enjoy their work and have a lot of control over their schedule already.
Still, it’s worth learning about the FIRE movement, even if you pick and choose the pieces that are relevant to you or take another path entirely.
What it means to reach financial independence
Let’s start off by defining a key part of the FIRE movement — what it means to be “financially independent.” To safely retire early, you’ll need to make sure your money won’t run out before you kick the bucket. That means it's critical to know how much to save for retirement.
Based on historical data, experts have found that retirees can safely withdraw 4% from their portfolio annually. This withdrawal rate ensures that retirees have enough money to live on while also preserving enough of their invested money to last them through their old age. This is assuming that about 75% of your money is invested in the stock market.
To calculate how much you’ll need to retire, divide your annual expenses by 0.04. Your annual expenses should be the amount you’ve determined you’ll need each year to be able to live comfortably by your own definition. So if you want $30,000 per year to live on, divide that by 0.04 and you get 750,000. That means you’ll need to have $750,000 saved up, with the majority of it invested, to be able to retire. This will allow you to withdraw 4% each year and live the way you want.
This rule translates to the 25X rule, which is also often used by FIRE proponents. This rule says you need to have 25 times your yearly expenses saved up to retire. It’s just another way of calculating how much you’ll need to live comfortably through the rest of your life.
Useful FIRE movement terminology
In addition to defining what it means to be financially independent, the FIRE movement is full of acronyms and jargon. Here are some terms that are helpful to know as you explore this movement:
- Early retirement: For people born after 1960, full Social Security benefits are available at age 67. Financial planners often consider early retirement as any time before the traditional retirement age of 65. But for FIRE participants, early retirement means you stop working decades before that.
- Lean FIRE: Lean FIRE describes someone who wants to retire early on a minimalist budget, which means they plan on spending less on living expenses than the average household. Census data shows that the average American household spends about $61,000 annually.
- Fat FIRE: This term describes someone who wants to retire early while spending more than the average household does annually.
- Barista FIRE: Think of Barista FIRE as delving halfway into early retirement. With Barista FIRE, the household is still earning income, either because the early retiree’s spouse still works or because the retiree has a part-time job or side hustle. It is named for the dream of having fun while slinging coffee and not having other responsibilities.
- Tax-advantaged savings/investing: A savings or investing plan that is exempt from taxation or otherwise offers tax benefits is known as tax-advantaged. This includes retirement plans such as IRAs and 401(k) plans.
- Bridge account: If you retire early, there will be a period of time in between when you stop working and when you’ll be able to withdraw money from your retirement account. Your retirement account will likely not let you take money out until you’re somewhere between 55 and 59.5 years old. This time between your early retirement and when you can withdraw your retirement funds is known as the bridge period. A bridge account is money set aside to support you through these in-between years.
Who the FIRE movement is good for
The FIRE movement is a good fit for someone who can live happily on a limited budget for an extended period of time. To decide if FIRE is right for you, consider what you’d be willing to give up in exchange for early retirement. Our own FinanceBuzz survey revealed that about 36% of respondents would be willing to go two years without buying something new, and 32% of respondents would be willing to get a second or third job if it meant early retirement was in their future.
To be a candidate for the FIRE movement, you might need to do both those things and more. Since saving for FIRE is an aggressive project, you may need to practice some extreme frugality. That could mean completely cut things like shopping for fun, dining out, and entertainment. You also might need to secure additional income, which means working more in your youth so you can enjoy time off later on.
If you cherish your daily latte and weekly brunch, or if going to movie theaters or concerts makes life worth living for you, you might find planning for FIRE a little depressing. There’s something to be said for enjoying life while you’re young. Then again, if you hate your job and would rather live on a limited income than work, joining the FIRE movement could make you happier. Some people find that the austerity of FIRE leads to a kind of simple living that is less stressful and more fulfilling.
You might also decide Lean FIRE or Barista FIRE is a better option for you. While Fat FIRE will require even an more extreme savings rate, Lean FIRE might allow you some wiggle room to have fun now if you’re willing to live on a lean budget in retirement. And Barista FIRE could be a great option if you can take on consultant work or get a part-time job that you’ll enjoy more than your full-time career.
How to get started if you want to join the FIRE movement
If reading all this has you excited about the possibility of early retirement, and you’re ready to jump on board the FIRE movement, then here’s what you need to do:
1. Find ways to cut your expenses
If you plan to retire early, you’ll need to do more than just cord-cutting or couponing, though those can be great places to start. You may need to do things like:
- Sell your car
- Move somewhere with a lower cost of living
- Move somewhere that will pay you to live there
- Live in a smaller space or with roommates
- Cancel memberships and subscriptions
- Prepare all your meals at home
- Stop taking traditional vacations
- Learn about free festivities in your area or hit up the free museum days
- Buy used clothing and home items instead of new ones
- Give up cigarettes and alcohol
- Forego having pets
- Skip having kids or at least work on reducing your kid-related expenses
- Eliminate holiday gifts
FIRE movement participants typically aim to set aside 50-75% of their earnings toward savings. Imagine living on just a quarter of your current salary. If that feels doable to you, you might be a great candidate for the FIRE movement.
To make sure you don’t overspend, create a strict annual budget. And any time you’re able to come out under budget, invest that extra money or deposit it into a high-yield savings account.
You should spend strategically as well. Take advantage of cashback apps and credit card rewards so that you can earn free cash on your essential spending.
2. Look for ways to bring in more income
You’ll need to think beyond just asking for a raise. You may need to take on a second or third job, pick up a side hustle, or find ways to earn passive income. You may even need to spend the majority of your time working, especially if your full-time salary isn’t that high. However you set it up for yourself, having multiple income streams can be key in achieving FIRE.
You could do things like:
- Rent out your spare room (or couch)
- Rent out your car
- Sell your old stuff
- Drive for a delivery service or rideshare service
- Monetize your online presence
- Sell your skills by teaching online courses
- Become a reseller
- Start a small business venture
If you don't know how to start a business, don't worry. There are many ways to make money out there. Find one that is enjoyable to you so you're more likely to keep at it and achieve financial freedom in the long run.
3. Prioritize saving and investing
Prioritizing saving means that any extra cash immediately gets put aside in a savings or investment account. Many FIRE participants also choose investment opportunities beyond just a retirement account. These can include:
- Investing in real estate
- Investing in the stock market
- Becoming a peer-to-peer lender
- Buying parking spots or storage facilities to rent
- Purchasing bonds
If you are new to the stock market, consider investing in something straightforward like index funds. As you get more comfortable investing, you can diversify your investment portfolio. Additionally, some of the best investment apps are low-cost and make it very easy to get into investing without a lot of money.
Prioritizing saving and investing for FIRE also means you won’t have room for certain other financial goals. For example, you may have to give up your annual vacation or forego saving for a wedding in favor of investing money for early retirement.
4. Pay off any debt
Student loan debt, credit card debt, and personal debt were all cited as major roadblocks to early retirement in our survey. If you want any hope of retiring early, it’s essential that you pay off all your debt. Not only does debt increase your monthly overhead, but you may be wasting money by paying a high interest rate on that debt.
You may need to consolidate or refinance your debt in order to lower your interest rate and pay off your debt. You could also use a strategy like the debt avalanche method to pay down your debt faster.
If you have concerns or questions about pursuing FIRE, then you might find that spending a few dollars on a financial advisor saves you a lot more money in the long run.
Frequently asked questions
Who started the FIRE movement?
While the FIRE movement only gained popularity in recent years, the idea isn’t new. A book published in 1992, called Your Money Your Life, originally introduced the idea of achieving financial independence. Authored by Vicki Robin and Joe Dominguez, the goal of the guide was to free Americans from consumerism and educate them on what they could achieve by living on a tight budget.
After the Great Recession of the late 2000s and early 2010s, a new voice emerged in the world of financial independence. Pete Adeney penned the blog, Mr. Money Mustache, to tell the story of his own early retirement. While it wasn’t the first blog about early retirement (Financial Samurai preceded it), it’s one of the most popular FIRE blogs today, and inspired many people to join the growing FIRE community and become bloggers themselves.
Now, FIRE participants can join meetups and attend conferences across the nation. There is a wealth of information out there about the FIRE lifestyle, from books to podcasts, and even tools like FIRE calculators that help people get started with the FIRE movement.
Does FIRE mean van life?
The #VanLife movement became popular a few years ago on social media. The idea is to get rid of your worldly belongings, live out of a van, and travel. Many people are motivated by a high cost of living and a desire to see the country when adopting this lifestyle.
It’s certainly an extreme way to cut costs, since the average American spends about $20,000 annually on housing, and it plays well into the FIRE movement. However, it’s not necessary to go full-van life in order to achieve FIRE. There are plenty of other ways to cut costs and increase income so that you can save money and invest your way to early retirement.
Can you retire at the age of 55?
Yes. But keep in mind that if you aim for this retirement age, then your investments won’t have as much time to mature, and you’re going to need to have more in savings. That’s because you’re looking at three decades without income on average as opposed to two. And you’ll have fewer years of generating income, as well, which means you’ll have less time to come up with your nest egg. You’ll also need to bridge the gap between when you stop working and when you can start collecting Social Security benefits.
You can figure out the minimum you’ll need by multiplying your annual expenses by your estimated number of years in retirement and then subtracting your total Social Security income. That’s the amount of money you’ll need to be responsible for generating. You can also use a retirement calculator that factors in things like other retirement income and returns on investments.
How long will a million dollars last in retirement?
That depends on where you live and what your lifestyle is like. To get the answer, divide $1 million by your total annual budget in retirement. According to an analysis of the total annual expenditures for Americans over 65, a million dollars can last anywhere from 10-23 years in retirement, depending on the cost of living in your state.
Bottom line on the FIRE movement and you
Are you ready for early retirement? You have to save up quite the stash of cash to be able to retire early. And you’ll need to make sacrifices, work hard for extra income, and adopt a frugal lifestyle. But even if you think the financial independence retire early movement is too extreme for you, there’s plenty you can learn about retirement planning from the idea.
Next time you’re about to purchase a pair of shoes you don’t actually need, think about whether it’s really worth trading in your time for something you could live without. Every little bit of extra money you’re able to save for retirement counts, and it will help you live life on your own terms when you retire.