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.
For many Millennials, the new goal is to retire early, even in their 30s or 40s. One early retirement craze called the FIRE movement is gaining popularity as a way to take savings to the next level and create financial freedom earlier in life.
Instead of merely budgeting, FIRE adherents are 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.
Here’s what you need to know about the FIRE movement and whether it's right for you.
FIRE is a financial movement that requires a frugal lifestyle and aggressive savings and investment strategies.
Planning, discipline, and a heavy reliance on stock investing are key components of the FIRE method.
FIRE followers withdraw 3% to 4% of their savings annually to cover living expenses in retirement.
By saving a large portion of their earnings, FIRE proponents can achieve financial independence and retire in their 30s and 40s.
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 in their 30s or 40s. This is achieved through a combination of boosting income and cutting costs.
The aggressive savings tactics of the FIRE method have downsides that may not appeal to everyone. Some would rather strike a balance between spending on the things they enjoy and building wealth for the future. Others simply don’t want to retire early since they enjoy their work and already have a lot of control over their schedule.
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 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 you need to know how much to save for retirement.
The following are two methods of determining how much you'll need to have saved up in order to safely withdraw enough money to live off of each month to be financially independent. The number is often referred to as your FIRE number.
The 4% rule
Based on historical data, experts estimate that you can safely withdraw 4% from your investment portfolio during your first year of retirement.
This withdrawal rate ensures that you have enough money to live on while also keeping enough of your invested money to last you through retirement.
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.
For example, if you want $40,000 per year to live on, divide that by 0.04 and you get 1,00,000. That means you’ll need to have $1,00,000 saved up in investments with the ability to withdraw 4% from your portfolio to live the way you want.
Note that the 4% rule only applies to your first year of retirement. Each year after the first you will need to adjust for inflation.
For instance, if inflation is at 2% the next year you would need to withdraw $40,800. (0.04 x 1.02 x $1,000,000). If the inflation rate rises to 3% the next year, you would adjust again and withdraw $42,024 ($40,800 x 1.03).
TipFIRE followers recommend you have between 50% to 75% of your investments in stock to make the 4% rule work for you
The rule of 25
The rule of 25 dovetails nicely with the 4% rule in terms of helping you calculate how much you'll need to have invested to live off of. According to many FIRE followers, you need to have 25 times your yearly expenses saved up by the time you're ready to retire.
So, in the previous example, if you decided that you want $40,000 to live off every year, you'll need to have $1,000,000 saved up in investments (25 x 40,000 = 1,000,000).
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.
Since saving for FIRE is an aggressive project, you may need to practice some extreme frugality. That could mean completely cutting things like shopping for fun, dining out, and entertainment. You also might need to secure additional income, which means working more now so you can enjoy time off later on.
Advantages of FIRE
- May allow you to retire earlier: The goal of the FIRE method is to use aggressive investment strategies when you're young in order to enjoy financial freedom earlier in life. May FIRE method proponents have a goal of retiring in their 30s and 40s.
- Keeps you track of retirement goals: No matter how you approach the FIRE method, using its techniques can give you a clearer picture of your retirement savings goals and where stand on them now.
- Helps you live below your means: The FIRE method can teach you how to live well on less money. It's common for people who increase their income to also increase their spending. The FIRE method encourages you to invest more of it in the future to give you financial freedom sooner rather than later.
Disadvantages of FIRE
- May require a large income: Some studies show that people who achieve financial freedom early on in life have done it with an annual income between $50,000 and $99,000. However, the FIRE method is designed for people who have an annual six-figure income through passive means.
- You might now be able to cut your spending: If you're already barely getting by, it can be hard to live a more frugal life and put aside more money as outlined in the FIRE method.
- Your investment might not perform as expected: Many of the calculations used in the FIRE method depend on a certain predictability of your investments. However, stocks can fluctuate in price leaving you with less to live on if you take an early retirement.
How to get started with FIRE
If reading all this has you excited about the possibility of early retirement, and you’re ready to jump on board the FIRE movement, here’s what you need to do:
1. 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 followers typically aim to set aside 50% to 75% of their earnings toward savings. Imagine living on just a quarter of your current salary. If that feels doable, 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 under budget, invest that extra money or deposit it into a high-yield savings account.
TipTake advantage of cashback apps and credit card rewards so that you can earn free cash on your essential spending.
2. Increase your 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 most of your time working, especially if your full-time salary isn’t that high.
Here are some other ways you can increase your income:
- 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
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're 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.
You can also try one of the best investment apps which let you 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 are all major roadblocks to early retirement. 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.
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: Full Social Security benefits are available at age 67 for people born after 1960. Financial planners often consider early retirement as any time before the traditional retirement age of 65. In the FIRE method, early retirement means you stop working decades before that.
- Lean FIRE: Lean FIRE is a way to retire early on a minimalist budget. by 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 a way to retire early while spending more than the average household does annually.
- Barista FIRE: With Barista FIRE, a 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: Most retirement accounts won't let you take money out until you’re around 55 to 59.5 years old. This time between when you want to retire and when you can withdraw your retirement funds is a bridge period. A bridge account lets you set money aside to get you through these in-between years.
Frequently asked questions
What is the FIRE method of saving money?
The FIRE method involves saving 50% to 70% of what you earn in order to retire as early as your 30s or 40s. The method helps you calculate a total savings goal based on the amount you want to live off while keeping enough invested money to last through retirement.
What does the FIRE acronym stand for?
FIRE stands for “financial independence retire early” and is used to describe the various practices of this popular financial independence movement. Lean FIRE, Fat FIRE, and Barista FIRE are variations on the financial independence retire early acronym.
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 or 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.
What is a good FIRE savings rate?
Most FIRE followers agree that you should put aside between 50% to 70% of your earnings into savings and investments if you want to retire early.
That range will depend on the lifestyle you want (how much or little you want to live on now) and how early you want to retire early or achieve financial independence. Simply put, the more money you save, the sooner you can stop working.
You have to save up quite the stash of cash if you're ready for early retirement. You’ll also need to make sacrifices, work hard for extra income, and adopt a frugal lifestyle.
But even if you find the FIRE movement too extreme, there’s plenty you can learn about retirement planning from its devotees.
The 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.