Financial Independence Retire Early: A comprehensive guide (2024)

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• The Financial Independence, Early Retirement (FIRE) movement inspires workers to save aggressively.
• To achieve FIRE, you must save and invest a majority of your income and live more frugally.
• FIRE is not for everyone since it requires dedication, discipline, and strategic budgeting.

Most people assume they'll start a career, regularly contribute to one of the best retirement plans, work until they're 65, and then enjoy a comfortable retirement. But many have found an alternative: the FIRE movement.

While not a new concept, the FIRE movement has regained popularity over the last few years. More than anything else, FIRE is about controlling your time and energy. Many people pursuing FIRE seek to retire in their 50s, 40s, or even their 30s. Others simply want the option to pursue work they're passionate about.

Here is everything you need to know about the Financial Independence, Retire Early (FIRE) movement, and how U.S. workers achieve it.

What is Financial Independence, Retire Early (FIRE)?

Definition and principals of achieving financial independence

The Financial Independence Retire Early movement — FIRE for short — is a financial lifestyle aimed at saving enough to become financially independent and retire before the traditional retirement age. Typically, participants invest more than half of their income and live on a very strict budget.

"The importance of spending less and investing more is a Finance 101 concept called the 'time value of money,'" says Jordan Taylor, an independent financial advisor with Core Planning. "If I give you $1 today, what will it be worth in four years? In 20 years? That depends on what you do with it. If you invest it wisely, time equals more money."

Investing most of your income allows you to amass as large of an investment portfolio as possible. And by investing a lot of money early on, you're giving the market time to do its job and your investments time to grow and compound.

History and evaluation of the FIRE movement

The FIRE movement concept dates back to the 1992 bestseller "Your Money Or Your Life" by Joe Dominguez and Vicki Robin. In the book, the authors explain that you don't necessarily have to continue working as long as you can grow your investments large enough to live off your returns.

The movement has continued to gain popularity, especially with the rise of social media and blogs. Many financial influencers started websites and social accounts documenting their journeys toward FIRE, inspiring their readers and followers to do the same.

Types of FIRE variations

FIRE looks different for everyone. Some hope to live lavish lifestyles during retirement, while others simply want to save enough to pay their bills. Therefore, there are several different variations of FIRE that someone might pursue. These are some of the most common:

• Regular FIRE: According to Taylor, the most popular type of FIRE people pursue is that which allows them to maintain their current lifestyles during retirement. Someone pursuing regular FIRE might aim to have a portfolio ranging from $1 million to several million.
• Lean FIRE: Someone pursuing lean FIRE is planning for a considerably lower income during retirement. With a FIRE number generally less than $1 million, the goal is to retire early and live a more frugal, minimalist lifestyle.
• Fat FIRE: You can think of Fat FIRE as the opposite of Lean FIRE. Someone pursuing this type of FIRE plans to live at least at their current standard of living — and possibly better — during retirement. Someone seeking Fat FIRE likely aims to have at least $2.5 million in investments.
• Barista FIRE: If you don't mind working after you reach financial independence, then Barista FIRE might be for you. Barista FIRE doesn't usually involve saving enough to cover all of your expenses during retirement, meaning you may need to work full-time to make up the difference. This strategy often has the added benefit of employer-provided health insurance.
• Coast FIRE: Coast FIRE doesn't necessarily involve early retirement. Instead, someone who has reached Coast FIRE has enough in their investment portfolio to retire at traditional retirement age without investing another dollar. Coast FIRE is the first step to any FIRE goal, and many people who reach it then pursue other variations of FIRE.

"Most notably, many FIRE community members use a hybrid plan or have switched between different versions," Taylor says.

Benefits of achieving Financial Independence, Early Retirement

It's easy to see the benefits of the FIRE movement. After all, who doesn't want to leave the workforce (or change to a new job without worrying about pay) at a younger age thanks to financial independence?

Personal freedom and flexibility

When someone reaches FIRE, they have more time and energy to focus on things they're passionate about, such as hobbies, travel, and time with loved ones. FIRE provides this freedom and flexibility.

Suppose you're in a high-paying job that you really dislike. If you reach financial independence, you could opt for a lower-paying or part-time job that excites you. It's no longer about the money. Instead, it's about doing something you genuinely enjoy.

Reduced financial stress

Financial independence can give you a strong financial foundation. You know that no matter what unforeseen circ*mstances come your way, you're prepared to weather the storm.

Not only could these benefits offer a clear boost to your mental and emotional health, but freedom from a demanding job and more time to relax and be outside could also improve your physical health.

Is FIRE right for you?

To determine whether FIRE is for you, consider your priorities. Yes, FIRE gives you total freedom over your time once you reach financial independence. But that comes at the expense of freedom over your time and money during your working years.

According to Lauren Keen Aumond, the creator of Adulting Is Easy and someone who reached FIRE with her husband, FIRE means different things to different people.

"This movement is about becoming work optional," Aumond says. "You could continue to work, as my husband and I are right now. You could travel, volunteer, work part-time, change careers, go back to school, etc. It's all about owning your time and spending it how you want to rather than stopping work altogether."

As Aumond notes, many people who reach FIRE don't actually leave the workforce altogether. Yes, many do choose to retire and spend their time on other activities. But some may continue to work in their current jobs, while others might take on jobs they're more passionate about, but that pay less.

While you can find FIRE movement success stories online from influencers offering advice, FIRE isn't for everyone. Someone with a high income might achieve FIRE with relatively little sacrifice. However, most people in the FIRE movement have to live a quite frugal lifestyle. And, someone working paycheck to paycheck may not make enough to save large sums of funds.

Steps to achieve FIRE

Knowing how much you need to save

One of the most important steps in pursuing FIRE is knowing the amount you must have in your investment portfolio to be financially independent. This is often referred to as your FIRE number.

"Depending on the math you use, who you listen to, and which FIRE community you frequent, you may be introduced to different 'rules of thumb' that people use to calculate what they need and how much income it can produce," Taylor says.

You can determine your FIRE number by multiplying your desired income during retirement — which should be 4% of your portfolio, if you're following the 4% rule — by 25. The resulting number is how much you should have in your portfolio when you retire. You can also find that number by dividing your desired annual retirement income by 0.04.

You can also use helpful tools like a retirement calculator to help determine how much you need to save to ensure a long, comfortable retirement.

Creating a detailed budget

Creating a detailed, comprehensive budget is a key strategy for early retirement and should be included as part of your financial plan. A thorough budget outlines realistic monthly financial restraints based on your goals, income, and expenses. It should also include paying off any existing debt and prioritizing high-interest debt.

Creating a detailed budget helps you identify better ways to save, such as uncovering if you're paying for unnecessary subscription services. FIRE encourages workers to maximize their income and save as much as possible as early as possible.

However, depending on your income, this may prove more difficult. Although intense saving is FIRE's main objective, don't neglect your current well-being in the hope of a more lucrative future. Ensure you maintain a healthy balance of mindful spending while achieving a comfortable and healthy lifestyle.

Building an emergency fund

An emergency fund is a savings bucket intended to be used for sudden and unexpected expenses, such as medical bills or home renovations. Building an emergency fund prevents you from dipping into your retirement savings prematurely when you have unforeseeable expenses.

A general rule of thumb is to save at least three to six months of living expenses in your emergency fund, somewhere liquid like a high-yield savings account. Depending on your budget and lifestyle, you may want to save more.

Common challenges and how to overcome them

Dealing with market volatility

No one can predict the market, and while short-term fluctuations generally have minimal long-term impact, significant economic events like a stock market crash could wipe out a good chunk of your portfolio.

All investments, even low-risk fixed-income investments like bonds, pose some degree of risk. The best way to combat this is by diversifying your portfolio. Moreover, as you near your preferred retirement age, you should gradually invest in more conservative investments to mitigate risk and potential loss.

Balancing lifestyle and savings

One major downside of FIRE is the extreme hustle often required to earn enough to reach your financial goal. Working long hours or multiple jobs could lead to burnout and exhaustion. You may also be neglecting your current lifestyle by missing out on non-budget-friendly opportunities.

"A huge drawback is the delayed gratification, the hard work, and the discipline required," Aumond says. "Some days, I wish I had a new boat and a house on the water and one job instead of house hacking with a job and all the real estate."

And even while you work hard to increase your income, pursuing FIRE still requires major sacrifices when it comes to spending. Living on a small percentage of your income is likely to impact almost every area of your life. You must ask yourself: Is it worth being less satisfied with my lifestyle right now so I can retire early?

FIRE simply isn't an option for everyone. Many young people graduate with student loan debt, meaning it can take years to achieve a positive net worth. Additionally, someone living paycheck to paycheck or on a low income is unlikely to be able to save enough of their income to achieve FIRE.

FIRE movement FAQs