What is FIRE (Financial Independence, Retire Early)? | Definition from TechTarget (2024)

FAQs

What is FIRE (Financial Independence, Retire Early)? | Definition from TechTarget? ›

Those who pursue FIRE aim to have enough income to cover their needs and comforts without having to continue to work. The overall goal is to accumulate enough wealth that you can retire early and on your terms.

Key Takeaways. Financial Independence, Retire Early (FIRE) is a financial movement defined by frugality, extreme savings, and investment. By saving up to 70% of their annual income, FIRE proponents aim to retire early and live off small withdrawals from their accumulated funds.

If you're working toward an early FIRE retirement, you'll start with two important concepts, your FIRE number and the 4% rule. Your FIRE number — generally equal to 25 times your annual expenses — is an estimate of how much money you'll need to reach a comfortable early retirement.

F.I.R.E. For Dummies shows you how to make financial freedom and early retirement a reality. With the easy-to-follow steps in this guide, you can set yourself up to follow your big dreams without worry of money being an obstacle.

FIRE followers dramatically reduce their expenses, seek ways to increase income, and invest heavily. Many FIRE followers also go by the rule of 25, saving 25 times your annual expenses to retire, and the 4% rule, withdrawing 4% or less per year.

One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.

The "4% rule" is a popular example of the dollar-plus-inflation strategy. Here's how it works. You withdraw 4% of your portfolio in your first year of retirement. Then, in each subsequent year, the amount you withdraw increases with the rate of inflation.

Here are the basic tenets of FIRE: Commit to extreme frugality and savings at an early age. Save and invest as much as possible (usually 50% to 70% of one's yearly income). Retire far earlier than the average retirement age of 65-years-old.

What is the 7 Percent Rule? In contrast to the more conservative 4% rule, the 7 percent rule suggests retirees can withdraw 7% of their total retirement corpus in the first year of retirement, with subsequent annual adjustments for inflation.

When to retire 62 or 67? ›

If you were born in 1960 or later, your full retirement age is 67 (En español) You can start your Social Security retirement benefits as early as age 62, but the benefit amount you receive will be less than your full retirement benefit amount.

This is where the rule of 55 comes in. If you turn 55 (or older) during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty. However, you must still pay taxes on your withdrawals.

FIRE usually involves saving anywhere from 40% to 75% of your income. This means it can be inaccessible for many people. Take some time to figure out if FIRE is right for you.

The 3% rule in retirement says you can withdraw 3% of your retirement savings a year and avoid running out of money. Historically, retirement planners recommended withdrawing 4% per year (the 4% rule). However, 3% is now considered a better target due to inflation, lower portfolio yields, and longer lifespans.

Three R's for a Fulfilling RetirementRediscover, Relearn, Relive. When we think of the word 'retirement', images of relaxed beachside living or perhaps a peaceful cottage home might come to mind.

The best place to start is by contributing to your workplace retirement plan. You want to always contribute at least the amount your company is willing to match you (it's free money!). Once you've reached your employer match, try to increase your contribution by 1% every 6-12 months.

Under the terms of this rule, you can withdraw funds from your current job's 401(k) or 403(b) plan with no 10% tax penalty if you leave that job in or after the year you turn 55. (Qualified public safety workers can start even earlier, at 50.) It doesn't matter whether you were laid off, fired, or just quit.

In some cases, it can decline for months or even years. As a result, some retirees like to use a 3 percent rule instead to reduce their risk further. A 3 percent withdrawal rate works better with larger portfolios. For instance, using the above numbers, a 3 percent rule would mean withdrawing just $22,500 per year.

The “95% Rule”, a variation of the Constant Percent scheme in which the maximum variation in income from year to year is limited to 5% up or down. The Constant Percent scheme.