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What You Need To Know About FIRE (Financial Independence / Retire Early)
Does the idea of retiring in your 30s with a million dollars in the bank sound appealing? You then have a lot of prime years in your life to spend however you like, without the need to work for money.
This bold financial move is the idea behind the FIRE movement. Short for Financial Independence / Retire Early, the idea is that you spend the early part of your career aggressively maximizing income and minimizing expenses so that you can save as much as possible, ideally quite a bit more than 50% of your annual income. Once you reach the crossover point, where your annual spending is less than your after-tax investment returns, you can simply walk away from the workplace and spend the rest of your years doing whatever you value.
Intrigued? Let’s take a deeper look.
Is retiring early a great goal?
Let’s start with why. Why would someone choose to approach their finances from a FIRE philosophy? Is retirement really a big goal someone in their 30s or 40s might want?
Don’t think of it as ‘retirement‘
The most important element of this story is to not think of the end goal of FIRE as retirement, or at least not retirement in the popular sense of days filled with golfing and gardening.
Rather, think of it this way: What would you do with your days if you did not have to work in order to maintain your standard of living?
Many people would identify something personally meaningful to fill their time. They might pursue a personal passion, like becoming an artist or a novelist or going back to school. They might devote themselves to a life of service through charitable work.
Others might radically change their life now that they’re no longer bound to working for financial security. They might buy a tiny home or a camper and live in that while exploring the country on their own terms and timelines. Others might choose to live in the mountains in a very isolated place, where they are largely free to spend their days however they wish.
Our FIRE dreams
My wife, Sarah, and I plan on retiring earlier than the traditional retirement age. What do we intend to do with our time?
First, we intend to retire right around the time our youngest child is fully independent from us. Before we FIRE, we want to ensure that all three of our children are independent.
Our plan at that point is something we’ve discussed for many years. We plan on traveling the country for several years, alternating between periods spent in national parks exploring and hiking and periods spent doing service projects. In between, we’ll visit our children and friends, and both of us have some artistic projects we want to pursue while traveling (for me, it’s writing a series of high fantasy novels in a world I’ve fleshed out over many years).
How are we doing this?
What you need to do to get there
Intense frugality to maximize your savings rate
In order to achieve FIRE, you need to have a very high savings rate. Your savings rate is the percentage of your income that you’re putting aside for the future. The higher your savings rate, the quicker you get to FIRE.
To do that, you have to be very careful about your spending. Intense frugality is simply part of the equation. No matter how you choose to go about this, you have to spend significantly less than you earn, and that means choosing again and again to minimize your nonessential spending.
You’re choosing, every day, to forgo short-term pleasures — particularly those with any sort of financial cost — in order to obtain greater personal freedom in the long run. However, it’s important to note that the big savings come from the big expenses, like your home and your car. It also comes from keeping regular bills under control and avoiding debt as much as you can.
This might mean choosing to live in a very basic fixer-upper home where you keep costs as low as possible and invest time and energy building a home you’re happy with. It means practicing frugal hedonism — you seek pleasure with the constraint of not spending money, and discover all kinds of things you didn’t consider before. It means continuously valuing the long term over the short term in terms of money use.
Your goal is to make your savings rate each year as high as you can while still enjoying daily life. This brings us to the other part of the equation.
Intense pursuit of income early in life
The other way to get your savings rate as high as possible is to raise your income as high as possible. Every professional choice you make is about earning maximum income in the shortest amount of time. You have to be aggressive with your career. Focus on what will maximize your income, rather than what is the easiest route.
The tradeoff here is that you might wind up in work or in a workplace that isn’t fulfilling, but you won’t be doing this for life. Rather, you’ll leave that position the second you’re ready to FIRE.
The best approach here is to use every spare moment of your professional time to maximize your income in the next decade or two rather than over the length of your career. This may mean taking on freelancing work and side gigs. This may mean choosing the more “corporate” work option rather than the more loose and fun option. Maximizing the amount you can save each year is the objective here.
Our path to FIRE
For Sarah and I, what does that look like in terms of our day-to-day financial choices? We live far below our means. When we travel, we mostly visit national parks and camp. We buy late model used cars (mostly) and drive them until they literally wear out. We bought a very modest home on the low end of our budget, just big enough for our family of five, and we’ve resisted the temptation to upgrade. We keep a close watch on our regular bills, like auto insurance and our energy bills.
In short, we’ve strongly internalized the idea that wealth and spending are not the route to happiness. It seems like an unusual lesson for a personal finance site, but the truth is that personal finance is just a tool to help you build the life you want. For us, that life involves maximizing personal freedom.
The math to FIRE
Let’s work through an example of how financial independence might work for a recent college graduate.
Let’s say a person graduates at age 22 with $40,000 in student loans. Their first job earns them $50,000 a year. They decide to use a 50% savings rate and live off of $25,000 a year. What would their FIRE path look like?
First of all, let’s establish their goal. They want to have enough in their investment account so that when they retire, they can withdraw 4% of the balance per year and expect that it will last for a very long time, if not forever. Assuming continued low inflation, this should provide a long-term sustainable lifestyle. Thus, they need to save 25 times their annual spending, in this case, $25,000 times 25, or $625,000.
If that person adopted a 50% savings rate and applied all of that to their student loans, then to savings, they could pay off their entire student loans in about 20 months and save $8,000 that year. Thereafter, they could save $25,000 a year. If we assume that they invest aggressively and earn an average annual return of 7%, this person would hit their goal at age 39!
Inflation isn’t really a concern, either, provided that this person was getting annual raises at least equal to inflation and stuck to their 50% savings rate. Their annual spending might increase over time, but so would the amount they’re investing. So at age 39, they would almost assuredly still have more than enough in investments to retire immediately.