An Introduction and Guide to the FIRE Movement

financial independence retire early FIRE couple

My first introduction to the FIRE movement came via the Frugalwoods. I’m not even sure how I stumbled onto their blog but have to assume it was through some combination of Google + frugal. In any case, I was hooked right from the start. Who were these people? How was it that they were living my dream life? I wanted to know more. I started researching early retirement, a concept I’d never heard formally named before (though it was definitely an idea I’d already spent plenty of time considering and working toward). From there, the Mr. Money Mustache blog entered my world and the rest, as they say, is history.

There are currently a plethora of bloggers who cover the topic. A plethora, you guys. So. Many. And the movement has taken hold to such a degree that you can find FIRE articles on Forbes and CNBC – heck, even Suze Orman had a thing or two to say about it.

The FIRE movement explained

If you have no idea what I’m talking about, let’s rewind briefly. The FIRE concept is relatively new but seems to be gaining in popularity every single day. FIRE is a combination two separate ideas – financial independence and early retirement. In a nutshell, FIRE followers live frugally and save aggressively in order to become financially independent and retire early. Twenty or thirty years early.

Financial Independence, Retire Early. FIRE.

Most Americans think of retirement in the same way – as the culmination of 40 or more years of working 40 or more hours per week. It’s the long awaited end to the daily grind, when you finally cross the rat race finish line. For folks in the FIRE community, including my husband and I, retirement is much more deliberate and intentional – it’s less about retirement in and of itself, and more about the idea of living on your own terms.

Who is FIRE for?

Generally speaking, the FIRE movement appeals to those who feel trapped by the rat race and want the freedom to pursue life on their own terms. In other words, the movement is probably appealing to a huge number of people. Who wouldn’t like to cut themselves loose from their 9-5 and spend their days as they please? 

When you consider the fact that life expectancies for men and women in the US are 76.1 and 81.1 years respectively (and declining), it’s no wonder that the idea of retiring well before age 65 has become so popular – the average retiree doesn’t have much time to enjoy the fruits of his or her labor. Even if they do have 20 or 30 years of retirement, health declines as you age and can severely affect the quality of those years. 

I don’t want to sugar coat things though – not everyone is positioned to achieve financial independence and therefore, not everyone is going to be capable of retiring early. As much as proponents like to push that “anyone” can achieve the dream, this just isn’t true. Large amounts of debt can be especially hard to overcome.

That said, I absolutely think that the everyday, average Joe or Jane definitely can. I say that because my husband and I are really, really average and we’re well on our way to being FIRE’d.

We’ve got two teenagers, including one who leaves for college this fall. We don’t make 6 figures and never have. We’ve never received a windfall or inheritance or otherwise come into money. We didn’t even get started until we were more than 30 years old. We’ve managed to get as far ahead as we have by pursuing a frugal, simple life, and living well below our means. As a result, we’ve been able to max out 2 IRAs and a TSP account every year – in addition, we invest whatever above that we’ve been able to save in a taxable brokerage account.

Those who succeed at becoming FIRE’d aren’t necessarily high earners (although it’s true that many are), but they’re all incredibly steadfast and exceptionally motivated to reach their goals. You won’t find many who simply stumble into early retirement; it takes a high level of commitment. 

The path to FIRE in 3 steps

There’s a simple formula that anyone can use to determine their “FIRE number” – aka, the amount of money you need to have saved in order to be financially independent so you never have to work again. Note that while the formula itself is simple, the actual path to reaching FIRE is not easy. For some of you it may very well be both, but I wanted to point out that there definitely is a difference. It’s one thing to know how to do something – it’s another thing altogether to be willing and able to.

1. Calculate your expenses

The first thing you’ll want to do is calculate your living expenses. Already you can see that this isn’t going to be a super straightforward calculation though – my current expenses? My projected expenses in early retirement? How the heck do I know what my healthcare costs will be when I’m not working and no longer covered by an employer?

All valid questions.

Everyone’s expenses will be different and will be based on a combination of hard numbers and estimates. You may need to do some quick or extensive research (or both) to figure out what your estimates should reasonably look like for certain categories. If you currently own your home, for example, and plan to remain in it, then you already know your housing expenses. On the other hand, if you currently rent, plan to move, or will be buying a home later on down the line, you’ll need to estimate your housing expenses based on your projected living situation.

Healthcare is an especially big concern for a lot of folks because there really isn’t a great way to estimate 1) the future cost of coverage, or 2) your future health – which is what a lot of your medical expenses will be based on. Luckily, my husband is in the military so we have a good idea of what our healthcare premiums, co-pays and such will be after he separates and into the future. If this isn’t the case for you, you will need to do the legwork to determine how best to calculate your healthcare costs – there is no one-size-fits-all answer here. 

2. Multiply by 25

Once you’ve established an expense number you’re comfortable with, you’ll want to multiply that by 25. Why 25? Well, because it’s essentially the reverse of the 4% rule. Twenty-five times your living expenses will give the amount of money you need to save in order to safely withdraw 4% per year.

The 4% rule is based on solid and extensive research. It essentially states that you can withdraw 4% of your portfolio value each year (adjusted for inflation) during retirement with minimal risk of running out of money. Based on this, for every $100,000 you have, you can safely withdraw $4,000 a year; on a $1M portfolio, you can withdraw $40,000.

The 4% rule works because it assumes you’ll be generating average returns of 7% per year on your retirement investments and that inflation will remain in the 2-3% range. Your returns will vary (sometimes wildly) from year to year, but overall your withdrawals should never reduce your principal. 

Let’s assume that you expect to have $50,000 in living expenses in retirement. In order to be FIRE’d, you’ll need $1.25M in retirement assets because $50,000 x 25 = $1.25M.

Put another way, to live on $50,000 per year in retirement, you’ll need to have $1.25M in retirement assets to withdraw from because $1.25M x 4% = $50,000.

How do I factor in my pension or Social Security?

If you’ll be guaranteed a pension, then you can use the yearly income to reduce your expenses. Using the same example above but with a pension of $20,000 per year, your FIRE number is reduced by $500,000 overall. ($50,000 – $20,000) x 25 = $750,000.

Most in the FIRE community ignore the potential income from Social Security. I’m fully in agreement – it’s my opinion that it’s much better to not include it and wind up receiving it than count on it and be disappointed.

3. Live frugally and save aggressively 

The math is important but knowing your numbers means nothing without execution. Step 3 is to do what you can to lower your expenses, increase your income and invest everything in between. This may mean picking up one or more side hustles, utilizing unconventional ways to reduce housing costs, or finding any number of other ways to save money.

My husband and I have averaged a 40% savings rate over the years, but if you’re a high earner or have exceptionally low housing or transportation costs for example, saving as much as 75% of your income may be possible. The more you save, the faster you can reach your FI number and the sooner you can RE.

Two important things to note:

  • Avoiding debt is a critical component to FIRE because any interest you’re paying is continually cutting into the interest you’re earning, significantly reducing your ability to build wealth.
  • Working your way toward financial independence and early retirement is an intentional process, and your spending should be just as intentional. Turning down an evening out with friends may help you save money in the short term, but may not make you happy in the long run. Your well-being matters. Make sure that if you plan to pursue or currently are pursuing FIRE, your spending and savings habits remain in alignment with the things that you value most. 

Myths about the FIRE movement 

It requires extreme frugality

Although this may be true depending on your particular circumstances, it’s not necessarily a fundamental requirement. You do have to keep your expenses low for two reasons: 1) the lower your expenses, the more able you are to save for retirement, and 2) the lower your expenses, the less you’ll need to save for retirement.

It will be boring

I hear this or some version of this a lot – but won’t you get bored if you’re not working? I’m willing to bet that most folks who FIRE are less bored than the general population, not more. With the time and space to pursue the things that they want to, early retirees are filling their days with the kinds of activities they want to rather the ones they have to. I personally have all sorts of plans for how I’ll spend my time (#backyardchickens).

Besides, the real purpose of the FIRE movement isn’t to not work – it’s to become financially independent so that you don’t have to work. There is a huge difference between the two. Early retirement will look different for everyone.

It’s too risky 

Listen, no one can predict the future. It is possible that money will become an issue at some point down the line – in truth, only time will tell. But risk is a part of everyone’s life and isn’t at all particular to the FIRE community. Build in a buffer if you are truly concerned. Lower your withdrawal rate to 3% instead of 4%. Increase your multiplier to 30 from 25. Continue to work in some capacity. All of these will reduce the probability of running into financial issues later. 

Questions? Advice to share? Let me know in the comments!

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