F.I.R.E. – Financially Independent, Retire Early

FIRE is a great example of how much retirement planning has changed over the last few decades. On one end of the spectrum, you have traditional planning with a financial advisor helping you accumulate enough money to retire at 65.

On the other, you have FIRE- a lifestyle that prioritizes low spending and high saving in order to retire significantly earlier than most people in the workforce- typically around your late 30s.  

Retiring at 38 sounds like a dream come true, but there’s a lot of nuance to this lifestyle that’s necessary to understand before deciding if it’s right for you. We’ve broken down the main considerations along with some alternatives so you can make the right retirement planning decision. 

Remember, there’s a lot of options for this type of planning, but they all have one thing in common: the sooner you start the better. So without wasting any more time, let’s get into it.

Part I – Financially Independent

The FI in FIRE stands for Financially Independent. Put simply, financial independence means you’re not relying on an employer for money. Spending less of your income is the biggest and most extreme change in pursuit of this independence. 

While there are variations to just how lean you need to be with your spending, the general idea is to cut out the vast majority of unnecessary expenses; things like eating out, vacations, and fashion purchases are axed out of the budget. Here’s a few specific guidelines to paint a clear picture of spending money in this lifestyle. 

One figure commonly referenced is 70% of your income going towards savings. That means that all your monthly expenses- rent/mortgage, utilities, groceries, and entertainment- shouldn’t exceed 30% of your total earnings.

At a time when some people are spending over half their income on rent alone, it’s easy to see how this lifestyle isn’t for everybody. Other more traditional expenses like childcare and medical bills can make the FIRE lifestyle unrealistic. 

Another important thing to consider is these lean expenses don’t necessarily stop when you retire- no matter how early. The point of FIRE is to spend as much of your life unburdened by a job as possible. Spending very little money is a key ingredient- both while you’re saving money and while you’re spending it after you retire. There’s no point in retiring early if you’re just going to spend all your savings in the next 10 years and end up back in the workforce at 50 years old. 

And that brings us to the second part of this lifestyle…

Part II – Retire Early

Once you’ve saved up enough money that you don’t need any additional income from a job, you can retire and begin living off of your savings. Of course, you can still continue to work, but at that point retirement becomes a possibility. 

Just like a traditional retirement plan, FIRE assumes a 4% withdrawal rate each year from your retirement portfolio- adjusted for inflation. By saving and investing over 70% of your income, it’s possible to achieve an adequate sum much earlier in life. 

Keep in mind that you won’t have an employer sponsored insurance plan during retirement, so any healthcare costs should be included in your 4% annual withdrawal. Once you’ve accounted for any additional expenses, it’s completely reasonable to “retire early”. Many practitioners of this lifestyle achieve retirement by their late 30s.

Is FIRE a good fit?

It’s certainly an interesting and exciting idea, but FIRE lies on an extreme end of the retirement planning spectrum. For people with childcare expenses, student loans, or even a simple desire to enjoy restaurants on a weekly basis, it might be too much of a stretch. 

Incorporating some of these frugal principles into your relationship with money is certainly realistic and can have profound effects on your long term finances.