The Financial Independence, Retire Early (FIRE) movement has become mainstream in recent years. But what does it mean? Here’s what you need to know.
Financial Independence, Retire Early (FIRE): What is it?
Financial Independence, Retire Early is a movement that refers to a goal of retiring early and having enough money to live on without needing to work.
Retiring early doesn’t necessarily mean doing so a few years before the standard retirement age. Many proponents of the FIRE movement hope to retire decades earlier than is considered normal.
The movement became popular in the 2010s, particularly amongst the millennial generation. Today, there are various blogs, podcasts, and online forums, such as Reddit, that discuss and support others in their quest to join the movement.
How is Financial Independence, Retire Early possible?
If you are looking to achieve financial independence, there are four main ingredients. Let’s break them down.
1. The discipline to save aggressively
Many advocates of FIRE manage to save between 25% – 75% of their working income. The idea is that the higher your savings rate, the fewer years that you need to work for.
As a rule of thumb, if you save 25% of your working income, you’ll have to work for three years to save for one year of living expenses. In contrast, if you manage to put away a much greater 75%, it will take just four months.
2. Be willing to live a frugal lifestyle
Many members of the FIRE movement are happy to live a frugal lifestyle, which can boost the amount that can be saved. A frugal lifestyle means cutting back on unnecessary spending, such as buying branded goods, eating out, or taking extravagant holidays. Interestingly, many FIRE members who have moved to a frugal lifestyle claim it hasn’t affected their happiness levels.
3. Have a passive income stream
Many advocates of Financial Independence, Retire Early hope to supplement their retirement with passive income streams. Passive income may include investments in stocks and shares, or rental income.
Having a passive income stream during your FIRE journey, and/or retirement means you can earn capital without having to expend energy to do so.
4. Have a date for retirement
The key to successfully achieving financial independence is knowing when to stop. Many proponents of the FIRE movement believe in the ‘4% rule.’ Under this rule, someone who has saved 25 times their yearly living expenses should be able to withdraw 4% of their capital without having to ever work again.
A set retirement date can also help determine whether your current rate of savings is adequate. To help with this, you can use a FIRE retirement calculator.
Do be mindful that if you do have a set retirement date, you’ll have to take into account what type of retirement you hope to have. For example, if you’re happy to carry on with a frugal lifestyle into retirement, you’ll probably have to save less than someone who wants a more fancy lifestyle.
What are common criticisms of Financial Independence, Retire Early?
While the FIRE movement has gained huge traction in recent years, it has its fair share of critics.
Many believe the movement is only for the rich, or those with the ability to earn very high salaries. For an individual earning an average wage with average spending habits, FIRE may seem unachievable.
Others suggest that pursuing FIRE is simply a bad way to live your life. For example, some believe cutting out unnecessary spending and extravagant purchases simply isn’t worth being able to retire early.
The movement has also come under ‘fire’ by those who enjoy working. Some people feel that being able to retire decades earlier than others would leave them bored, and starved of purpose. Others would feel that working for a living gives them a sense of worth, limiting the movement’s appeal.
What is the reason behind its growing popularity?
The reasons for pursuing financial independence are likely to differ widely amongst individuals.
Some may see Financial Independence, Retire Early as a way of escaping the drudgery of working for a living. Others may see the movement as a way to focus more of their time on hobbies and interests.
Others, particularly younger people, may feel that working for a living simply isn’t as rewarding as a used to be due to the rising cost of shelter and decades of stagnant wages.
Changing attitudes to lifestyles should also be considered another factor. For example, advocates of FIRE may be less driven by consumer goods and more likely to find happiness through financial stability or other less-costly experiences.
Whatever your views on the FIRE movement, it’s always worth getting your finances in order.