FIRE stands for Financial Independence Retire Early. It is a movement of people who aim to be financially independent and retire much earlier than the traditional retirement age of 67. But what does it take to achieve this? FIRE be achieved by frugality, extreme savings, and investments.
What is the purpose of FIRE?
The FIRE movement challenges the traditional concept of retirement at 67, and the financial industry that promotes it. Instead, followers of this movement aim to save most of their income in order to retire early. By living frugally, saving more, and aggressively investing their savings in medium to high-yield products, they hope to live off the returns from their investments, long before they reach the conventional retirement age. In recent years, the FIRE retirement lifestyle has gained popularity, particularly among millennials, who save as much as 70% of their yearly income. Once their savings reach a level of approximately 25-30 times their yearly expenses, they may retire from work altogether.
The devotees of this movement retire at a young age and to cover their living expenses, they make small withdrawals from their savings. This usually amounts to around 3% to 4% of their asset per year. Depending on the size of their savings and desired lifestyle, this requires a lot of effort to closely monitor expenses and a lot of dedication to maintain and reallocate their investments.
Who is FIRE designed for?
FIRE requires an extreme financial commitment and might only be right for some. Is this right for you? That would depend on many factors such as your income, savings, and investment and is largely governed by lifestyle habits and discipline. Those who are considering following the FIRE movement should be prepared to make significant financial adjustments and understand that, as with any investment strategy, there is no guarantee for success. However, for individuals who are dedicated to it, the FIRE movement may be an effective way to achieve early retirement.
Although it’s commonly believed that FIRE is only for high-income earners who want to retire in their 30s or 40s, anyone can benefit from its principles.
If you want to know more about how you can plan for retirement, check out this link from the government: https://moneysmart.gov.au/retirement-income/prepare-to-retire.
Even if you don’t want to retire early, implementing some of the principles of FIRE can help you achieve financial independence. This will give you the financial freedom to work on something you love instead of something you have to do.
What is your FIRE number?
When working towards FIRE, the most important thing to know is your FIRE number. It is generally recommended that your FIRE number is 25 times your annual income. That is, you can retire once you reach 25 times your annual income. For example, if your annual income is $100,000, you can retire when your savings and investments reach $2,500,000 or $2.5 million.
This is based on the idea that once you retire, you draw 4% of your savings per year and live off that. This is the same as your current annual income. This ensures you can still maintain your current lifestyle on retirement.
A word of caution when calculating the FIRE number
Even though the FIRE number is generally 25 times your yearly income, locking in such a number comes with its risks. It is recommended you understand these risks when calculating your FIRE number. Some of the inherent risks are:
- Annual income and expenses change with changing family, social, and economic situations. If a single person earning $60,000 wants to lock in $1.5 million as his or her fire number, and later over time, has a family their living expenses will increase and $1.5 million won’t be enough.
- There are a lot of uncertainties over such a long time.
- The FIRE number also takes into account a 30-year period of retired life. So, if anyone plans to retire at 40, they need to take into account the amount they need to survive beyond the age of 70.
Different Variations of FIRE
This movement offers variations that you can modify to fit your unique financial circumstances and retirement needs. Popular variations are Lean, Fat, and Barista FIRE.
Lean FIRE involves minimalistic living and spending less after retirement than you did while working. To follow the Lean FIRE methodology, you need to have a modest retirement budget with an aggressive savings plan. You would need to set aside up to 25 times your annual expenses to be able to follow Lean FIRE.
Fat FIRE, on the other hand, is more where you can continue a lifestyle on a generous budget even after retirement. To be able to maintain a good lifestyle after retirement, you’ll need to earn and save as much as possible. This means saving a minimum of 25 times your annual expenses and surpassing this goal when possible.
Barista FIRE incorporates part-time work into your post-retirement plans. You’ll still need to build a generous savings fund, but some of the post-retirement living cost is funded by part-time work. Having such a goal requires less aggressive savings and focuses more on work-life balance over full early retirement.
Pros and cons of the FIRE movement?
You need to assess the benefits and risks of the FIRE movement before you decide on following the path.
Pros
- Reduces stress and anxiety: Those who are stuck in a job they don’t like will be able to move away from the job-related stress and improve their mental health.
- Time to spend with family and friends. When you retire early or get to choose your schedule, you can get ample time to spend with your family and friends and follow your passion.
- Greater financial security: The aggressive savings and investing habits that are associated with FIRE will help you grow and sustain a bigger safety net and make you financially more secure.
Cons
- Limited benefits for low-income earners: For low-income earners who already live hand to month, it is not practically feasible to save 50-70% of their income which is what FIRE requires.
- Extreme financial discipline: Being able to save 50-70% of income for middle-income earners too means extreme financial discipline and sacrifice which is not possible for everyone.
- Risky investments: Even low-risk investments might not have a growth rate as expected and returns might not catch up with inflation or recession and retirees might have to spend more than the stipulated 4% to just get by.
- Health insurance coverage gaps. Benefits such as the Commonwealth Seniors Health Card and Seniors Card are tied to age. So, anyone retiring before 67 is not eligible for the health benefits and would have to manage private insurance.
Key Takeaways
- FIRE is a movement of people wanting to achieve financial independence and early retirement.
- FIRE followers follow extreme frugality, aggressive saving, and investing.
- They seek to retire early by saving up to 70% of their annual income.
- Upon retiring, they live off small withdrawals, usually up to 4% of their accumulated wealth from savings and investments.
- Calculating your FIRE number of 25 times your annual income comes with some caveats that you should know about.
- Even if you don’t follow the FIRE process strictly, adopting some of its habits can help you achieve financial freedom.
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