Financial independence retire early. You’ve probably heard the term, or its acronym of FIRE, at least once before. But what does it actually mean? Are people really able to retire early?
Drinking wine on a tropical island, enjoying a round of golf at the club, or just enjoying more time with your family are some of the perks people expect to enjoy after they retire. Often, those expectations of a better future offer us the motivation to continue pulling through the daily grind.
Nevertheless, this is becoming a challenging dream to accomplish. It appears that back in the eighties, a person could easily retire from a typical job at fifty-five or sixty years old and enjoy a massive amount of government pension to never think about working again.
However, it is no secret that state pensions aren’t what they used to be—at least in many nations. Along with the ever-growing public deficit, an aging population has made it more complicated to maintain the pension level that most seniors enjoy these days.
You see, pensions are only decreasing, and the retirement account options available mostly rely on the individual to save for their own retirement. The only thing increasing is the retirement age, which has pushed most individuals to take things into their own hands. Working extra hard and saving by cutting costs on spending, some individuals try to accomplish early retirement and financial independence (FIRE).
You may have heard of the new movement and philosophy happening today that many call FIRE, but do you know what it is?
This article will detail the basics of financial independence retire early, including what it is, the types of FIRE, and how you can get started on your FIRE journey.
Table of Contents
What Is FIRE?
FIRE (Financial Independence Retire Early) is a movement involving saving and investing a high percentage of your income with the outlook of retiring before standard pensions and retirement accounts become accessible. Individuals embracing FIRE will normally save and invest fifty to sixty percent of their income, along with retiring in their thirties or forties.
Financial independence is where the investment returns outweigh the lifestyle expenses and liabilities. For instance, your annual expenses might be $30,000, and your investments might return $40,000 per year. That means you are financially independent and don’t need to work anymore unless you choose to.
Meanwhile, you get to enter retirement ahead of time compared to the standard retirement programs. Some individuals accomplish FIRE in their thirties and forties. However, the definition of retirement can be subjective. It could indicate total retirement or that you are pursuing other passions for added income after leaving your career.
Regardless, the key with FIRE is financial independence, where additional income is not crucial, and you could live off the returns of your invested assets.
Types of FIRE
While the term FIRE simply means that you’ve accumulated enough savings/investments that you no longer need to work and can “retire,” you will find numerous variations on the idea of FIRE.
The two variations most often discussed are FatFIRE and LeanFIRE. Other types include BaristaFIRE and CoastFIRE. These come with various goals, depending on what fits your life and what you wish to do when you reach financial independence.
While many are simply pursuing traditional FIRE, others prefer to chase one of the specific variations of FIRE below.
Considered the minimalist’s approach to FIRE, you need to have an annual expense of $40,000 or less. This is suitable for individuals who have a frugal and minimalist approach to life. You’d need to carry through with this type of lifestyle to keep your expenses low and forgo the need for extra income.
People pursuing this kind of FIRE don’t need to work full time. They can withdraw four percent of their passive income for most of their living expenses but need to work part-time to cover the rest.
Rather than working at a high-stress job, you could take a step back and begin working a low-stress, part-time job you genuinely love to fill in the financial gaps. It would also be better if you get a part-time job that provides health benefits, especially if you live in a country where you will need to factor healthcare coverage into your expenses. That can get a bit costly if you’re paying for them on your own.
This FIRE type is categorized as having enough money invested at an early age that you don’t need to contribute to your investment portfolio anymore. You will still have enough when you reach your retirement age. You’ve spent time and energy into investing early on and can simply coast to your retirement age.
People who pursue this FIRE don’t touch investments. They still work full-time to cover their day-to-day expenses, and when they reach FI when they have enough in their portfolio to cover their overall expenses.
This type of FIRE is ideal for individuals who don’t embrace the full-on frugal lifestyle and like to have that additional cushion of passive income after reaching financial independence. Those pursuing FatFIRE would strive to have sufficient money to supplement a budget of $200,000 per year.
Apart from the types we mentioned earlier, you will find many other acronyms, which have appeared in the past to describe a person’s FIRE journey. Take note that the FI journey is unique for everybody, and there isn’t a one-size-fits-all approach.
Why Pursue FIRE
Below are some of the unique advantages of pursuing FIRE.
Have More Options
Did you know that pursuing FIRE opens more options to you? You don’t even need to know what you would like to do in 6 years or ten years, or more. However, getting yourself on the journey to FI helps you open a broad spectrum of options. You never know where the journey may lead.
Be More Prepared for Emergencies
One typical problem folks have with the idea of early retirement is the unknowability of the future. You cannot predict how much cash you will require, even for an average retirement that begins in your 60s or 70s.
Despite this criticism, people pursuing financial independence are more likely to be the readiest individuals you will meet. Individuals pursuing FIRE:
- Seek ways to raise their income.
- Consider alternative possibilities and scenarios.
- Track their investments.
- Regularly assess their spending.
Set Clear Goals
You need to zero in on what your priorities are, especially if you hope to reach financial independence retire early status. You need to be consistent and clear about why this is your goal. Would you wish to take more risks at work or begin a new business? Do you like to feel secure about your finances and stop worrying? Do you want to spend more time with your family?
Setting a goal to become financially independent helps you understand what matters the most to you. Getting your priorities straight will provide you numerous advantages for the rest of your life. Whether you need to pay off debt, save more money, or spend less, understanding your priorities lets you align your actions with the things that matter most to you.
How to Reach Financial Independence
Living below your means is a popular method to retire early. Here are some of the major costs that FIRE experts try to lessen through some creative approaches.
1. Raise Your Income
Are you still young and serious about reaching FIRE? Then you need to make the most of that time. You have the motivation and energy, something you’ll lose as you get a bit older. Make sure you put it to use. Why don’t you work extra hard to get that promotion you are aiming for or seek other income sources?
Thanks to the advent of the gig economy and the internet, it has never been simpler to put yourself out on the market and get paid for your skills. You can begin with websites such as Upwork, Freelancer, or Guru. You would be shocked at the massive amount of well-paid jobs you can get there. Side hustles are everywhere and easier than ever to start. There are tons of online jobs out there, even for teens and college students. Bringing in a little extra income each month will help you reach your money goals faster, no matter what they are.
2. Save on Food
Many people pursuing FIRE cut down on eating and drinking out. While it is possible to save money eating out, you would be shocked what a significant difference eating at home will make to your finances. Remember that small savings build up over time.
When it comes to groceries, we suggest buying in bulk and keeping your eyes open for weekly deals. Couponing is another great way to stack your savings. Stock up on your favorite items when they’re on sale and don’t buy more perishable items than you and your family will consume to reduce waste.
3. Telephone and Cable
Is it necessary to watch cable television when there are cheaper streaming cable alternatives available? You may want to consider how much mobile data you actually need if a Wi-Fi connection is readily accessible. You can also often find a phone company with a better deal than your current provider. Better yet, you can learn how to get free internet altogether.
Owning a car may not make sense for you. It is a depreciating asset, and new cars lose close to half their value after buying it. What’s more, you need to deal with maintenance and repairs, insurance, and parking, not to mention the occasional speeding ticket.
So, why not take public transportation instead and utilize that free time to read or pick up on some high-income skills? If you prefer to use a car, ensure you maximize car sharing. Also, consider owning a reliable used car or paying in cash to avoid interest. A reliable beater car will get you from point A to point B just as well as a fancy new car for much less money.
5. Housing Costs
Renting or buying a house will be one of your biggest monthly expenses. One way to jump-start your journey to FIRE is to find ways to lower your housing costs.
Some individuals prefer to live in micro houses to lessen their housing expenses. Also, consider location since living in a city will be considerably more expensive than a more rural area. Others work diligently to pay off their mortgages or house hack to reduce costs.
Use Financial Independence and Early Retirement to Grasp Your Best Life
There are many ways to get started on your FIRE journey. There are unlimited paths to achieving your financial goals, from saving and earning more money to smart investing and management.
Are you ready to achieve FI and live your best life? What changes will you be making?