The truth is that a number of people have high-pressure jobs that they hate and would rather not go to work everyday, if at all they have to go. Some others prefer to work on their own terms. To yet a few others, they have passions that they want to pursue that may not necessarily bring much income. If you belong to one of those described above, then you need to hear about the term FIRE. The acronym simply means Financial Independence Retire Early. There is a whole new movement of FIRE enthusiasts, most common among millennials. When you think about retirement, most people usually think someone in their late 60’s and this is because this is the norm. The earliest you can start withdrawing from Social Security is age 62 and you can only start withdrawing from most tax-deferred retirement plans without penalty from age 59.5. Early retirement is the literal definition of the FIRE movement, but there’s a much more robust meaning when you start digging into the principles behind FIRE. Namely, it’s about flexibility. It involves simplifying and redesigning your life to reduce spending.
These days, there are some flavors of FIRE that float around the blogosphere:
“Lean FIRE“: Those that practice extreme frugality and learn to live off a lot less. Most in this camp usually amass $1 million and aim to live on less than $40,000 annually. Majority live on $30,000 annually like this guy who retired in 2013 at age 33. And he lives a wonderful life with lots of travel but he has hacked his life so much that it is highly efficient and extremely frugal.
“Fat FIRE”: Those who maintain a more typical standard of living while saving and investing and “retire” to live off a lot more. This is seen more commonly amongst the Physician FIRE crowds like physician on fire. Those in this category often have >$2.5 million in their nest egg and aim to live on $100,000 annually
“Barista FIRE“: Those who “retire” and work part-time at places like Starbucks to get the company health insurance (health insurance is one of the major headaches of retiring early)
Some of those in the FIRE movement often get criticized by the internet retirement police because some of them do not actually retire, as they often take on projects or new careers they are passionate about…on their own terms. The most important portion of the FIRE movement is the FI portion or Financial Independence. FI ultimately means that you can shape your life without taking money into consideration. A common theme with FIRE enthusiasts when they reach fire is to start blogging about their story. And often, this creates a stream of income in their retirement. But it’s all on their own terms. FIRE doesn’t necessarily mean you have to quit your job, contrary to the traditional definition of retirement. FIRE is really about the freedom to choose to work or not. In this NYT article, they describe how to retire in your 30’s with $1 million in the bank. The article notes that much of the conversation around FIRE, on Reddit message boards or blogs like Mr. Money Mustache, revolves around hacking one’s finances: strategies for increasing your savings rate to the hallowed 70 percent, tips for cheap travel through airline rewards cards, ways to save nickels and dimes at the grocery store. Most in the FIRE crowd typically save 50-70% of their after-tax income. I know, that’s very impressive.
In concrete terms, when you have saved up 25x your annual expenses, you’re considered financially independent. So if your annual expenses are $40,000, you are financially independent when your total investment portfolio is $1,000,000. If your annual expenses are $100,000, you will become financially independent when you have $2.5 million in your investments. This presupposes that you will withdraw 4% of your portfolio annually for the rest of your life without the risk of depleting your money. This is based on the Trinity study.
While financial independence does require cutting back on expenses, it also requires a decent income. Many people in the FIRE community who have actually achieved this usually earned at least low 6-figure incomes. While plenty of folks have become financially independent without earning six figures, earning more certainly helps speed things along.
Retire and sip Pina coladas?
The reality is that most in the FIRE movement do not want to retire and do nothing. They don’t just want to go to the beach and sip Pina coladas all day. That gets boring very fast and will likely leave you depressed after a while. The majority who seek FIRE status do it just to take control of their own life and do what they are passionate about. In fact, there are some who have stayed as busy, if not busier after they FIREd than when they were working for money….like this guy. However this is the good kind of busy: the one you get to control and can cut down whenever you like. Some take up new adventures and some even try 2nd careers. Bottom line is you get to do whatever you want to do without worrying about the money part.
Basic Math For FIRE
The basic rule behind FIRE is ridiculously simple: Make a lot of money, spend way less than you earn and invest the difference in low-cost investments like Index Funds. It’s that simple, though extremely hard to pull off. Other investments, like rental properties and passive income streams, are a big part of achieving financial independence, too. And so is frugality. The less money you need to live on, the less money you need to save in order to fund the rest of your life. To highlight the value of cutting expenses, for every $100 per month you can trim, it means you need $30,000 less to achieve FI ($1,200 yearly expense x 25 = $30,000). Mr. Money Moustache has a popular blog post where he detailed the shockingly simple math behind early retirement. In that post, he has a table which compares your savings rate to how long you can work before retiring. In that table for example, if you have a 50% savings rate, you can retire after 17 years and if you have a savings rate of 65%, you can retire after 10.5 years of work. What about a savings rate of 10%? That would take you 51 years to retire. A 5% savings rate takes you 66 years of work to retire. To put it in perspective, the current personal savings rate in America is 6.7%. Little wonder then why so many Americans cannot retire, or rather retire without much savings.
There are those in the FIRE movement like Mr. Money Moustache who saved 70% of his after-tax income for 10 years and had $1 million in his account by the time he was 30 to retire. That is an extreme savings rate. However most FIRE adherents save about 50% of their income. It’s not for the faint of heart. Almost all FIRE adherents will start off saving and investing in their retirement accounts and maxing them out. For some others, they prefer to invest in taxable accounts so they can get to it immediately once they retire so they are not penalized if they withdraw from their retirement accounts. However there is a way you can still get to your money in your retirement accounts if you’re not 59.5 years old, without a penalty. A few of those who retired early use this Substantially Equal Periodic Payment or SEPP strategy to get to their money without having to pay the 10% penalty. A good number though, have money accumulated in taxable investment accounts and usually start living off from the income in those accounts while they leave their retirement accounts to continue to compound until age 59.5. This may be a smarter strategy.
Strategies for FIRE
1. Geographic Arbitrage
You can opt to live in a low cost of living area with similar income profiles compared to a high cost of living area. For example, an IT engineer in Silicon Valley, CA making $120,000 annually would cut his expenses in more than half just by moving to South Bend, IN doing the same thing and earning similar income. This is one of the core pillars to achieve FIRE status as fast as possible
2. Reducing Housing Costs
It will be faster to achieve FIRE status if you find cheap rent or if you buy a modest home and aim to pay it off as fast as possible so that you are mortgage free by the time you are financially independent. The cost of housing is one of the major areas of a household budget. If you can tame this area, you will achieve success
3. Driving Used Cars
Besides a home, a car is often the largest purchase we make. However, cars depreciate in value like a rock the minute you drive off from the car lot. To achieve FIRE status, most people drive fairly used cars like Hondas or Toyotas with minimal cost of maintenance. They typically don’t have car notes sucking up their monthly budgets. Some of those in the extreme category, like MMM, even stop driving and resort to biking to work
4. Cutting Grocery Bills
Some clip coupons. Others do bargain hunting and shop in cheaper places like Aldi’s. A large majority learn to prepare their meals at home from scratch. It’s amazing how much people spend on eating out. A large proportion of Americans eat out at least twice per week. If you cut this to once every 2 weeks, the savings can be substantial
5. Cutting The Cable
Cable bills can run up to $100-200 per month in some areas. A lot in the FIRE movement learn to make do with Netflix or similar options and cut the cable completely.
6. Using Cheaper Phone Service
Many use low-cost phone service often for <$40 per month. Here is a selection of such plans
7. Credit Card Rewards Strategies
Many in the FIRE movement use elaborate strategies around credit card churning and travel hacking, neither of which are for the faint-hearted. The former involves signing up for new credit cards to capture the bonus (typically cash or airline miles), hitting the minimum spend, and then canceling before you have to pay the annual fee. While churning can be a profitable activity, it requires meticulous organization (one missed payment can wipe out the gains) and can hurt your credit in the short-term. Most of the rewards from churning are in the form of airline miles. Travel hacking is the practice of arbitraging these miles to get the most mileage. There are some bloggers who travel the world, mostly with their airline miles.
8. Increasing Multiple Streams of Income
Many try to work overtime, or increase their income by driving for Uber or creating other streams of income. This adds to the numerator and helps to get them to FIRE faster. Some of these extra work is meant to be temporary
9. Decreasing Tax Liability
They do this mostly by maximizing all the retirement vehicles available to them. These include 401(k), 403(b), 457, Roth IRA, HSA etc.
10. Utilizing Low-Cost Index Funds
This is the holy grail for investments amongst the FIRE crowd. It’s a smart investing strategy that is passive and hands off and ensures that you capture the returns of the market.
FIRE Movement Gets A Bad Rap
So recently, the blogosphere was abuzz because of the comments of the multi-millionaire financial expert, Suze Orman. She was asked by Paula Pant, a blogger, on the Afford Anything podcast about her views on the FIRE movement and Suze simply hates it, hates it, hates it! She thinks you need at least $5 million or even $10 million before you can FIRE. Of course, she got a smackdown from those in the FIRE movement. Some felt Suze Orman was threatened by the FIRE crowd because it means not listening to ‘financial experts’ like her. Mr. Money Moustache who rarely posts on his blog these days, fired back in a fiery post and detailed what everybody is getting wrong about FIRE. It’s a worthy post to check out.
So You Think You Can FIRE?
For many immigrants, they do not have this concept of stopping work before the traditional retirement age of 65 or even later. Most don’t even believe this to be possible. But it’s certainly worth considering the FI portion of FIRE and trying to achieve that as soon as you can. Why? Because it gives you options in life. Even if you can’t achieve that until age 55 or age 60, it’s still a good milestone to reach. It might make you cut back from the aspects of your work you do not enjoy. Or make you relocate to the area where you have always wanted to live in but couldn’t because of financial constraints. It can make you take a less paying job but which is more fulfilling for you. It can even make you get to enjoy your job more, because you can afford to quit anytime you want. Financial freedom is not so much about the money it provides you but about the freedom it gives you to live life on your own terms. What’s not to like about that?
So are you on FIRE? Would you like to FIRE? What strategies are you employing to reach FIRE status?
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