Financial Independence Retire Early (FIRE) Meaning
Financial Independence Retire Early (FIRE) is a lifestyle followed by people who become financially independent and retire early. These individuals save in excess, spend less, invest smartly, and make passive income to attain their goals.
Increasing the savings rate brings down the retirement age significantly. In 1993 this idea became a popular movement. The popularity was based on the book, Your Money or Your Life written by Vicki Robin and Joe Dominguez.
- Financial Independence, Retire Early (FIRE) is a concept where individuals save their income zealously to retire from a routine job as early as possible. Even in their 30’s.
- Joe Dominguez and Vicki Robin propounded the FIRE movement in their book, Your Money or Your Life, published in 1992.
- Under the FIRE movement, an individual should spend less, save in excess, invest more and develop alternative income streams.
- The 25x rule says that people should maintain a reserve amounting to 25 times their yearly expenditure. The FIRE 4% rule, states that only up to 4% of savings should be consumed each year, post-retirement.
How Does FIRE Work?
A person’s legal retirement age is considered to be 65 years. But today, when the world is transforming at a fast pace, people desire to chase their passion, spend quality time with dear ones and go out on long vacations. But, unfortunately, a person pursuing a routine job can only wish to accomplish these dreams. Therein comes the concept of FIRE that facilitates individuals to live their dreams by retiring from a full-time job in their 50’s, 40’s or even 30’s.
If people start investing a huge chunk of their income at an early age, they can actualize the FIRE movement. This movement came to the limelight after a 1992 book becoming popular. Joe Dominguez and Vicki Robin who authored, Your Money or Your Life, were financial experts.
Consider this numerical. Timothy is 28 years old and plans to FIRE. He holds investments worth $1000, and his investment portfolioInvestment PortfolioPortfolio investments are investments made in a group of assets (equity, debt, mutual funds, derivatives or even bitcoins) instead of a single asset with the objective of earning returns that are proportional to the investor's risk profile. comprises 80% stocks, 18% bonds and 2% cash. His portfolio shows a growth of 8% per annum (p.a.). After paying off taxes, he is left with an annual income of $24000, out of which he incurs $12000 on expenses each year. While he has some other passive incomePassive IncomePassive income is the cash flow generated by an individual with minimum or no effort at regular intervals. It gives them additional financial security while requiring some amount of hard work initially, such as maintaining rental properties, making investments, upgrading products, etc. of $1500 p.a. from farming, he pays off $1000 every year for farm maintenance. The farming income and expenses will continue till Timothy turns 50. Also, he would require $20000 annually as retirement spending with a 4% Target withdrawal as a safe amount. The average tax rate is estimated to be 7% on retirement, and the returns from stocks and bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period. are 8.1% and 2.4%, respectively. Using the fixed percentage method, determine the age at which Timothy can retire.
This Financial Independence, Retire Early (FIRE) calculator can determine the earliest retirement age. On putting the values in the calculator, the following results were attained.
Thus, Timothy can retire at the age of 40. He can retire in another 12.4 years of working. Also, his FIRE number or target is $535000.
Following is a to-do list for the successful execution of the FIRE movement.
- Plan your goals: People need to set their financial goals and the time of retirement. For this purpose, they have to analyze the income level, the standard of living, responsibilities, spending, savings, and scope of additional income.
- Cut down your expenses: Another crucial step is to understand monthly and yearly expenditures. While spending on necessities cannot be compromised, the movement recommends trimming off leisure and unreasonable expenses. People may even save up to 70% of their earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments. if they plan for expenses.
- Earn more: No, it doesn’t mean people have to work for extra hours. The movement recommends generating a secondary income to enhance earnings. People can learn new skills, switch jobs, or seek better incomes.
- Save high: The movement emphasized Progressive savings. For beginners, it’s difficult to save much. They are recommended to start small, keeping aside a small portion of their income. Then as their income increases, they can save more aggressively.
- Invest what you save: Saving alone would not be adequate. This lifestyle recommends employing these funds somewhere to generate a passive income. It is important to note that investments carry risk. Hiring the services of an investment advisor is recommended.
- Stay debt-free: FIRE asks people to stay out of the debt trap. Debts exhaust people’s income leaving them with nil savings. People should keep a reserve fund for emergencies and get medical cover, accident cover, and other insurances to deal with uncertain events.
Individuals following the FIRE movement should have saved 25 times their annual spending before retiring. Also, the post-retirement expenditure has to be regulated at 4%. The 4% rule restricts spending to 4% of the retirement fund allocated for that year.
For applying the 25x rule, an individual requires a FIRE number. It is the amount the individual needs to accumulate before retirement. It is computed as follows:
FIRE Number=25×Annual Expense
In the contemporary era, where people wish to retire in their 30’s, it is desirable to save 70% of earnings. A person can then leave the monotonous 9 to 5 job. According to Forbes, some individuals choose to become FIRE experts to mentor beginners.
Financial Independence Retire Early (FIRE) Types
The intensity of FIRE depends upon the desired lifestyle of individuals. The four popular kinds of Financial Independence Retire Early are as follows.
- Lean FIRE: It signifies a strictly restrictive lifestyle where people spend only on minimal necessities. They also save in excess. This kind of financial strategy help average individuals retire early.
- Fat FIRE: For this strategy, individuals belonging to a fair income class maintain a better or traditional living standard. Such individuals need to save more funds for managing the same lifestyle after retirement.
- Barista FIRE: These individuals retire from a full-time job but develop a secondary income source like becoming a barista on a part-time basis. This way, they meet their necessities while keeping their savings intact as their retirement funds.
- Coast FIRE: Like the Barista FIRE, individuals following the Coast FIRE variation also earn their living through a part-time job. But such individuals do not make enough money to fulfil their expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.. Also, they are short of sufficient savings at retirement.
Frequently Asked Questions (FAQs)
The percentage of savings varies from one person to another, depending on the individual’s income and expenses. However, the FIRE concept recommends saving 50 to 70% of earnings after paying off taxes.
The following strategies will help individuals save for FIRE:
• Seek extra income opportunities like freelancing.
• Get rid of unnecessary expenses. Rescind from an inflated lifestyle.
• Avoid using credit cards or other high-interest debts.
• Boost your savings every year. Save progressively.
• Invest enough to make a regular passive income.
• Look out for investments that save your tax.
The FIRE 25x rule states that people should save 25 times their yearly expenses achieving financial independence, and retire early.
The 4% rule states that individuals can spend only up to 4% of what they have saved for retirement annually.
This article has been a guide to Financial Independence Retire Early (FIRE) & its Definition. Here we discuss the types of financial independence along with calculation and how it works? You can learn more about from the following articles –