Financial Independence Early Retirement (FIRE) is a movement of people devoted to extreme savings and investment programs aimed at enabling them to retire much earlier than traditional retirement plans and budgets allow. The origins of the term and acronym FIRE are unknown.
FIRE stands for Financial Independence Retire Early. This is a movement that began in 1992 when authors Vicki Robin and Joe Dominguez used the term in their book, Your Money or Your Life. Their book asks readers to question how they feel about money and their values. It asks the reader what in their life they would like to trade in the pursuit of more money.
Financial independence is not about getting rich, it is about identifying what you personally need to have enough. It’s about having financial security and the ability to free yourself from the 9 to 5 grind. It’s about spending money with purpose and intention, not consuming mindlessly.
Those who pursue FIRE aim to have sufficient income to fulfill their needs and comfort without having to continue working. The overall goal is to accumulate enough wealth so you can retire early and on your terms. Many of those pursuing FIRE aim to retire between 30 and 50 years old.
The Financial Independence Retire Early movement directly targets the conventional retirement age of 65 years, and the industry that has grown up to encourage people to plan for it. By dedicating most of their income to savings, followers of the FIRE movement hope to quit their jobs and live off small withdrawals from their portfolio decades before they reach age 65.
In recent years, many people have started to take part in the FIRE program. Proponents of an extreme thrifty lifestyle stay employed for several years, saving up to 70% of their annual income. When their savings reach about 30 times their annual spending, or about $1 million, they may quit their day job or retire from work altogether.
To cover people’s living expenses after retiring at a young age, Financial Independence Retire Early believers make small withdrawals from their savings, usually around 3% to 4% of the balance each year. Depending on the size of their savings and the lifestyle they desire, this requires extreme diligence in monitoring spending and dedication to maintaining and reallocating their investments.
There are several variations of the FIRE Movement:
Fat FIRE
It’s for people with 9am to 5pm jobs who aim to save much more than the average worker but don’t want to compromise their current standard of living. It usually requires a high salary and an aggressive savings and investment strategy to succeed.
Lean FIRE
These people are dedicated to minimalist living and extreme savings, thus requiring a much more restricted lifestyle. Many Lean FIRE adherents live on $25,000 or less annually.
FIRE Baristas
This individual wants to exist between the two choices above. They quit their traditional 9-to-5 jobs and used a combination of part-time work and savings to live a lifestyle that was more than just a minimalist one. They might buy health coverage while keeping their retirement funds intact.
When designing your FIRE approach, figure out how much income you’ll need to maintain your lifestyle in retirement. Then decide when you wish to retire.
If you need $90,000 per year to maintain your lifestyle in retirement and you want to retire by age 40, your plans will look much different than someone who can live on $60,000 per year and wants to retire by age 50.
You can consider the Financial Independence Retire Early strategy as a two-pronged approach. Those who want to retire early usually try to cut costs while saving as much of their income as possible.
To cut costs, you can use strategies such as buying used goods instead of new ones. Buying only what you need rather than buying everything you want and learning how to make many home improvement projects yourself instead of paying someone else are two other approaches.
On the savings side, many FIRE movement followers want to save and invest 50% to 75% of their income. To increase your income, you might consider finding additional part-time work or starting a side hustle.
Although investment strategies vary, many FIRE movement followers put their money in passively managed index funds or exchange-traded funds (ETFs). You can also consider tax strategies to reduce the amount of tax you pay on retirement income. Use IRAs and 401(k)s to invest in your retirement. To stash away cash and still let it grow, you can also put money away for things like an emergency fund in a high-yield savings account (HYSA).
