What is the Financial Independence, Retire Early (FIRE) movement?

The Financial Independence, Retire Early movement, or FIRE, is a group of people trying to gain financial independence by amassing enough wealth and cutting their expenses so that they can retire extremely early. Many FIRE proponents are looking to retire in their 30s or 40s.

So how do people in the FIRE movement achieve their goal, and what are the drawbacks?

How Financial Independence, Retire Early works

The FIRE movement centers on taking control of your finances, and proponents focus on earning more and  spending less. FIRE participants focus on two areas, which are really two sides of the same coin:

• Saving and investing more of what you earn.
• Spending less of what you earn.

By saving and investing their money, participants grow an amount of money that can generate enough income to sustain their lifestyles. They use detailed spreadsheets and financial plans to model how they’ll be able to meet their needs based on their income and the rate of return they can expect from their savings and investments in stocks or stock funds.

To meet their goals, FIRE participants must take on extra risk by investing in stocks, and that means understanding how the stock market works and having a brokerage account. They won’t be able to rely on the low returns and absolute safety of a bank account to amass their fortune.

And by spending less, they reduce the level of savings they need in order to retire early. While some FIRE critics say that FIRE participants live a too-frugal lifestyle to reach their goal, many proponents say that they’re not making extraordinary sacrifices. In fact, they say by spending on what they really love that they actually derive more enjoyment from those things. Plus, they enjoy moving toward independence, when they can do what they truly love.

But however they approach it, FIRE participants see the lifestyle as a way to spend their time doing what they really want to do rather than what society tells them they should want.

Because of their desire to retire early, many participants won’t be able to take full advantage of employer-sponsored retirement plans such as a 401(k). They may or may not be able to take advantage of plans such as an IRA, depending on whether they earn income in retirement. Instead, they’ll need to save in taxable accounts or in accounts such as a Roth IRA, both of which offer access to cash (at least at some level with the IRA) without any penalties.

To achieve FIRE, followers adhere to two key principles: the rule of 25 and the 4 percent withdrawal rule.

The rule of 25

The rule of 25 serves as a helpful tool in planning for retirement. It recommends that a person should have 25 times their yearly expenses saved up for their retirement. To use the rule of 25 to figure out your FIRE number, begin by estimating your annual expenses in retirement, and then multiply that number by 25. To put it in perspective, if your yearly expenses amount to $40,000, you should strive to save $1,000,000 for your retirement, according to the rule of 25.

The 4 percent rule

The 4 percent rule is a common retirement withdrawal strategy. It suggests that retirees should initially withdraw 4 percent from their total investment portfolio in their first retirement year, then adjust this figure annually for inflation, in order to make their savings last for a 30-year retirement. This guideline intends to strike a balance between enjoying life and safeguarding against running out of money in retirement.

Who is FIRE for?

The FIRE movement is not for everyone. It takes a certain type of person to be able to live frugally and save aggressively. It requires a high level of discipline, commitment and a willingness to live well below one’s means. It is best suited for individuals who have a high income and can afford to save a large portion of their earnings.

Additionally, it helps to have a minimalist mindset and the ability to derive happiness from non-materialistic aspects of life. However, anyone who is interested in gaining financial independence and the possibility of retiring early can benefit from the principles of the FIRE movement.

Support from other FIRE participants

Achieving financial freedom usually doesn’t happen out of the blue, but instead demands a well-thought-out strategy. This is something the FIRE community is especially committed to, often mapping out their financial journey years in advance. The movement is also really supportive of members who have started the journey, and members provide spreadsheets and other tools to help each other.

This social solidarity helps FIRE participants realize that there is a community that values what they’re trying to achieve, making it that much easier to do.

Different types of FIRE

Here’s a rundown of the different mindsets within the FIRE movement:

• Lean FIRE: This cluster embodies extreme thriftiness to save and invest, with the goal of surviving on a limited budget.
• Fat FIRE: This method is ideal for those desiring to maintain a higher standard of living, requiring a bigger savings cushion to support a more lavish lifestyle.
• Barista FIRE: Followers of Barista FIRE strive to save sufficiently to transition to part-time or less stressful occupations, whilst still enjoying some early retirement perks.
• Coast FIRE: This method involves saving adequately early on in life to allow investments room to compound over time, potentially enabling an individual to cease saving for retirement at an earlier age.
• Slow FI: This strategy centers on appreciating the path to financial independence by gradually incorporating more enjoyment and freedom into one’s life.

Benefits of FIRE

The benefits of FIRE come mostly from the financial independence component, though retiring early can be a nice benefit as well.

Financial security

When you become financially independent, you no longer need a bi-weekly paycheck to survive. That is because you have amassed enough wealth that your investments can cover all your expenses.

Financial security is arguably the biggest benefit of financial independence. While there are other benefits of FIRE, they tend to be enabled by the financial security that comes along with it.

For example, before reaching financial independence, you may have no choice but to keep working. But after financial independence, you can leave the moment you say “that’s the last straw” and still be just fine financially.

Choose a job that aligns with your values

Different people define FIRE in different ways. Some say you “have” to stop working completely, while others include the option to work a job you care about instead of simply exchanging your time for a paycheck.

For instance, there may be a non-profit working to address an issue that is important to you. A job with the non-profit may pay less than your current job, but once you reach financial independence, you can “retire” from your current job. Thus, the idea is to have more options and be able to do something especially meaningful to you.

Reclaiming your time

They say that time is money, but for FIRE proponents, there is nothing more valuable than time. No, not even money. And once you reach FIRE, you will no longer be obligated to exchange your time for money. Instead, you can spend time doing things you really enjoy.

That could be spending more time with family, volunteering, traveling, or whatever you are passionate about. Notice how these activities usually don’t pay, and yet, most of us would consider them priceless.

Drawbacks of the FIRE movement

Criticisms of the FIRE movement generally fall into one of two key categories:

• Some critics say that savers are making extreme trade-offs to achieve their goal of early retirement. While that may be true, proponents of the lifestyle rightly argue that it’s their own choice to make. Certainly, the FIRE lifestyle is not for everyone, but those who find it valuable are making a choice that’s right for them. And many defend their lifestyle by saying that it actually makes them happier to reduce their spending and aim for financial independence.
• Other critics point out that FIRE participants may be taking on too much risk by retiring early, using assumptions about their finances that are unsustainable. And this criticism carries more weight, but of course it depends on the individual’s financial situation and planning.

Some early retirees, for example, may assume that they could generate the kind of returns that investors have seen in stocks over the past few years. Or perhaps some may rely on their ability to pick stocks and have had a few lucky years.

Critics also say that FIRE participants are not factoring in the longer-term costs of major expenses such as health care and housing, which have continued to increase substantially. Plus, leaving the workforce may create an employment gap that many employers will view negatively. For sure, staying out of the workforce will ding the amount of Social Security income you can draw later in life, and that’s when those on a fixed income may most need the money.

These are all relevant concerns, but many in the FIRE community say they have considered these scenarios and have planned accordingly. They may cite their financial models as proof that they have been realistic, pointing to detailed projections of their income and expenses.

In any case, a major decline in stocks, which typically occurs as part of a recession, will stress-test these plans and forecasts, and may challenge the security of many early retirees.

How you can become financially independent

The FIRE movement is just that: a movement. It isn’t a particular decree or set of rules. However, some ways to become financially independent include:

1. Increase your income. Again, there are many ways to go about this. Common strategies include asking for a raise, switching jobs, or getting another job/side hustle.
2. Reduce expenses. For most Americans, their biggest expenses are housing, transportation, and food. Strategies here include downsizing your home or renting out extra bedrooms if you’d rather stay put. You can also buy less expensive cars and eat out less often to help keep within a budget.
3. Save and invest the difference. After increasing income and reducing expenses, FIRE proponents save the difference and often invest it in high-return assets such as stocks or stock funds. They keep their money working for them as long as possible.

Is FIRE right for you?

There is a lot to like about the FIRE movement even if you don’t decide to retire early. For one thing, pensions have largely disappeared in the private sector, lessening the financial incentive to stay with one employer for many years.

This has also resulted in a shift of financial responsibility from employer to employee; in many ways, FIRE is just taking an already existing trend to the next level.

And even if you choose not to retire early, FI just makes sense from a financial security perspective. Thus, everyone should consider pursuing financial independence regardless of their long-term goals. You never know what could happen due to an economic slowdown or a change in strategy at your employer. FI, and thus FIRE, lead to the sort of financial security we should all aspire to have.

Bottom line

The FIRE movement has attracted a lot of attention in recent years – some of it negative. Yet it’s hard to see how people consciously spending their money and time on what they truly love is anything but a net positive, even if it does have some costs along the way.

— Bankrate’s Brian Baker contributed to an update of this story.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.