You’ve likely heard of it, but may be asking yourself what FIRE actually is, and if it makes sense within your financial future. As the Millennial and Gen Z generations continue to shift their perspectives on work and happiness, the Financial Independence, Retire Early (FIRE) movement has… well… been spreading like wildfire. Here are three things you should know before you consider a FIRE approach to your retirement.
FIRE means saving aggressively.
The lure of retiring when you’re young and spending the greater part of your life exploring the world or pursuing your hobbies may be tempting. But choosing to follow FIRE means saving more than the standard 10–15% typically recommended by financial planners. Many FIRE participants save 50-75% of their income. This means making plenty of sacrifices or finding ways to supplement your income such as taking a second job to be able to meet your savings goals.
There are many approaches to FIRE.
The approach you take to FIRE is not the same for everybody. For example, if you’re frugal by nature, you may consider LeanFIRE. This refers to the ability to retire early with less retirement income. LeanFIRE translates to limited living expenses which will require discipline and caution during retirement.
If you’d rather work hard to have a lavish retirement, FatFIRE may be the way to go. Fat FIRE allows you to retire early once you’ve reached significant accumulated wealth and passive income with no concerns about how much you’ll spend during retirement.
Somewhere in the middle? BaristaFIRE may be the answer for you. This lifestyle may require working part-time for extra income, freelancing, or pursuing career dreams that come with an unpredictable income. Maybe you worked a 9-5 for a decade, but finally had enough money saved to move to the coast of Spain and write your first novel. Or you decided to retire from your job as an accountant and focus on your budding charcuterie business. Alternatively, one partner within a household may continue to work to help make ends meet.
You need to save, but you also need to invest.
According to NerdWallet, as a general guideline, you should save up approximately 25-30 times your annual expenses, which you would then invest to provide you with sufficient income in retirement.
Saving that amount means you can likely withdraw 4% of the value of the amount you have saved in your investment portfolio without running out of money or having to rejoin the workforce.
Markets can be unpredictable and fluctuations could affect your savings and when you’re actually able to retire. Investing in the latest risky meme stock may not be the best approach when planning for FIRE. But you also need to make sure you’re earning sufficient returns to grow your savings. People saving for FIRE may consider investing in mutual funds or ETFs that meet their risk profile.
Not sure where to begin? One popular blog for FIRE proponents, including lifestyle tips, is Mr. Money Mustache.
Love your career? You may also decide to focus on “Financial Independence” but not “Retire Early.” The principles of making good financial decisions included within the FIRE framework can benefit anybody. Saving and investing strategically can help you reach a variety of goals.
Next Steps: Consider taking our Financial Personality Assessment. The assessment reveals whether somebody is a Purpose investor, or if they prioritize other areas such as Security, Touch or Viewpoints. Learn ideas for starting to invest in the areas you believe in most once you complete the assessment.