This article is not an endorsement of any particular product, service or organization; nor is it intended to provide financial, tax, or legal advice. It is intended to promote awareness and is for educational purposes only.
Heard of the FIRE movement?
If not, imagine this scenario: After looking at your finances, you decide to retire early and you’re only 35 years old. As in, if you never worked another day in your life, your finances are set.
Intrigued? Read on to find out how FIRE works, who’s leading the movement, and an objective view of the pros and cons.
What Exactly is FIRE?
For those who don’t know, FIRE is an acronym for Financial Independence, Retire Early. When most people think of retirement, they believe it’s probably for people in their late 50s or 60s.
That’s typically when you can start taking your Social Security benefits and withdraw money from your retirement account (like your IRA) without penalties.
Instead, people who pursue FIRE can retire much earlier than that.
We’re talking about people in their 40s, 30s, and even their late 20s. People like Paula Pant, who became a millionaire at 31 years old by investing in rental properties. Or Grant Sabatier who amassed a net worth of $1.25 million in five years and is now pursuing his own entrepreneurial projects.
The FIRE movement isn’t literally about retirement—aka not working ever again. Instead, it’s about using your finances to create freedom and flexibility.
Most people who pursue FIRE want to free themselves from the shackles of their 9 to 5 jobs so they can pursue passions outside of work. Others think of FIRE as leverage.
If they want to take a sabbatical (to raise young children, for example) and return to work later, they don’t have to worry about the financial implications of that decision.
Some may simply want to have peace of mind knowing that they can take care of their expenses even if they choose not to continue working at their current job.
According to a 2018 TD Ameritrade survey of more than 1,500 adults, three quarters of respondents claim that achieving financial independence is the goal.
Over 4 out of 10 people mention plans to continue working after they “retire”—whether it’s because they don’t want to live a totally frugal lifestyle or they want to do work they love.
The idea is to make your money work for you so that you can pursue your version of the best life.
If that means working at your day job, so be it.
How Does It Work?
The basic premise is that you earn 25 times your annual expenses so that you never have to work again if you don’t want to.
You invest what you save and in theory, the money you withdraw from your investments should last you for the foreseeable future. The safe withdrawal rate means that you only withdraw a maximum of 4% of the amount in your investments so that you don’t run out of money in your accounts.
Again, you want your net worth to be 25 times what you spend each year.
The idea behind reaching FIRE is simple:
- Find out your numbers – Tally up your annual expenses and multiply that by 25 to find your “FIRE number.” For example, if you have $40k worth of annual expenses, many FIRE experts will suggest you need $1 million to “retire.”
- Optimize your spending – Find ways to cut expenses so that you can put that money toward retirement savings. Most FIRE devotees recommend saving at least half of your income.
- Remove yourself from consumer culture – You’ll spend less, and ultimately it’ll help you realize that owning more material goods won’t increase your levels of happiness. FIRE followers ruthlessly cut their expenses and find hobbies that are low-cost or free. This includes finding free community activities, hosting potlucks with friends, and spending time outdoors.
- Invest as much as possible – There are a lot of ways to do this, but many FIRE devotees recommend maxing out your 401k, investing in low cost ETFs, and finding other forms of income like rental properties. Of course there are varying levels of risks — investing in real estate is riskier than investing in a fixed income ETF.
Ultimately, it’s also about living a frugal lifestyle and figuring out how to increase your savings gap—the difference between your income and your expenditures.
The higher that gap is, the more you can save toward early retirement.
Will It Make It More Difficult If I’m In a Relationship?
The short answer: it depends.
You may need to have a bunch of tough conversations if your partner isn’t convinced FIRE is for them.
However, if you and your partner already share very similar money philosophies and values, then working toward FIRE might make sense. Ultimately, you should try to communicate openly and honestly with your partner.
No matter what financial future you both want, be willing to compromise and listen to each other.
What Are the Pros and Cons of FIRE?
FIRE is appealing to so many folks because it offers the freedom to work on passion projects without worrying about how to pay the bills.
For example, opening an Etsy shop might net $1,000 per month, which barely covers a mortgage payment. During your FIRE years, even if the shop continues to make $1,000, you don’t need to worry about whether you can pay your bills.
Chad Carson is a real estate investor who considers himself FIRE.
He hasn’t stopped working, sharing duties with his business partner in their real estate investing business. However, he’s taken what he calls mini-retirements, where he takes extended periods of time off work. Carson has taken extended trips to South America with his family, and most recently came back from a yearlong stint in Ecuador, where his wife, children, and himself embraced the local community.
“My children made friends when we put them in school there,” he says. “Having our children speak Spanish was a priority for me and my wife, and we’re so grateful for the experience.”
And that’s not all. FIRE could potentially increase your levels of happiness.
According to a 2017 CareerBuilder survey, 78% of workers surveyed live paycheck to paycheck, including those who earn more than six figures per year. What if we can remove some of those worries? FIRE might be the ticket for relieving some of the major stresses in our lives.
However, there are a few downsides to FIRE.
For one, there could be a risk you could run out of money.
Even if you’re able to live a frugal lifestyle, you could be at the mercy of your investments—such as during a bear market—or your expenses could increase due to unforeseen circumstances.
In a bear market, you could see your investments (and therefore net worth) go down 20 percent.
If that’s the case, you may not have as much money to spend. Or if you keep taking out the same amount, you’ll soon find that your assets can’t keep up with your expenditures.
Let’s say for some reason you need to go back to work. What if you’ve been out of the industry for many years? Will you still have marketable skills to land the job?
All of these scenarios are hard to predict. Even if you’re prepared, you just never know.
Finally, some critics argue that FIRE is only for those who have a high salary.
If you want to be able to save at least half your income, you need to be earning enough to pay your bills and set money aside for retirement.
Although there aren’t hard numbers proving the critics just yet, demographics from those surveyed in the TD Ameritrade survey mentioned earlier in the article found that 6% of those who were FI made under $50,000, 33% made under $99,999, 47% made between $100,000 and $200,000 and 14% made over $200.000.
This indicates that many who make at least $50,000 are more likely to reach FI, although there needs to be more studies to completely prove this point.
Where Can I Find Out More About FIRE?
As you can see, FIRE is a simple concept but it’s much more complex than meets the eye.
If you’re interested in learning more, here are some big players in the space that will offer both a realistic and objective perspective of the movement:
- Mr. Money Mustache – Considered one of the early pioneers of the FIRE movement, Pete Adeney advocates a frugal lifestyle and optimizing your finances. There is an active community in his forums and many offer advice and support for those pursuing FIRE.
- Paula Pant – The founder of Afford Anything, Pant’s philosophy is that you can afford anything but not everything. She offers advice such as using the anti-budget, increasing your savings gap and more.
- Tanja Hester – The blogger behind Our Next Life, Hester advocates using FIRE to become work optional and life a purpose driven life. She offers both the upsides and downsides of conventional FIRE advice, such as what you can do to plan for healthcare before Medicare kicks in.
Every situation is different, so take any success stories and financial advice with a grain of salt.
If you do decide to pursue FIRE, seek support from others on the journey.
At the end of the day, only you know what’s best for you.
Sarah Li Cain is an experienced content marketing writer specializing in FinTech, credit, loans, personal finance, alternative investments, international business, travel and k12 education. Her work has appeared in Fortune 500 companies, publications and startups such as Lending Tree, Vistaprint, WordPress.org, Pearson Teachability. She’s also the host of Beyond The Dollar, whose mission is to have deep and honest conversations about how money affects our well-being.