Financial independence? Sounds great! Retiring early? Sign me up. The FIRE movement (financial independence, retire early) embraces the concept of saving most of your income in your 20s or 30s so you can retire in your 30s or 40s, but this elusive goal requires a good, stable income and an extreme dedication to saving.
While it’s true the value of compound interest from investing early in your 20s can provide a large nest egg, FIRE’s seductive premise has its share of detractors, too. The movement has been criticized for overly optimistic projections of savings, ignoring child-rearing, promoting unrealistic long-term consumption habits and for simply being unattainable to anyone that isn’t already privileged with wealth. You might want to take “early retirement” with a grain of salt.
What is FIRE, exactly?
When you think about retirement age, you probably think of someone in their late 50s or 60s, and there’s a reason for that—it’s the norm. After all, Social Security benefits start at age 62, and you can withdraw from your Individual Retirement Account without a penalty at age 59.5. FIRE adherents generally want to retire much earlier, in their 40s, 30s, and sometimes even in their 20s. (You’re probably thinking something along the lines of, “This sounds great, but what if I only make 35K a year and I’m drowning in student loan debt?” We’ll get to that—many FIRE enthusiasts wholeheartedly acknowledge the privilege of the FIRE movement.)
While early retirement is a common goal in the FIRE community, philosophically speaking the emphasis is on financial independence. “It’s less about retiring early and more about having the freedom to pursue your dreams and ambitions,” says Deacon Hayes, author of You Can Retire Early! Hayes adds that FIRE is really about “the freedom to choose to work or not.”
What’s known as The Rule of 25 is a more concrete definition of financial independence: When your net worth is 25 times your annual expenses, you’re considered financially independent. (e.g., if your annual expenses are $40,000, you’re financially independent when your total net worth is $1,000,000).
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Who is FIRE for?
If you have a high-paying but soul-sucking job, FIRE probably sounds pretty good right now. Tanja Hester, author of Work Optional: Retire the Non-Penny-Pinching Way warns against this, however:
“Retiring early because you don’t like your job is a bad reason to do it, and is a recipe for being bored or aimless when you get there,” she says. “Achieving FIRE is a big deal, and it takes a lot of focus and determination. It’s not for those who want to get rich quick, or for those who just hate their job.”
It’s not about an escape from your career, but rather a long-planned all-around lifestyle upgrade. “A good reason to retire early is that you have an alternate vision for your life that you’re eager to pursue, but which you can’t pursue while employed full time,” says Hester. “Achieving financial independence allowed us to leave that career chapter of our lives from a place of gratitude and appreciation, and move onto our next chapter that we’re in control of.”
While financial independence does require cutting back on expenses, it also requires a decent income, as many in the FIRE community acknowledge.
“There’s a huge element of privilege to being able to do this,” says Liz Thames, author Meet the Frugalwoods: Achieving Financial Independence Through Simple Living. “We have a real problem with the income gap and people who do not make a living wage. So I want to make sure that we recognize that the ability to put distance between your income and your spending is often a privilege.”
Hester adds that it’s not realistic to think that “everyone can save enough to retire early in a country that doesn’t value a lot of professions or commit to a living wage. So while plenty of folks have become financially independent without earning six figures, earning more certainly helps speed things along,” she says.
The rules behind FIRE
The basic math behind FIRE is simple: spend less than you earn and save the difference in low-fee investments like index funds. Other investments, like rental properties and passive income streams, are a big part of achieving financial independence, too. And so is frugality: The less money you need to live, the less money you need to save in order to fund the rest of your years.
So while the rules are simple, getting there is, of course, another story. Reaching FIRE involves the same concepts of reaching any financial goal, and it ultimately comes down to behavior and privilege, rather than an exercise in denial.
As an example, Thames lives a frugal lifestyle that many would view as sacrificial, but her frugality has nothing to do with depriving herself. “I don’t miss out on anything in my life being frugal,” she said. “I spend money on things that are important to me. There’s just not a lot that I need to buy to live a very a fulfilling life.”
The first steps to reach FIRE
If any of this sounds appealing and realistic to you, the experts all pretty much agree: The first step is figuring out your “why.”
“If you want to retire early, you need to have a strong ‘why,’” says Hayes. “Do you want to quit your job to start that business you always talked about with your friends? Do you want to have more than two weeks per year of vacation time? Do you want to spend more time with your loved ones? Whatever your why, let that be the motivating factor to create a plan and stick to it during the tough times. Once you have that why, you want to determine your path.”
The second step? Tracking your expenses. Check out your bank statements, credit card statements, online budgets, and decide which purchases are meaningful or necessary.
“Most of us are shocked to realize how much we actually spend,” Hester said. “After you’ve started tracking, figure out how much your lifestyle costs per year, look for what you might be able to cut out to shrink that number, and then work on increasing your savings rate. Those are the hardest parts of the journey, and the rest is just a matter of waiting for the money to add up and compound.”
Once you’ve conquered your spending, it’s time to look at your net income and compare. Thames said to subtract your fixed mandatory expenses from your income and then adjust your discretionary expenses as necessary.
From there, FIRE comes down to math and mechanics. In an episode of his podcast, Mendonsa suggests ten “pillars” of financial independence. Those pillars are:
Lower your housing costsDrive used cars
Cut the cable cord
Lower your tax liability by maxing out your tax-deferred vehicles such as your 401(k), 457, 403(b), IRA, HSA, etc.
Switch to cheaper cell phone service
Use credit card rewards and smart financial habits to help fund your travel
Reduce your grocery bills
Increase your income and consider adding multiple income streams
Invest via low-cost index funds
Use the 4% rule: if you can safely withdraw 4% from your nest egg each year to cover your expenses and still have enough money down the road, you’ve reached financial independence.
Like any other financial goal, the math is easy but it requires resourcefulness, diligence, and patience. Whether FIRE is realistic, however, is up to you.
This story was first published in 2017 and was updated on October 19, 2020 with more current information.
