The thought of potentially having to work for the rest of your life is a pretty daunting one, and that is why people try so hard to build a nice little nest egg for retirement. While most people expect to retire around the age of 60-65, for others, this seems too far away. They’d prefer to retire as soon as possible so that they can enrich their lives with other experiences while they’re still young and able.
If this sounds anything like you, it may be worth it to look into the FIRE method. Standing for Financial Independence, Retire Early (FIRE), it was first introduced through a 1992 book called “Your Money or Your Life” by Vicki Robin and Joe Dominguez.
How Does the FIRE Method Work?
FIRE is a method that helps you plan your finances in a way that will help you retire in your 40s (or even 30s) while still having amassed a sizeable retirement fund. As you may expect, the methods expected of those adopting the FIRE method may seem a bit extreme; such as saving up to 75% of your income and living frugally, among others.
However, for those who take FIRE on, it’s more about looking forward to what is to come. FIRE appeals to those who want to quit working their boring 9 to 5 jobs and gain financial independence. Surprisingly, the global pandemic has also influenced people’s mindsets about work and retirement. More people are working towards early retirement now than ever. 1 in 4 18-34-year old stated it as their new financial goal, according to research by Moneyfarm.
Even if you don’t think you can take on the challenge entirely, there are several FIRE principles that you can take away that may help you in your day-to-day finances. Maybe you can retire in your 50s instead – a nice halfway point if you will!
Different Types of FIRE
Not everyone can follow the principles of FIRE to a T and several variations of the method have evolved over the years. According to Forbes Advisor, these are as follows:
Those who do not wish to give up their current standard of living but also aim to save substantially more than the average worker falls into this category. However, this would only be possible if they earned a very high salary and aggressively invest their money.
Those who fall into this category are very strict with their expenses and aim to save every penny possible. They live a minimalistic and restrictive lifestyle in the hopes of retiring early. A typical Lean FIRE adoptee earns $25,000 or less per year.
Those who are tired of the traditional 9 to 5 grind, but aren’t able to retire completely, may adopt this method. They typically live a “less-than-minimalist” lifestyle and take on part-time work, which along with savings, helps them keep up with expenses. The former offers them health coverage while the latter keeps them from taking money out of their retirement funds.
Principles of the Fire Movement
The main goals of the FIRE method are as follows:
- Save as much as your income as possible (up to 75%)
- Be extremely frugal
- Pay off all your debt
- Grow your income through investment
- Own a home outright without mortgage obligations
- Build a net worth of 25 times your estimated annual spending
The last of those is FIRE’s “magical formula”. According to it, you should calculate your estimated annual spending and then aim to build up a net worth of at least 25 times it. For instance, if you expect to spend $40,000 a year, your retirement pot will need to be $1 million rich before you can retire. Once you are ready to retire, you are expected to withdraw no more than 4% from the pot every year.
Beyond this, you are expected to have an emergency fund of 3-6 months and own a home outright so you can have a higher disposable income once you retire.
The Steps to FIRE
Save as Much as Possible
While it is ideal to put aside up to 75% of your income, most people don’t earn enough to do that. The typical FIRE adoptee saves around 25-50% of their income every month, but how much you can save will depend on your financial circumstances.
Obviously, the more you can put away for your retirement, the quicker you will be able to get there. Every penny counts so no percentage is too little to start. You can try out different savings methods to see what works for you.
Saving as much as possible means having to give up on luxuries and unnecessary spending. Most FIRE savers aren’t into such purchases anyway as the method tends to attract people who are tired of consumerism in general.
You should carefully analyze each and every expense before jumping in. You may also have to go through your expenses and figure out areas in which you could cut out certain expenses. The more money you can save now, the more you’ll have for your work-free years later on.
Pay Off Debts
There is no way you can retire early if you still have debt in your name. Interest rates on loans and credit cards are going to eat away at your retirement pot, which means you could run out of money faster than you expected.
It can also extend the period of time that you need to work now, as you will be spending more money on these interest rates the longer you have open debts. That’s why you should make paying off debts one of your major priorities in preparing to retire early.
Invest to Grow Money
Another important aspect of the FIRE method is to invest the money you save so that it can grow. It doesn’t make much sense to put away your hard-earned money somewhere where it will lay stagnant because its value will steadily decline over the years due to inflation and other influences. To put it simply, your $10 now has more purchasing power than it will 10-20 years later. So why not put those $10 to use now so you can have more later?
To make sure that you don’t run out of money during your retirement period, you should have set up methods of passive income that will help your money keep growing. Although passive income is money that you can earn without working, it’s not actually free. It requires a lot of smart investment where you can earn compound interest. This may be through places like high-yield savings accounts, retirement accounts, mutual funds, stocks, or other.
Boost Your Income
While saving as much as your income as you can bear to do, you should also simultaneously seek out ways to boost your income. It’s simple logic, really. The more money you earn, the more you can put aside in your retirement fund.
There are a number of different ways to boost your income, starting by asking for a pay hike at work or looking for jobs that pay more. You could also start a side hustle in your time off or take up part-time or freelance work.
Working more doesn’t sound too fun, but it’s important to keep your goal in mind. The objective of FIRE is to help you retire early and it wouldn’t be plausible to do so without putting in some extra effort now. The harder you work now, the earlier you can retire and enjoy a stress-free life!