FIRE - Financial Independence, Retire Early
If you’re tired of the daily grind and looking for a way to get more enjoyment and meaning out of life, then consider FIRE (financial independence, retire early). This trend, which is growing among millennials, is about rethinking the traditional ideas surrounding career and retirement.
FIRE adopters reject a consumer-driven culture, preferring to focus on having life experiences rather than accumulating material possessions. Many were high earners who grew dissatisfied with their stressful work environments.
How they did it
In order to retire in their 30s and 40s, FIRE converts took living beneath their means to the extreme. They downsized, slashed living expenses, eliminated debt, and saved and invested between 50% to 70% of their income to attain a certain net worth, typically $1 million or more.
After retiring, followers maintain their frugal lifestyle, withdrawing no more than 4% of their investments per year. With a $1 million nest egg, that equates to about $40,000 a year.*
There are some variations on the theme. When couples are involved, one may retire while the other continues to work. Others stopped working full time, choosing to freelance or pursue a lifelong passion. Some young retirees picked up a part-time job to acquire employer benefits.
Hold on!
FIRE is not without its critics. Some say it leaves out some important strategies such as the power of compounding returns and forgoing all future contributions to Social Security. Withdrawing funds from your employer-sponsored retirement plan or individual retirement account (IRA) before retirement age may trigger taxes and penalties, so it’s important to consider all of the implications of tapping into various retirement accounts.**
They also say it’s difficult to plan for life’s unknowns including severe market downturns, needing expensive medical care without having health insurance or paying for children’s higher education given the rising costs of college tuition.
Talk to a financial advisor
It is best to talk to a financial advisor about your goals and your options to achieve. Talking with an advisor can provide you with a clear roadmap to the future of your financial situation and strategies to address any potential bumps in the road before they happen so you can stay on track.
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Lessons learned
Even if you don’t want to retire in your 30s or 40s, many financial experts say becoming financially independent is a worthy goal.
While you may not be willing or able to make extreme lifestyle changes or achieve a net worth of $1 million, FIRE does offer valuable life hacks everyone can use:
- Work on paying down and ultimately eliminating your debt.
- Start saving in your 20s to take advantage of the power of compounding returns.
- Aim to save 20% of your gross income.
- Build an emergency fund equal to three to six months’ worth of your current living expenses.
- Prioritize saving with automatic deposits in an individual retirement account (IRA) or 401(k).
- Look for ways to reduce spending: bike or walk to work, dine out less/eat in more, pull the plug on cable.
- Find an activity or hobby that gives you joy so you can lead a more fulfilling life.