Are you in your 20s, 30s, or 50s? Do you have a retirement plan or have you ever thought about retiring? Are you putting off thinking about it? In this article, I’m going to take a deep dive into The FIRE (Financial Independence Retire Early) retirement method. By presenting you with facts and adding some reality and honesty, I hope to motivate, innovate, and elevate you towards living your best life!
The 4% rule.
William Bengen came up with this rule in 1994, based on a 30-year retirement. It states that if you use only 4% of your retirement funds in the first year and adjust your spending to only use that 4% (along with your social security) every year, your savings should last for 30 years. Bengen considered inflation and stock market changes when developing this rule. Retirement investors and financial planners have used this as a rule of thumb. This has been the aim for millions who are saving to retire between the ages of 62 to 67.
Retire Early with the FIRE Method
In 1992, Vicki Robin and Joe Dominguez published the popular book Your Money or Your Life, which introduced a plan for retiring early. The plan involves living frugally, saving most of your income, and investing in your retirement savings. The book was a success, and thus the FIRE (Financial Independence Retire Early) movement was born.
The FIRE movement promotes a simple lifestyle and discourages over-consumption. The basic idea is to live off 30-40% of your income and save and invest the rest. By following this approach, you can retire earlier and have more time to pursue your passions. Once retired, you will live off 4% of your retirement savings annually, which should last until the end of your life.
Although the approach seems straightforward, the FIRE method is broken down into three levels:
- Fat FIRE: This group is willing to invest more than the average person and needs to live off more than 30% of their income. They are often in a high-income bracket or have the potential to land a higher-paying job. They are experienced in investing and are willing to take some risks to achieve their goals. They are also willing to take longer to reach their retirement goals if necessary.
- Lean FIRE: This group consists of minimalists and extreme savers. They commit 50-75% of their income to saving and investing to retire as early as possible. They only buy and use what they need and want to retire as early as possible, no matter what.
- Barista FIRE: This group works, saves, and invests. As soon as they reach their retirement goal, they are done with the 9-5 grind. Some may work part-time for healthcare benefits or freelance, but they will never touch their savings, which grows into a significant nest egg.
There is no fixed amount you need to save or invest. Once you have figured out your FIRE number, you will decide the percentage you are saving and investing. This plan is entirely tailored to your needs and wants.
No matter which category you choose, you will need to live below your means. While it may be challenging to adjust at first, living below your means is essential to achieving your FIRE goals.
How Much Will Be Enough
First, let’s determine your FIRE number, or the savings amount you need to accumulate before you can live without a paycheck. For example, let’s assume you have $40,000 in yearly living expenses. Using the 4% rule (multiply your yearly expenses by 25), you’ll need to save 1 million dollars before you can retire early. If you can live off of 3-3.5%, you only need to multiply by 33 to retire even earlier.
The Positive Impact of the FIRE Method
The FIRE method had a couple of positive impacts when it first came out. It made people take a good, long look at their retirement plans, and it opened conversations with a younger generation about saving and investing. This was particularly significant for those who grew up in an era that saved money in a bank and scoffed at investing.
Additionally, it emphasized financial independence – the ability to cover your living expenses without being financially dependent on others or having to work for the rest of your life. While most people dream of financial independence, very few achieve it.
Things Go Sideways
The 4% rule is based on a 30-year retirement plan, where you draw 4% of your retirement savings each year. However, with people living longer, there’s a risk that you may outlive your retirement savings, like the Baby Boomers who saved within their means but are still struggling to make ends meet.
If you retire at 40 and only have 4% saved, will it be enough to last you 45-50 years? A lot can happen in that time, such as economic downturns, inflation, and fluctuations in the stock market. It’s impossible to predict, but it’s important to make your best guess and set yourself up for success with proper education and motivation.
Unfortunately, many people will never be able to save for retirement and may end up living below the poverty level or worse. Some are not educated enough to save, while others can’t save due to low income. Some just don’t prioritize saving for retirement. Many people assume that an employee-funded 401k will be enough, but that’s not always the case.
It doesn’t take much to throw off your finances, like an unexpected illness or car repair. This is why it’s important to plan for the unexpected when planning for retirement. Medicare doesn’t cover everything, and medication costs will only increase in the coming decades.
The FIRE method focuses on extreme saving and encourages living as cheaply as possible. However, this isn’t realistic for everyone. Living on an entry-level income makes it difficult to save 50% of take-home pay, which is required in the FIRE method. If you have a second job or a side hustle, it could supplement your income and get you closer to early retirement. But be aware that working more hours contradicts the FIRE motto of working less and having your money work for you.
The third focus of FIRE is investing and creating a passive income that can supplement your retirement. It’s important to invest and earn capital to retire earlier, as savings alone may not be enough. However, investing requires education and know-how, as well as an investment planner for most people.
Your success with FIRE may depend on the volatility of the stock market and interest rates incurred on investments and savings. It’s important to be aware of these factors, but don’t let them discourage you.
Overall, the core focus of FIRE is to lower consumption of goods and resources to save and invest. This may mean giving up some luxuries now to have them later.
Who’s Stoking This FIRE
For some, FIRE is the race to no work at forty. For others, it’s a way to achieve financial stability in older age. It’s not one-size-fits-all; it’s what you need it to be. It’s your plan for retirement. When viewed in this light, FIRE can be for anyone willing to work at it.
The core principle is something we all seek: financial independence sooner rather than later. It’s the ability to live like no one else because you lived like no one else!
FIRE isn’t the retirement plan for low-income or younger breadwinners, but it can be the beginning of savings to invest later. It may take another ten years to get started, giving them time to learn and start using the FIRE principles to get to the next level of earnings they’ll need to achieve FIRE.
If you’re in your 40s or 50s and need to catch up to retire as comfortably as possible, FIRE is precisely what you need to be doing to get your retirement in order. You have the income, hopefully, have a home, and your needs are all met. It may require moving to a smaller or more economical home, but you can tighten your belt and lower your consumption to save a larger portion of your income to increase your investments. This process is perfect for you.
The Takeaway
FIRE (Financial Independence Retire Early) is a no-brainer for anyone making over $100,000, living below their means, having the discipline to save, and knowledge of investments. The FIRE method is designed with you in mind.
Even if you can’t afford to do FIRE now or in the future, you can still use your money to improve your life. Everyone can benefit from ditching unnecessary expenses. Learning to manage your money more efficiently and increasing your earnings will go a long way in starting your retirement savings.
If you can spare five dollars a week, you could be in a good position if you start in your 20s. You can find a way to invest even small amounts between online platforms where you manage your investment yourself and lending institutions with investment planners. Throwing an extra percentage or two into your 401k can only help you later. You won’t miss it now, but you’ll be glad to have it later. While this may not help you retire early, it can get you closer to building that nest egg you will need!
Not being able to retire through the FIRE method doesn’t have to hinder saving and investing for retirement. You will just have to do it on a smaller scale!
If you’re looking for more Thoughts of a Random Citizen, head to the podcast section. You might find some fascinating podcasts to listen to.
