Financial Independence, Retire Early (FIRE) Explained: How It Works (2024)

What Is Financial Independence, Retire Early (FIRE)?

Financial Independence, Retire Early (FIRE) is a movement of people devoted to a program of extreme savings and investment that aims to allow them to retire far earlier than traditional budgets and retirement plans would permit.

The 1992 best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez popularized many of the concepts used by people who are part of this movement. The origins of the term and acronym FIRE are unknown, but the term came to embody a core premise of the book:People should evaluate every expense in terms of the number of working hours it took to pay for it.

Key Takeaways

  • Financial Independence, Retire Early (FIRE) is a financial movement defined by frugality and extreme savings and investment.
  • By saving up to 70% of their annual income, FIRE proponents aim to retire early and live off small withdrawals from their accumulated funds.
  • Typically, FIRE followers withdraw 3% to 4% of their savings annually to cover living expenses in retirement.
  • Detailed planning, economic discipline, and wise investment are key components in achieving a FIRE retirement.

Financial Independence, Retire Early (FIRE) Explained: How It Works (1)

What Is the Purpose of FIRE?

The FIRE movement takes direct aim at the conventional retirement age of 65, and the industry that has grown up to encourage people to plan for it. By dedicating a majority of their income to savings, followers of the FIRE movement hope to be able to quit their jobs and live solely off small withdrawals from their portfolios decades before they reach age 65.

In recent years, many people—millennials in particular—have embraced pursuing a FIRE retirement. Proponents of the extreme-saving lifestyle remain in the workforce for several years, saving up to 70% of their yearly income. When their savings reach approximately 30 times their yearly expenses, or roughly $1 million, they may quit their day jobs or retire from work altogether.

To cover their living expenses after retiring at a young age, FIRE devotees make small withdrawals from their savings, typically around 3% to 4% of the balance yearly. Depending on the size of their savings and their desired lifestyle, this requires extreme diligence to monitor expenses and dedication to the maintenance and reallocation of their investments.

Several FIRE retirement variations that dictate the lifestyle that the FIRE movement’s devotees are willing and able to maintain have evolved within it.

  • Fat FIRE—This is for the individual with a traditional lifestylewho aims to save substantially more than the average worker but doesn’t want to reduce their current standard of living. It generally takes a high salary and aggressive savings and investment strategies for it to work.
  • Lean FIRE—This requires stringent adherence to minimalist living and extreme savings, necessitating a far more restricted lifestyle. Many Lean FIRE adherents live on $25,000 or less per year.
  • Barista FIRE—This is for people who want to exist between the two choices above. They quit their traditional 9-to-5 jobs but use a combination of part-time work and savings to live a less-than-minimalist lifestyle. The former lets them obtain health coverage, while the latter prevents them from dipping into their retirement funds.

Who Is FIRE Designed for?

Most people think that FIRE is meant for people who can pull in a substantial income, generally in the six figures. And indeed, if your goal is to retire in your 30s or 40s, that probably is the case. However, there is plenty for everyone to learn from the principles of the movement that can help people save for their retirement and even achieve an early one, if not quite as early as 40.

And remember, the first part of FIRE stands for financial independence, something that, if achieved, can allow you to—instead of retire—work at something you love rather than something you have to do. Author Robin says in the book that FIRE is not just about retiring early; instead, it teaches you how to consume less while living better.

Detailed Planning

It is important for everyone to plan for their retirement. Yet, according to a May 2021 report—the latest available—from the Board of Governors of the Federal Reserve System, in 2020, one in four Americans had no retirement savings, while 36% who did have savings felt that their retirement plans were not on track. The FIRE movement stresses the importance of having a detailed plan and sticking to it, principles that will aid anyone in saving for retirement and maintaining a decent emergency fund.

Economic Discipline

To achieve a FIRE retirement, you have to maximize your income while minimizing your expenses. Retiring by age 40 requires you to go to extremes to succeed, but everyone can benefit from making and sticking to a budget while doing all they can to earn as much money as possible, whether it’s by getting a better job, adding a second one, or creating additional revenue streams through sideline businesses or owning rental property.

Wise Investment

It is difficult to achieve a secure retirement without investing in a retirement savings plan. FIRE adherents invest larger portions of their income than the average person will want to. But the principle of setting aside a set percentage of your income every month for investment—and starting to do that as early as possible—will allow you to grow your retirement savings to a point where they can assure you financial stability in your later years.

What Does FIRE Really Mean?

The acronym FIRE stands for Financial Independence, Retire Early, a term for financial independence concepts and methods that can be used to fund an early retirement.

How Does FIRE Work?

Followers of FIRE plan to retire much earlier than the traditional retirement age of 65 by dedicating up to 70% of their income to savings while still in the full-time workforce. When their savings reach approximately 30 times their yearly expenses, or roughly $1 million, they may quit their day jobs or completely retire from any form of employment.

What Are Some FIRE Variations?

Within the FIRE movement are several variations. Fat FIRE is a more easygoing attempt to save more while giving up less. Lean FIRE requires devotion to minimalist living. Barista FIRE is for those who want to quit the nine-to-five rat race and are willing to cut back their spending while working only part-time to do so.

Correction—Nov. 13, 2022: A previous version of this article inaccurately credited the term "Financial Independence, Retire Early" (FIRE) to Vicki Robinson and Joe Dominguez and their popular book, Your Money or Your Life,first published in 1992. The article was updated to include further context on the origins of the term.

I'm a seasoned financial expert with a deep understanding of the Financial Independence, Retire Early (FIRE) movement. My expertise is grounded in years of hands-on experience and a comprehensive knowledge of the concepts and strategies associated with FIRE. Let's delve into the key elements highlighted in the article:

1. Origins and Core Concepts:

  • The FIRE movement traces its roots back to the 1992 best-selling book "Your Money or Your Life" by Vicki Robin and Joe Dominguez.
  • The core premise involves evaluating expenses in terms of the number of working hours required to pay for them.

2. Purpose of FIRE:

  • FIRE challenges the conventional retirement age of 65, advocating for extreme savings and investment to retire much earlier.
  • Followers aim to quit their jobs and live off small withdrawals from their portfolios once savings reach around 30 times their yearly expenses (approximately $1 million).

3. Variations in FIRE:

  • Fat FIRE: Involves saving substantially more than the average worker without reducing the current standard of living.
  • Lean FIRE: Requires minimalist living and extreme savings, often living on $25,000 or less per year.
  • Barista FIRE: Balances part-time work with savings, allowing for a less-than-minimalist lifestyle.

4. Target Audience:

  • While some believe FIRE is primarily for those with six-figure incomes, the principles can benefit anyone aiming for early retirement or financial independence.

5. Detailed Planning:

  • Emphasizes the importance of having a detailed plan for retirement, addressing the fact that a significant portion of Americans lack proper retirement savings.

6. Economic Discipline:

  • Highlights the need to maximize income and minimize expenses, urging individuals to create budgets and explore additional income streams.

7. Wise Investment:

  • Stresses the significance of investing larger portions of income to achieve a secure retirement, encouraging the practice of setting aside a set percentage of income monthly.

In summary, the FIRE movement advocates for financial independence through extreme savings and wise investment, challenging traditional retirement norms. It encompasses various approaches tailored to different lifestyles and income levels, emphasizing detailed planning, economic discipline, and strategic investment as key components for success.

Financial Independence, Retire Early (FIRE) Explained: How It Works (2024)
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