April 15, 2022
Typically, a financial plan is built around working until the age of 65 and then retiring. Though for many individuals, retiring sooner or at least having the option to retire earlier sounds much more enticing. The F.I.R.E opens the door to access financial independence sooner.
What is F.I.R.E
F.I.R.E stands for financial independence, retire early. It’s a lifestyle movement for individuals who want to gain financial independence and retire earlier than the average person.
This is achieved through aggressively saving and investing enough money at a younger age so you can live on distributions from your accumulated portfolio. Makes work at this point – optional.
F.I.R.E was birthed in the best-selling 1992 book, Your Money or Your Life by Vicki Robin and Joe Dominguez. The book helps readers transform their relationship with money by helping them realize:
Enough is not more income to be consistently spent on upgrades in the quality of living, rather, it’s the freedom of choice.
Money is a force multiplier. It allows you to be more of who you are unconstrained by external rules.
How F.I.R.E works
At a basic level, F.I.R.E works by saving a large percentage of your income and heavily investing. If done correctly, you can live off your saved nest egg in retirement. There are a few variations of F.I.R.E:
Fat F.I.R.E
Retire without altering your current standard of living. This requires the most aggressive saving and investment strategies.
Lean F.I.R.E
Live a more minimalistic lifestyle to cut expenses to their bare bones. Typically, these individuals aim to survive on around $25,000 annually.
Barista F.I.R.E
This variation falls in-between fat & lean. Baristas have enough money to retire early while relying on some additional income through part-time income (or semi-retirement in your current role, resulting in fewer hours and less pay).
A Different Perspective on Money
F.I.R.E teaches the lesson that with money, less can be more. It challenges participants to focus on constant internal peace over endless external consumption. Happiness cannot be purchased nor is predicated on perpetual upgrades in the quality of living.
By focusing on aligning your spending with your values you may find there’s excess spending on things that don’t truly bring you joy. It’s just something you do because you feel that’s what you’re supposed to be doing (ex: country club memberships, luxury cars, expensive vacations, etc.)
Wealth is what you don’t see.
What you spend matters more than how much income you make.
If you can spend multiples less than what you earn – you’ve won.
The less you feel you need to increase your standard of living to be happy, the sooner you access freedom of choice.
How to Get Started with F.I.R.E
F.I.R.E solves money problems so you are only left with problems money can’t solve. Money will not make you healthy, improve your relationships, or make you a better friend.
Instead, money will allow you choice to spend your time doing things you want to be doing.
What sounds great in theory, isn’t always easy in practice. F.I.R.E is no different. Some factors to consider are as follows:
- Extensive planning – How much can you withdraw from your portfolio per year? (HINT: It’s not 4%) What’s your plan for health insurance? If the market has a bad few years, how does this impact your plan? Have a clear roadmap to financial freedom.
- Longevity – Sustaining the accumulated savings through time is a big risk. We don’t know how long we will live nor what unexpected expenses will arise along the way.
- Increase revenue – To achieve financial independence, you may need to increase your income. What can you do to make yourself more valuable at work (to earn more)?
- How could you provide more value to your firm in your role (sales, revenue, efficiency, profitability, & service)?
- How can you position and negotiate your value relative to wages earned? Less replaceable = more salary (& vice versa).
- What skills do your role require that you’re weak in? Learn these skills.
- Discipline – Spend less than you make. Having the discipline to adhere to your budget is an absolute must.
- Savings Rate – what number is right for you?
- Withdrawing – If you retire before 59.5, you pay a 10% penalty for early withdrawal, money taken out of qualified accounts are pre-tax (ensure you factor this into your equation of retiring early). A Roth conversion ladder or 72(t) distributions are an option but pose new risks.
Risks of F.I.R.E
Like most things in life, there are pros and cons to consider before diving in headfirst.
- Solving for health insurance pre-Medicare
- What if you become disabled/die? How does this impact your family?
- Accessing retirement accounts before age 59.5
- Running out of money prematurely
- You didn’t save enough for life’s unexpected circumstances like having another child or illness
- You’ll be disappointed that you aren’t much happier
- Lost employer match contributions.
Why F.I.R.E may be the spark you need
On the surface, F.I.R.E appears to be an extreme financial lifestyle that feels impossible to achieve. Drastically cutting back on expenses and saving/investing much of your income is no small feat. However, F.I.R.E offers a unique perspective on money that can help you define enough and work backwards. The movement asks you to evaluate the presence money has in your life.
Lessons taught by F.I.R.E:
- Value your time
- What you want is not what you need
- Contentment > consumption
- Relationships, family, health > 70+/hr work weeks
Perceptions are reality. The person who believes he can, and the person who believes he can’t, are both right.
How could you access freedom sooner?