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

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 with the goal of retiring 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 in 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.

What Is the Purpose of FIRE?

The FIRE movement prioritizes greater financial independence through a program of extreme frugality and aggressive investment. FIRE devotees may hope to retire earlier than the conventional retirement age range of 65 to 70, or they may hope to gain greater financial independence. Those who want to retire early may plan to live solely off small withdrawals from their portfolios or they may incorporate part-time work into their strategy.

Proponents of the extreme-saving lifestyle remain in the workforce for several years, saving up to 75% of their yearly income. When their savings reach their FIRE number, typically 25 times their yearly expenses, 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.

FIRE Variations

There are several FIRE retirement variations:

• Fat FIRE: This is for the individual with a 9-to-5 job who 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 individual is devoted 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 individual wants to exist between the two choices above. They quit their traditional 9-to-5 job and use a combination of part-time work and savings to live a more-than-minimalist lifestyle. They might purchase health coverage while keeping their retirement funds intact.

How Many People Achieve FIRE?

In recent years, the FIRE movement has started getting more coverage in the media. However, only a small percentage of people achieve the early retirement part of the equation.

According to Motley Fool data gathered between 2016 and 2022, here is the percentage of Americans who are retired in four age brackets:

• 40 to 44: 1%
• 45 to 49: 2%
• 50 to 54: 6%
• 55 to 59: 11%

Furthermore, Gallup research shows that the percentage of retired adults between the ages of 55 and 74 is declining. The average reported retirement age was 61 in 2022—earlier than the plan for future retirees but still far later than most FIRE goals.

Considerations for FIRE Planning

Whether you want to retire early or gain more financial independence while continuing to work, the FIRE lifestyle requires planning. Here are some things to keep in mind before making the leap.

Build an Emergency Fund

Before taking further steps, save three to six month's worth of expenses. That's how much many experts advise keeping in an emergency fund. Your savings should be able to tide you over during employment, unexpected expenses, or other unforeseen issues.

Invest Wisely

You won't reach FIRE just by putting your money in the bank, even if you choose a high-yield savings account. However, that doesn't mean that you should be reckless when choosing investments. Start by maxing out any employer-sponsored retirement savings plans. Then consider contributing to a traditional or Roth IRA.

As of 2024, individuals can contribute $23,000 to an employer-sponsored plan like a 401(k), plus a catch-up contribution of $7,500 if they're aged 50 or older. IRA holders can deposit $7,000, plus a catch-up contribution of $8,000 if they're at least 50 years old.

Reconsider Your FIRE Number

The Rule of 25 used by many FIRE participants depends on a 4% maximum portfolio withdrawal rate. However, many experts question the validity of the 4% guideline, especially for folks who plan to retire early.

In addition, keep in mind that you'll pay a penalty if you withdraw funds from a 401(k), IRA, or similar retirement plan before the age of 59½. FIRE plans that depend on early access to these funds may be not be sustainable.

Frequently Asked Questions (FAQs)

The Bottom Line

The Financial Independence, Retire Early (FIRE) movement offers an alternative approach to traditional retirement planning. Instead of aiming to retire at 65, many FIRE participants target an earlier retirement age. Others plan to stay in the workforce but hope to achieve financial independence, which means depending less on a regular paycheck from a full-time job.

If you want to pursue FIRE, you'll need to plan carefully. Keep in mind that the common retirement guidelines are intended for people who will be out of the workforce for only 30 years or so. Consider speaking with a financial planner to adjust your goals and strategies.