The Financial Independence/Retire Early, or FIRE, movement is an investment practice and lifestyle that focuses on saving aggressively and spending frugally so individuals can move toward financial freedom and perhaps even retire decades ahead of schedule.
The movement has been around since the 90’s and has gained more exposure recently as the financial fallout from the COVID-19 pandemic has more people considering what financial independence and freedom from their 9-to-5 jobs could mean for them.
Even if early retirement isn’t in the cards, there are key lessons from the movement that can help you plan for a financially secure future.
The foundation of the FIRE approach is rooted in financial discipline. The practice requires aggressive saving, investing, and careful spending so practitioners can eventually rely on passive income instead of a traditional paycheck. This approach emphasizes financial sacrifice early on to reap long-term rewards.
FIRE adherents recommend that you save half of your net income, which is quite a bit more than the 15% of your paycheck many experts recommend the average person devote to savings. If you save 50% of your income, it only takes one year to save for a year’s worth of financial independence. If you only save 15%, it will take you eight and a half years to do the same.
Experts also recommend that adherents invest the money they save in low-cost index funds, especially those that track the broader market.
So just how much do you need to save? FIRE proponents advocate targeting about 25 times your annual expenses. So, if you can live off $40,000 a year, you’ll need $1 million in savings to reach financial independence.
Once you’ve put a substantial amount of money away for retirement, you should be able to safely withdraw 4% per year from a portfolio invested in a broad mix of low-cost index funds. At that rate, there’s a good chance you’ll avoid running out of money over time.
Key Takeaways from FIRE Fundamentals
For some people, setting aside half of their income may feel too rigorous. That said, there are still lessons from the FIRE movement that can benefit everyone.