Many millennials feel like they have very little control over their working lives, especially in the current economy. Corporations make people feel expendable, so when we look ahead at the next 20, 30, 40 years of our lives, it can sometimes feel like: “What’s the point? What’s there for me?’”
If you feel like this, I want you to know: you don’t have to just get by, working at a job you don’t like forever. Retiring early may feel like it’s out of reach, but in reality, it’s actually more attainable than you think. If you want the freedom to retire early, or simply have the option to only work when and if you want, the FIRE movement is for you.
What is the FIRE movement?
The Financial Independence, Retire Early (FIRE) movement was first mentioned in the 1992 book Your Money or Your Life, written by Vicki Robin and Joe Dominguez. The purpose behind this movement was “…not just to have a whole bunch of people quit their jobs. Our aim was to lower consumption to save the planet.”
FIRE is a method of extreme saving and investing that gives people the freedom to retire earlier than most traditional budgets or retirement plans may allow. The idea is, by dedicating up to 70% of income to savings and investments, followers of FIRE can eventually quit their jobs and live solely off of small withdrawals from their portfolios years before the conventional retirement age of 65.
Is the FIRE movement for me?
People use the FIRE method so that they can comfortably retire at 55 or 45 (and some have even been able to retire as early as 35!) so that they can pursue passion projects or part-time work as and when they want. To cover living expenses after retiring at a young age, people who use FIRE make small withdrawals from their savings, typically around 3% to 4% yearly.
If you’re thinking “it’s way too late for me to start this now” or “I don’t earn enough to be able to start,” then I have news for you, friend. It’s never too late to start, and you don’t need a six-figure salary to make FIRE a reality. You just need the diligence to monitor your expenses and continued maintenance and reallocation of your investments.
The 4 different types of FIRE methods
Just like there isn’t only one path to success, there isn’t just one way to do FIRE. There are four different methods you can follow, depending on what kind of lifestyle you want to live:
Lean FIRE – This is designed for people who are happier living a more minimalist, low-expense lifestyle. They only save the minimum amount needed to live comfortably below their means, eg. not accounting for extras like traveling, and they will often do their own home or car repairs, etc.
Fat FIRE – This is for those seeking a more standard lifestyle, eg. with room to travel first class when they want, outsource maintenance costs, or make big purchases from time to time. However, this means having to save more than the average retirement investor.
Barista FIRE – This is perfect for people who want to quit their 9-to-5 job, but still want to take on some form of part-time work to cover expenses that would otherwise eat away at their retirement fund (such as health care, dental plans, or insurance).
Coast FIRE – Similar to the Barista FIRE method, these people want to have enough saved to fund their retirement and current living expenses, so that they only work because they want to and it’s convenient for them, like pursuing passion projects.
How to calculate how much you need to retire early
In order to make FIRE work, you need to pay attention to your living expenses, rather than income. Keep track of how much you spend on everything at the moment – rent, food, bills, insurance, subscriptions, fun spending – to see how much you would feasibly need to live on.
Then you need to think about how much you’d need to retire early. Make sure you explore all different avenues… For example, your expenses may be low now, but what if in a few years you get a mortgage on a bigger property: how much would your expenses have to increase? Or you may have high outgoings now, but they may decrease when you retire due to downsizing, not commuting, and being able to make more meals at home, etc.
Basically, you need to figure out your living expenses for a year, then multiply it by 25. Depending on each person’s lifestyle and what FIRE method you’re using, this number can be anywhere between $1m – $2.5m.
One year’s living expenses x 25 = your FIRE number. A great tool to help you work this out is Networthify, which gives you a detailed breakdown of how long it would take you to retire, depending on how much you save annually.
Where to save your FIRE money
You should be keeping your retirement money in an investment account so that you’re not just saving but growing your money. Interest rates on savings accounts don’t usually have the same returns as investing accounts, so your money can actually lose value over time.
Statistics show that the market gives you (on average) an 8% return on your investments each year. So in retirement, you’ll also be living on the growth of your investments, rather than just a salary at a regular job.
You just have to choose between a Traditional IRA and a Roth IRA, which is effectively choosing when you pay tax on your money. If you decide to go with a Traditional IRA, you pay tax when you withdraw the money and if you go with a Roth IRA, you pay the tax upfront.
(…and if you join the Confident Money Club, we explore FIRE in more detail, including ways to maximize tax-free withdrawals!)
FIRE isn’t just about not working
The FIRE movement isn’t just about turning your back on work and watching Netflix for the next 50 years (although if that’s what you want to do, live your life!) A lot of people who have retired using FIRE – particularly those who adopted the Barista and Coast methods – still work, but have the freedom to pursue projects they actually want to do, and on their own schedule.
Financial Independence, Retire Early is all about the freedom to live your life completely on your terms, which we’re all about here at Hear Me Finance.
So remember, living a life of early retirement and financial freedom doesn’t have to be a pipedream! I truly believe that this is something you can achieve for yourself and that with a carefully thought-out plan, it’s something you can turn into a reality.
