Creating a FIRE lifestyle to reach financial independence and retire early

The path to retirement has traditionally involved working a steady job for decades, contributing to a pension plan, and relying on those funds alongside Social Security in your golden years. However, the Financial Independence, Retire Early (FIRE) movement has gained popularity from those who reject this gradual approach. Instead, the FIRE method prioritizes aggressive saving and investing with the goal of achieving financial independence at a much younger age, on your own terms.

The FIRE movement is a lifestyle and financial philosophy that emphasizes low expenses, high savings, and passive investing with the ultimate goal of achieving financial independence and retiring early. The first question to ask yourself is: what is financial independence? Once you've saved up enough to cover future expenses in retirement — while accounting for inflation — then you’ve conquered FIRE.

Although the traditional retirement age has been shifting, most consider the typical retirement age to be in the 60s, given that you can receive full Social Security benefits at age 67. FIRE enthusiasts aim to retire as early as possible while their peers may still be stuck working in an office. The exact early retirement age depends on factors such as:

• Your amount of money saved and invested

• The rate of return on your investments

• Your desired standard of living in early retirement

Supporters of the movement recommend saving at least 50% of your income to achieve FIRE, aggressively cutting expenses by living a minimalist lifestyle, and investing in passive investment strategies like low-cost index funds to generate returns. The overarching idea is to accumulate enough wealth to retire on investment income.

Within the FIRE movement, many followers hope to continue working well into “retirement.” For this group, FIRE means having the freedom to take on meaningful work at their discretion. Most adopt FIRE ideals to gain complete freedom and control over their time, whether that means in work or leisure, or a bit of both.

The Financial Independence, Retire Early (FIRE) movement focuses on helping you get a grip on your finances to become financially free and retire as early as possible. Followers of the FIRE movement focus on two interconnected areas:

• Saving and investing aggressively

• Spending minimally

FIRE participants prioritize saving and investing as much of their earnings as possible, often 50% or more. They strive to consistently stash away money to put towards investments that will generate long-term returns. Many FIRE enthusiasts favor investments in passive investment strategies like low-cost index funds, which can minimize fees and offer positive, diversified returns over time. Others may invest in higher-risk, potentially higher-return strategies with the hopes of generating excess returns.

FIRE supporters are intentional about saving and investing, often employing intricate spreadsheets and financial plans to simulate how they can live off the proceeds of their investments. These plans factor in their income, inflation rates, and expected rate of return from their investments.

By saving and strategically investing a significant part of their income — if possible, 50% to 70% — FIRE participants can accumulate wealth quickly and reach financial independence at a much earlier age than most retirement plans.

To maximize their savings and investments, FIRE followers aim to spend considerably less than they earn. Reducing living costs involve making conscious choices about expenses, such as living in a smaller home, buying and driving a used vehicle until the wheels fall off, and eliminating other non-essentials like eating out or buying the latest gadgets. By spending less, FIRE followers can free up more money to invest toward their long-term financial goals.

With the combined approach of spending less and saving and investing, adherents of the FIRE movement aspire to accumulate sufficient wealth to meet their needs when they retire in their 40s, 50s, or even earlier. While simple in principle, practicing FIRE requires patience, discipline, consistency, and a willingness to make sacrifices for long-term financial goals. FIRE may not be the ideal approach for everyone and it's not a one-size-fits-all solution, but like many people, you can find financial success and security by applying the principles of FIRE.

The path to FIRE starts with determining your FIRE number, which is the amount of retirement savings you need to retire early. You don’t need to fund all of your expenses at once — the goal is to fund a passive investment that generates returns to cover your future expenses.

Start by figuring out how much you need to spend annually and then ask the question: How much do I need to save to be able to withdraw that amount?

Savers commonly use a percentage withdrawal rule — like a 3% or 4% rule — to estimate the amount of money they can withdraw each year without quickly depleting retirement savings. The assumption is that you diversify your investments by investing in stocks and bonds. Studies of past market returns have shown that such portfolios can support withdrawals for up to 30 years. The main caveat is that past performance does not guarantee future results. A 4% rule means that you would initially withdraw 4% from your portfolio balance during the first year of retirement and then increase this amount for inflation in subsequent years. A lower withdrawal rate, like 3%, is a more conservative rule to follow.

To determine your FIRE number using the 4% withdrawal rule, take your estimated annual spending requirements in retirement and multiply it by 25.

Here’s a hypothetical early retirement scenario based on the following assumptions:

• Current age: 30 years old

• Goal: Retire in 15 years at age 45

• Estimated expenses in retirement: $60,000 per year

• Current retirement savings: $30,000

Based on this scenario, assume your savings are being invested with an expected annual growth rate of 8% after inflation. Based on the 4% rule, you’ll need $60,000 divided by 4%. This means you need $1.5 million saved by age 45, which is your FIRE number.

In order to reach your retirement savings goal of $1.5 million, you’ll need to save approximately $4,300 per month for 15 years. Assuming you save this amount consistently, you’ll have saved approximately $52,000 per year, including your initial savings of $30,000. After 15 years of consistent saving and investing, you will have accumulated $1.5 million in retirement savings, which you can use to retire at age 45 and spend $60,000 per year, according to the 4% withdrawal rule.

Of course, this scenario is hypothetical and assumes a consistent savings rate and an 8% annual growth rate. In the real world, these factors will vary, and unexpected expenses or market fluctuations could impact your ability to reach your $1.5 million target on schedule.

However, FIRE is not an all-or-nothing system — the main point is to gather as much savings into your nest egg as possible. Then you will not be compelled to trade time for money when, for example, you'd rather pursue a different passion than working the current 9-to-5 grind.

Creating and sticking to a FIRE plan will require sacrifices, which can make FIRE followers come off as extremists. However, following FIRE principles doesn’t have to mean living an utterly spartan lifestyle — there’s still room for some spending. Each individual needs to determine the savings and spending levels that make the most sense, which a financial advisor can help estimate. Regardless of your long-term financial goals, you can apply FIRE concepts to potentially achieve your goals faster.

Here are helpful tips to achieve financial independence:

• Set clear financial goals. To achieve financial independence and retire early, establish clear and specific financial goals. Determine your retirement expenses, how much you need to save up for retirement based on a 3% or 4% withdrawal rule and your proposed retirement age, in addition to how much you need to save and invest each year.

• Prioritize savings. One of the key principles of the FIRE movement is prioritizing savings and investing as much of your income as possible. Retirement plans and accounts such as a 401(k) can help accelerate savings growth if you leverage employer matching by maximizing your contribution. For any dollar you contribute to the retirement plan, your employer will match it with the equivalent, which will not be counted as your income. That means you don't have to remove it from your disposable income to save.

• Strategic investing. When investing for the long term, choose suitable investments that align with your goals and risk limits. Many FIRE followers prefer passive investment strategies that don’t require active management, but passive strategies may not always suit your risk tolerance. A financial advisor would assess your risk profile to come up with appropriate investing strategies.

• Work with a financial advisor. Trying to come up with specific financial objectives and creating a plan to achieve them isn’t easy. Most people never manage to do this on their own, even with the best of intentions. A financial advisor offers an objective perspective on the financial decisions required to achieve FIRE, like estimating your future expenses and designing an appropriate investment strategy.

• Reducing debt. Paying off high-interest debts — like credit card debt and student loans — can be a crucial contributor to achieving financial independence faster. By reducing debt, you can save money from interest and borrowing fees, which you can channel toward savings and investments.

• Increase income. The FIRE movement focuses heavily on reducing expenses, but finding ways to increase your earnings can also help you reach your goals faster. Common ideas include seeking higher-paying job opportunities or starting a side hustle.

• Stay frugal and disciplined. Achieving FIRE requires discipline, patience, and commitment to your long-term financial goals. You may need to delay instant gratification, forego luxury purchases, minimize dining out, and cut other frivolous expenses to achieve long-term financial independence.

Retirement planning may seem a long way off for some, but starting early can make a significant difference in achieving your goals. By adopting a frugal lifestyle, saving aggressively, and investing intentionally, anyone can work towards achieving financial strength.

Getting started may be the toughest part. You’ll need to review your financial status, determine your retirement needs, and create a realistic savings and investment strategy. Market conditions will likely shift, and you may need to adjust your approach accordingly. For example, on the path to FIRE, if you haven’t saved as much as you’d planned, a 3% withdrawal rate may be a more conservative target compared to 4%.

An experienced financial advisor can work with you to create a bespoke financial plan to achieve your long-term goals. Whether you’re exploring a FIRE retirement or looking to optimize an existing retirement plan, financial advisors provide ongoing support and guidance as you work to secure your financial future. Start your journey to financial independence by consulting a financial advisor through FinanceHQ. With expert guidance, you’ll be on your way to tackling your early retirement goals.