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The FIRE movementfinancial independence, retire earlyhas gained wide exposure in recent years. FIRE adherents are often portrayed as people who take extreme measures to save for early retirement, leading many people to dismiss the movement as a fringe concept. But theres more to FIRE frugality and deprivation, and it hardly a one-size-fits-all journey.
For many practitioners of FIRE, the goal isnt the retire early end of the acronym but rather the financial independence part. They aim to save enough money to given them the freedom they want and avoid depending on a regular job to pay the bills.
In its most extreme versions, of course, FIRE adherents minimize expenses by giving up all the small comforts in life, from turning on the heat or air conditioning to buying a cup of coffee. But there are plenty of folks for whom the journey more moderate sacrifices. In this version of FIRE, its about living within ones means while saving for the future.
Jackie Cummings Koski accomplished her goal of saving 25x her yearly expenses in 2018. With enough savings tucked away, she believed that she had the means necessary to quit her job as a sales manager in Dayton, Ohio but has in fact chosen to keep working. Knowing that she can quit when she wants is liberating, she says.
Koski started working toward financial independence after getting divorced in 2003. During the process of splitting their assets, she realized her ex-husband had $120,000 in his retirement accountsabout six times as much as she had saved. For Koski, it was an eye-opening moment.
I vowed from that day that I was going to pay close attention to my finances and do things to put me on a better financial trajectory, she recalls. I didnt want to be the stereotype of a divorced single mom, especially being African American, so I did everything I could to turn it around.
FIRE practitioners aim to save 25x their annual expenses. This strategy is based on two common retirement strategies: The 25x Rule and the 4% Rule, each of which help people set up safe rates of withdrawal from their retirement savings.
But as noted above, FIRE isnt a one-size-fits-all goal. Some, like Koski, are looking to be financially independent, while others really are focused on beating the standard timeline and retiring very early. Individual interpretations of FIRE are affected by how much people are willing to save each year, and what they plan to do and how they want to live in retirement.
There are three broad approaches to FIRE:
The three factors that go into financial independence include your savings rate, investment returns and withdrawal rate. Heres how that works.
First, determine what percentage of your income you can save. Savings can and should include all retirement contributions, any employer matching contributions and money set aside outside of retirement accounts in a taxable brokerage account.
Second, take the portion of your current income you spend and multiply that number by 25. For example, someone who spends $50,000 a year would need to accumulate 25 times this amount, or $1.25 million to achieve FIRE.
Finally, calculate how long it will take you to accumulate your FIRE number based on the amount you save each year. This will require you to make an assumption about investment returns. The higher the rate of return, the faster you achieve FIRE. You can use this calculator to try this for yourself.
Take somebody who earns $70,000 a year, with zero saved for retirement. If this person wanted to pursue a FIRE strategy, they could save 10% of their income, or $7,000 a year. Applying the 25x rule, they would need to save around $1.58 million (25 x $63,000). Given these assumptions, plus an 8% annual return, it would take this person about 37 years to reach financial freedom.
Heres another scenario: A person who earns an annual income of $70,000, with zero saved. But in this case, the person is pursuing FIRE by saving 30% of their income. Assuming the same 8% return, it would take them about 22 years to save the same 25x amount to reach financial independence.
The more you save, the sooner youll reach financial independence. If you budget wisely and choose to save 50% of your income under the same scenario, youd hit financial independence in about 14 years.
People pursue FIRE for a variety of reasonsnot everyone wants to be financially independent just so they can stop working. Koskis decision stems from experiences she had as a child growing up poor.
Koski and her five brothers were raised by their father, a single parent who worked at a factory in Augusta, Georgia. Koski says they never went withouttheir father worked multiple jobs to make ends meet, and they got free lunch at schoolbut they were living below the poverty line. She recalls how she and her brothers always knew it was almost payday: the fridge was empty.
At the time, I didnt realize it, but we were very much living paycheck to paycheck, Koski recalls. The experience made her want to cultivate a very different life..
Some say FIRE is only possible for individuals who are ready to forgo comfortable lives now to retire early in the future. But Koski doesnt believe shes sacrificing her current lifestyle to achieve financial independence. Im not a minimalist. I buy the things that I value and that I like. And my daughter, she had a good life, too, says Koski.
She builds her budget around the money that is left after maxing out contributions to her 401(k), Roth IRA and health savings account (HSA), a practice she started in 2008. Koski has enough money for everything she wants to do, because she is strategic about spending. She uses an app called GasBuddy to find the cheapest gas near her, for example.
I dont mind spending money, but I want to know if Im getting the best deal and making sure that Im careful with the way that I spend my money, says Koski
Part of what has fueled interest in the FIRE movement is a growing discontentment with life in corporate America. Some FIRE followers say instead of being miserable sitting at a desk for most of their lives, theyd rather travel the world or do work they actually find fulfilling. But not everyone pursuing FIRE hates their job.
Koski may already have 25x her yearly expenses saved, but she still heads to the office Monday through Friday. Theres other things that I would like to do, but I like my job, Koski says. I like my boss. I work at a great company. I feel good about what Im doing at work, so Im not running from my job.
Theres little reliable information on who identifies with the FIRE movement. But its clear that the dream of achieving financial independence isnt only for high earners.
In 2018, TD Ameritrade conducted a survey of 1,503 U.S. adults aged 45 and older with more than $250,000 in investable assets, including 753 individuals who said they are financially independent or plan to be. Around a third of respondents who were already financially independent had incomes between $50,000 and $99,900a stark contrast from the idea that FIRE is only attainable for people making six figures.
Still, there are obvious barriers to the most ambitious FIRE goals, like retiring at 35 or 40. A big one is student debt. Over half of young adults who attended college have student debt, with the typical monthly payment reaching between $200 and $299 per month, according to the Federal Reserve.
Student loans may slow down the process of becoming financially free, but paying off student loans doesnt have to be seen as a permanent barrier, says Tanja Hester, author of Work Optional and a leading figure in the FIRE community.
Its just another savings goal, Hester says. In order to do something like retire early, youre going to have to go through several financial milestones. Its understandable why you might see it as a hurdle, but its just another thing to figure out, just like figuring out how youre going to fund your early retirement years, how youll fund your traditional retirement years or how youre going to get health care.
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Some critics argue that the FIRE concept carries big risks. Saving 25x yearly expenses is based on the traditional 4% rule, which is considered as a safe withdrawal rate for a 30-year retirement. An individual retiring at age 40, rather than the expected retirement age of 65, could easily outlive their savings.
Some individuals pursuing FIRE try to mitigate this risk by investing in passive income streams, like rental properties, to help boost their annual cash flow. Others choose income producing activities that are meaningful to them, such as running profitable blogs or starting businesses built on their passions.
David Blanchett, head of retirement research at Morningstar, says that while wanting to retire at 30 is unrealistic for most Americans, the general principle of financial independence is something everyone should be striving for.
My concern with what Ive heard about FIRE is mostly about outliers in an impossible situation, so it doesnt really connect well and isnt realistic, Blanchett says. But the concept of saving more is one thing as a society that we need to do. People really need to ask themselves, what is really important to me? And then build financial goals around it.
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FIRE: Financial Independence, Retire Early Forbes Advisor
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