Get Started with Financial Independence, Retire Early (FIRE)

FIRE (sometimes written FI/ER) stands for Financial Independence, Retire Early (or Early Retirement). These are two separate concepts that often go hand-in-hand. If you’re already familiar with FIRE, start with our analysis: frugal versus cheap or get to know Jenni & Chris.

What is Financial Independence?

Financial Independence is a personal net worth milestone generally accepted as having enough invested assets, minus debts, to pay for your living expenses through retirement. We reached FI at age 33 with a $1.2M net worth.

There’s a lot of nuance to what defines those inputs and outputs. In general, if you can live off the returns and growth of your investments without working for paycheck, you’re financially independent.

What is Early Retirement?

Early Retirement generally refers to people leveraging financial independence at a young age to leave a traditional career path. That standard path typically ends around age 65 with retirement.

Early retirees often call it quits when their nest egg reaches maturity and they’ve lost their interest in traditional work. The date this happens depends on your savings rate and your desire to work.

FIRE FAQ

If you’re new to this entire concept, read through the FAQ below to find answers to questions that newcomers have when entering the world of FIRE. Did we miss something? Let us know to add to the FAQ!

What’s a typical age for early retirement?

Early retirees typically reach for the escape hatch once their nest egg is large enough to pay for their expenses, often following the “4% rule”, through retirement. The age that happens varies, but a lot of early retirees manage to do it in their 30s or 40s.

What’s the 4% rule?

Based on the Trinity study, it’s the statistical odds that a person can withdraw approximately 4% of their assets (savings, investments, etc.), annually, for extended periods of time (15-30 years), to fund their life.

The study cites certain asset combinations that make this more or less likely. “Stock allocations below 50 percent and above 75 percent are counterproductive.” The study found that the ideal asset allocation amongst the groupings they tested was 75% stocks and 25% bonds.

In general, it relies on an ongoing stock market return of around 10%. This growth covers your withdrawals, inflation, and some sequence of returns risk.

Can you give me an example of the 4% rule in action?

Sure. Let’s say you make $90,000/year and are willing to invest a little less than half of it: $40,000. With a 10% return on investment annually, you’d have $1,334,444 in 15 years.

You’d now have the option to withdraw 4% of your balance ($53,377.76), annually, to live on. That’s actually a bit more than you were spending when you were in the saving phase!

I don’t make a lot of money, how could the 4% rule and FI/ER apply to me?

Your absolute income dollar figure doesn’t actually matter so far as the 4% rule. All the inputs to the statistical model are relative percentages. For example, it’s a 50% savings rate. A 10% growth rate. A 4% withdraw rate.

Someone with a $45,000 income could still retire on the 4% rule in 15 years if they invest $20,000/year.

If I withdraw the same 4% annually, won’t that be eaten by inflation decades later?

The 4% rule actually accounts for this. You don’t withdraw the exact same 4% of your initial balance per year. As your balance continues to grow (that same 10% growth per year, minus the 4% you withdraw), you continue to withdraw 4% of the growing balance.

How do I calculate my net worth?

There are several tools available online to connect your digital accounts and automatically total up the value. In general, your net worth is the value of your assets (think of savings accounts, investments, cash reserves, real estate, etc.) minus your debts (student loans, mortgages, credit card debt, etc.).

What if I like my job and don’t want to retire early?

Financial independence is the first step and many people don’t take the second step (early retirement) until it’s no longer early. Being financially independent will let you make more clear-headed decisions about your career, employer, and day-to-day work. Having the security to decide to work rather than feeling forced to work to pay bills is what many people on the road to FIRE desire most.

What if I already spend most of my income?

That’s okay, we all start somewhere. It’s a slow process to increase your savings rate that is often a mix of increasing your income and decreasing your expenses. Are debt payments eating a lot of income? Is there a particular source of most of your expenses? Take a look at our $41,000 of annual expenses, a key ingredient to our FIRE at 35 years old.

How much do you need to save to retire?

By inverting the 4% rule, we know that you need to save twenty-five times your annual spending to be able to live off of the invested savings.

Here’s some common spending levels and their required savings:

Annual ExpensesRequired Savings to Retire
$30,000$750,000
$40,000$1,000,000
$50,000$1,250,000
$60,000$1,500,000
$80,000$2,000,000
$100,000$2,500,000
$150,000$3,750,000

If you’d like to get started on your journey, we recommend beginning with our post: how to decide your FIRE number and date.

Alternatively, you can get to know the authors, Jenni & Chris, behind the writing.

Good luck on your adventure!