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.
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 a paycheck, you’re financially independent.
Getting to financial independence usually requires a lot of forward-thinking and planning. The most basic step is to live within your means. Once you’ve reached this first of the 7 steps to financial freedom and solvency, you can start working towards building wealth for your future. That’s when you begin spending less than you earn, where you live below your means. With this buffer in your personal finances, you can build up an emergency fund and save for your future self.
You’ll be well on your way to financial independence.
What is Retire Early?
Retire Early 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.
If you’re new to the financial independence retire early 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!
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.
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.
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!
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.
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.
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.).
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.
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 Expenses||Required Savings to Retire|
Financial Independence Retire Early
Most proponents of the FIRE movement have come to focus on the Financial Independence (FI) part of the journey. This is the stage where you build up your savings and investments and adjust your spending to focus on the elements of life you care about. Doing this, over time, will free you to make decisions about your career, lifestyle, and goals that you may not have been able to with more dependence on your week-to-week income.
While Retire Early (RE) is certainly an important aspect of FIRE, and often the end goal for many, it’s entirely optional. If you’re genuinely happy with your work, why not keep working but with the added benefit of it being optional? If you’ve reached FI, you can afford to take risks in your career or push for the values that matter to you in your business.
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 financial independence retire early journey!