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Financial Independence Retire Early (FIRE): Definition, Pros & Cons
The Financial Independence Retire Early (FIRE) movement has caught the attention of millions worldwide. It is based on the idea of retiring before the traditional 65-year benchmark, by aggressive saving and investing.
QUOTE
Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this.
Big ideas
- FIRE requires saving 50%-75% of income, a mindset of frugality, and high levels of discipline, along with maximising your salary as much as possible.
- The five guidelines of the FIRE movement are the rule of 25, the 4% rule, the savings rate, compound growth, and tax efficiency.
- FIRE is certainly not for everyone. It requires a large income in today’s costly era of consumer inflation and sky-high rent. It further requires discipline, sacrifice, budgeting, planning, and skillful investment.
What is the FIRE movement?
Under the FIRE (sometimes referred to as FI/RE) movement, the idea is to save and invest aggressively in order to retire significantly earlier than the typical age of 65. The retirement age can be as low as 45 or even 35. However, these early retirement ages often represent optimal scenarios achieved by high-income earners, those who began saving early, or individuals with relatively low living costs. Timelines for reaching financial independence and early retirement vary widely, depending on factors like income level, lifestyle choices, and the age at which saving begins.
FIRE has been around since the 1990s, popularised by the book Your Money or Your Life, by Joseph R Dominguez, which was released in 1992. In order to retire under 40 or 50, people will still need to work very hard and have a high income, likely over six figures. A useful benchmark is to at least have your primary home paid off, and be debt-free, to consider yourself as retired.
FIRE is not overly concerned with advanced investment techniques. The emphasis is on saving as much as possible and using the classical principles of asset allocation and diversification to compound returns, with tax benefits.
FIRE has been around since the 1990s, popularised by the book Your Money or Your Life, by Joseph R Dominguez, which was released in 1992. In order to retire under 40 or 50, people will still need to work very hard and have a high income, likely over six figures. A useful benchmark is to at least have your primary home paid off, and be debt-free, to consider yourself as retired.
FIRE is not overly concerned with advanced investment techniques. The emphasis is on saving as much as possible and using the classical principles of asset allocation and diversification to compound returns, with tax benefits.
How does the FIRE movement work?
In order to succeed under FIRE, it is necessary to save between 50% to 75% of all income. To achieve this, expenses must be kept as low as possible, while income must be kept as high as possible. Like many investment principles, it is simple in theory but difficult in practice! No shiny new Porches in this plan.
Even with a high income and low spending, barriers such as rising rental costs, periods of high inflation and the risk of AI-consuming salaried positions still exist. Unforeseen crises such as medical catastrophes, theft, and natural disasters, can quickly destroy savings. Yet it is still entirely possible to retire early, with the right mindset and an intelligent plan.
Aside from cutting expenses and increasing income, the other principles include the rule of 25, the 4% rule, the savings rate, compound growth, and tax efficiency. These elements are discussed in more detail further down in the article.
Even with a high income and low spending, barriers such as rising rental costs, periods of high inflation and the risk of AI-consuming salaried positions still exist. Unforeseen crises such as medical catastrophes, theft, and natural disasters, can quickly destroy savings. Yet it is still entirely possible to retire early, with the right mindset and an intelligent plan.
Aside from cutting expenses and increasing income, the other principles include the rule of 25, the 4% rule, the savings rate, compound growth, and tax efficiency. These elements are discussed in more detail further down in the article.
The core principles of financial independence
Financial independence means different things to different people. For some, retiring to a tropical island with a small yearly income to meet basic needs qualifies as financial independence. For others, the goal might be more concrete, such as a net worth of $1,000,000 or the acquisition of a certain number of real estate properties.
Financial independence could also mean something a bit less extreme than relaxing in a deckchair in the Caribbean all day - such as reducing a traditional 9 to 5 position for a part-time 20-hour weekly schedule. Just like all aspects of financial planning, you really need to clarify your unique goals and expectations in order to achieve them. The more vague the objective, the poorer the results, generally speaking.
Financial independence could also mean something a bit less extreme than relaxing in a deckchair in the Caribbean all day - such as reducing a traditional 9 to 5 position for a part-time 20-hour weekly schedule. Just like all aspects of financial planning, you really need to clarify your unique goals and expectations in order to achieve them. The more vague the objective, the poorer the results, generally speaking.
The importance of budgeting and saving
Of course, one of the most important elements of the entire FIRE movement is budgeting and saving. And this means constant budgeting and saving. Budgeting goals, including expenses, need to be continually monitored and revised. Most financial applications can neatly categorise expenses to streamline financial planning.
Source: Fulton Financial Corporation. Image for illustration purposes. Do your own research.In terms of saving, perhaps one of the best techniques is to automatically send a portion of your salary to a dedicated savings amount (which could be an emergency fund) and another amount to a diversified investment portfolio of stocks, bonds, and cash. It is much more effective if this is done automatically than manually, to save on decision fatigue.
What is a FIRE number?
DEFINITION
Your own FIRE number is the total savings needed to retire early and maintain a desired lifestyle.
It is based on how much you plan to spend each year after retiring. By estimating your annual expenses and applying a withdrawal rate (usually 4%), you can calculate this number. Once known, you will have a clear target to work toward, guiding savings and investment strategies.
How to calculate your FIRE number
Start by estimating your expected annual expenses in retirement. This includes housing, food, travel, and any other ongoing costs. Then, multiply that figure by 25. This formula assumes a 4% annual withdrawal rate; it can further be adjusted for specific, individual circumstances.
Adjust for inflation
When calculating the FIRE number, inflation has to be accounted for. The purchasing power of money decreases with time as the prices for goods and services increase yearly. This is even more relevant given the excessive money printing policies associated with the modern era.
Common mistakes in calculating your FIRE number
Perhaps the most common mistake is in terms of future expenses. Even with a strong budget, there are always going to be unforeseen expenses or things that cost more than originally anticipated. Projections regarding the expected return on investment are often too high, and need to be kept on the conservative side just in case.
The five guidelines of the FIRE movement
There are five guidelines involved in this type of early retirement. These are just generalisations but can be very useful. Each of these financial strategies is useful on its own, but they are extremely powerful when used in tandem with one another.
The first is the rule of 25. This means that people will need to save 25x the annual expenses in order to retire. If you’re wondering where 25 comes in, it relates to the 4% rule below, such that after investment income and inflation, you should have around 25-30 years worth of savings after retirement.
If you need $100,000 to live for a year, the FIRE number would be $2.5 million. Of course, if you are going to a lower-cost country, or if you plan to retire especially early - say in your 30s - then this number can be altered.
The second is the 4% rule. This means that about 4% of your savings can be spent per year, to flesh it out as much as possible. You can increase to 5% if you have a bigger pot to play with once retired or decrease it to 3% if you retired earlier so the money lasts longer.
The third is the savings rate. This means you should save 50% - 75% of everything you earn in a year, as an aggressive plan to retire early.
The fourth is the principle of compound growth, known to all investors. You can reinvest savings into an investment portfolio for the highest possible compound growth coupled with increased risk, year after year.
Finally, there are several legitimate tax strategies available to help minimize the amount paid to the government. This includes tax-advantaged accounts such as ISA in the UK. Incorporating tax-efficient accounts and strategies should be part of a balanced financial plan, aligning with long-term goals while maximizing savings through widely accessible, lawful options.
The first is the rule of 25. This means that people will need to save 25x the annual expenses in order to retire. If you’re wondering where 25 comes in, it relates to the 4% rule below, such that after investment income and inflation, you should have around 25-30 years worth of savings after retirement.
If you need $100,000 to live for a year, the FIRE number would be $2.5 million. Of course, if you are going to a lower-cost country, or if you plan to retire especially early - say in your 30s - then this number can be altered.
The second is the 4% rule. This means that about 4% of your savings can be spent per year, to flesh it out as much as possible. You can increase to 5% if you have a bigger pot to play with once retired or decrease it to 3% if you retired earlier so the money lasts longer.
The third is the savings rate. This means you should save 50% - 75% of everything you earn in a year, as an aggressive plan to retire early.
The fourth is the principle of compound growth, known to all investors. You can reinvest savings into an investment portfolio for the highest possible compound growth coupled with increased risk, year after year.
Finally, there are several legitimate tax strategies available to help minimize the amount paid to the government. This includes tax-advantaged accounts such as ISA in the UK. Incorporating tax-efficient accounts and strategies should be part of a balanced financial plan, aligning with long-term goals while maximizing savings through widely accessible, lawful options.
Different types of FIRE
There are different classes of retirees under the FIRE movement. Again, this depends on the unique preferences and situation of each individual retiree.
- Lean FIRE - retiring with a relatively low budget, often requiring strict control over spending. Typically, it involves living in low-cost areas or adopting a minimalist lifestyle to make savings last longer.
- Fat FIRE - aiming for retirement with a higher level of comfort and luxury. Requires significantly more savings, allowing for a lifestyle that is closer to, or better than, pre-retirement standards.
- Slow FIRE - taking a more gradual approach to financial independence, balancing saving and spending while maintaining a work-life balance. Retirement comes later, but allows for living a bit more along the way!
- Financial Independence Retire Occasionally (FIRO) - focuses on gaining enough financial independence to take extended breaks from work, rather than retiring permanently. This allows more flexibility and freedom without full early retirement - suitable for those with goals like travelling the world for a few years without giving up work entirely.
This information is not investment advice. Do your own research.
Planning your financial independence
Achieving financial independence requires clear goals and a well-thought-out plan. The first step is to determine how much you need to cover annual expenses in retirement. Multiply that by a safe withdrawal rate, like 4%, to estimate the targeted savings. Remember this is only going to be a projection.
From there, decide how much to save monthly or yearly to reach that goal within your desired timeline. Reducing unnecessary expenses and increasing income can help accelerate the process. Progress needs to be regularly tracked and monitored - this is key to long-term success.
From there, decide how much to save monthly or yearly to reach that goal within your desired timeline. Reducing unnecessary expenses and increasing income can help accelerate the process. Progress needs to be regularly tracked and monitored - this is key to long-term success.
Investing wisely: Asset allocation strategies
Asset allocation also has to be considered; there is little point in putting all your savings in high-risk stocks, as a conservative approach is emphasised for retirement purposes. However, robo-advisors and automated investment strategies take away a lot of these difficulties, making investing more accessible and less time-intensive. That said, they still require regular oversight to ensure investments remain aligned with changing financial goals and market conditions.
Source: John Hancock Investment Management, 2021. Image for illustration purposes. Do your own research.Stocks, bonds, cash, and real estate are the most common investment options when discussing early retirements. Stocks are riskier, bonds are safer, and real estate offers a stable investment option that tends to be recession-resistant. Portfolios are typically divided into stocks/bonds/cash percentages depending on risk tolerance.
Many financial platforms can perform this function automatically for investors, with the option to use dividend reinvestment and, in some countries like the UK, tax-advantaged accounts for long-term compound growth. For example, Trading 212’s AutoInvest feature makes this process effortless, allowing you to set up automatic investments in your chosen Pies - customized portfolios designed to grow steadily over time. Simply set your investment schedule, and AutoInvest will handle the rest, helping you build wealth systematically. This is an execution-only service. Not investment advice or portfolio management. Automatic investing refers to executing scheduled deposits. You are responsible for all investment and rebalancing decisions.
Many financial platforms can perform this function automatically for investors, with the option to use dividend reinvestment and, in some countries like the UK, tax-advantaged accounts for long-term compound growth. For example, Trading 212’s AutoInvest feature makes this process effortless, allowing you to set up automatic investments in your chosen Pies - customized portfolios designed to grow steadily over time. Simply set your investment schedule, and AutoInvest will handle the rest, helping you build wealth systematically. This is an execution-only service. Not investment advice or portfolio management. Automatic investing refers to executing scheduled deposits. You are responsible for all investment and rebalancing decisions.
Reassessing your financial goals regularly
Financial independence is not a set-it-and-forget-it process. Regularly reassessing your goals and progress is essential for staying on track. Life changes like career shifts, family growth, or market conditions may require adjustments to your plan. That said, the more shock-proof you make your FIRE plan, the better.
Review your savings rate, investment returns, and spending habits at least annually to ensure they align with your objectives. Staying flexible and making necessary changes can improve your chances of reaching financial independence faster.
It is ok if many of your initial projections and estimates are off. It is not ok if your projections and estimates are way off, and you don’t check them periodically. You could then be in for a shock if you have to work for a number of additional years.
Review your savings rate, investment returns, and spending habits at least annually to ensure they align with your objectives. Staying flexible and making necessary changes can improve your chances of reaching financial independence faster.
It is ok if many of your initial projections and estimates are off. It is not ok if your projections and estimates are way off, and you don’t check them periodically. You could then be in for a shock if you have to work for a number of additional years.
FIRE movement pros and cons
Like all financial strategies, FIRE has pros and cons that need to be understood in depth before it is implemented. Retirees would do well to remember that this is a multi-year strategy.
Pros of the FIRE movement
✅ Financial security
✅ Potential for early retirement
✅ Opportunity to pursue personal goals
✅ Reduced stress and improved well-being
✅ Reduced working hours
✅ Is simple to understand
✅ Potential for early retirement
✅ Opportunity to pursue personal goals
✅ Reduced stress and improved well-being
✅ Reduced working hours
✅ Is simple to understand
Cons of the FIRE movement
❌ Requires a high salary
❌ Requires extreme financial discipline, over years and decades
❌ Retirees are sacrificing their 20’s, in many respects
❌ Limited access to employer-based benefits, such as private healthcare plans
❌ Can backfire if investments do not perform as expected
❌ Can suffer from idealistic expectations
❌ Requires extreme financial discipline, over years and decades
❌ Retirees are sacrificing their 20’s, in many respects
❌ Limited access to employer-based benefits, such as private healthcare plans
❌ Can backfire if investments do not perform as expected
❌ Can suffer from idealistic expectations
Limitations of FIRE
FIRE is definitely a viable option for people who are truly serious about early retirement. But this has to become the primary life goal. It mandates a high salary and an extreme dedication to the goal of retiring early. Without these two components, early retirement is very unlikely.
Probably some specific reason for retiring early is needed - buying a farm and living off the land or owning my own restaurant without working there are the kinds of things people usually have in mind.
Those who retire early will not benefit from medical or employer pension contributions and do not have any of the safeguards associated with salaried work. Investments might not perform as well as originally thought.
Perhaps the most overlooked element is that discipline and budgeting are still required after retirement. If you have a bad year and spend three times more than you planned, you might end up having to go back to work!
A better way to approach FIRE is to build a lifestyle that caters to your preferences and needs, not to escape from life and retire early. Working 10 years at a job you detest is not going to work out.
Probably some specific reason for retiring early is needed - buying a farm and living off the land or owning my own restaurant without working there are the kinds of things people usually have in mind.
Those who retire early will not benefit from medical or employer pension contributions and do not have any of the safeguards associated with salaried work. Investments might not perform as well as originally thought.
Perhaps the most overlooked element is that discipline and budgeting are still required after retirement. If you have a bad year and spend three times more than you planned, you might end up having to go back to work!
A better way to approach FIRE is to build a lifestyle that caters to your preferences and needs, not to escape from life and retire early. Working 10 years at a job you detest is not going to work out.
QUOTE
Choose a work that you love and you won’t have to work another day.
The classical advice - find something you love doing and get paid for - is a more holistic model. And at 35 or 45, you are still going to have to find something enjoyable to do in your retirement. Why not get remunerated for it as well?
Recap of Financial Independence Retire Early (FIRE)
In sum, FIRE is certainly viable for those looking to retire early. With remote work options, global hires, cheaper international travel, and geo-arbitrage, it is arguably easier to achieve now than it was, even in the 1990s. The model is also flexible, with multiple variants.
Still, FIRE is not for the idealistic. It is for disciplined, frugal, and rational individuals who are prepared to work hard and budget mercilessly to retire early and meet their clearly specified goals.
If this is not done organically, with appropriate rest and relaxation, it is possible to suffer from burnout, an increasingly common phenomenon.
Still, FIRE is not for the idealistic. It is for disciplined, frugal, and rational individuals who are prepared to work hard and budget mercilessly to retire early and meet their clearly specified goals.
If this is not done organically, with appropriate rest and relaxation, it is possible to suffer from burnout, an increasingly common phenomenon.
FAQ on Financial Independence Retire Early (FIRE)
Q: What is the Financial Independence Retire Early (FIRE) strategy?
The FIRE strategy involves aggressively saving and investing to achieve financial independence early, allowing retirement years ahead of the traditional age. It typically requires cutting expenses, increasing savings, and investing wisely to reach a target amount, known as the FIRE number, sufficient to sustain living expenses indefinitely without work.
Q: What is the 3-bucket retirement strategy?
The 3 bucket retirement strategy divides your retirement savings into three categories: short-term (cash and bonds for immediate expenses), medium-term (income-producing investments like bonds for the next 5-10 years), and long-term (stocks or higher-growth assets for future needs). This approach balances liquidity, stability, and growth throughout retirement.
Q: Do FIRE advocates endorse the use of credit cards?
Yes, but this has been criticised by many financial professionals, such as Dave Ramsey. In theory, it is fine if you pay it off every month - which many don’t, suffering from huge penalties. Paying off interest on debt is not a recipe for financial success, and is a bad habit to get into during the early stages of financial growth.
Q: What are the main criticisms of FIRE?
Aside from credit card endorsement, one of the main criticisms is that it can be difficult to estimate expenses and income accurately, particularly over decade-long periods. If a person expects to retire at 35 and live until 100, it is nearly impossible to make a reasonable financial projection. Another frequent criticism is that the tradeoff is too severe for an expected financial payoff, especially when a person is young. Even under the most ideal of conditions, it will take 15 years (from 20 to 35) to retire successfully.
- Frugality: A financial mindset focused on minimising unnecessary expenses and maximising savings.
- Savings Rate: The percentage of income that is saved rather than spent.
- The 4% Rule: A common rule of thumb for sustainable retirement withdrawals. It suggests that retirees can safely withdraw 4% of their total savings annually without depleting their funds over time.
- Rule of 25: A principle used to calculate the amount of savings required for early retirement. It states that an individual should save at least 25 times their expected annual expenses before retiring.
- Compound Growth: The process of reinvesting investment earnings so that returns themselves generate further returns over time.
- Geo-Arbitrage: A financial strategy where individuals move to a location with a lower cost of living to stretch their savings and achieve financial independence more easily.
- Tax Efficiency: The practice of structuring savings and investments in a way that minimises tax liability.
- Passive Income: Earnings that require little to no active work, such as dividends, rental income, or royalties.
