Introduction
Today, people want financial freedom without having to depend on their regular job. But how does one achieve financial independence at an early age and meet specific lifestyle needs? Well, this is where the FIRE movement comes into the picture.
So, what is the FIRE movement? FIRE refers to Financial Independence and Retire Early. It is a proven model that revolves around extreme investments and savings. As per the FIRE model, the idea is that if you can save over 70% of your annual income, you can retire early.
Millennials are leading the charge in the FIRE movement with 58% and want to retire before they reach 65. Conversely, Pew Research highlights that only 24% of the young generation is financially independent in the U.S.
Fortunately, FIRE has made it possible for a lot of people to live off of their withdrawals from saved funds. FIRE followers usually withdraw 3%-4% from their saved funds a year to cover their expenses and enjoy retirement.
Ultimately, it takes strategic planning, wise investments, and thorough economic understanding to hit a specific threshold and achieve financial independence at an early age. Once you’re able to combine and utilize these elements – you can hit FIRE retirement.
Let’s touch on FIRE methods, how it works, FIRE benefits, and how to implement FIRE in 2023:
FIRE Movement Continues to Evolve
The FIRE movement in 2023 continues to evolve and has become a broader concept. Most people emphasize full financial independence when they implement the FIRE model.
Many folks are more than willing to change their patterns of how they spend and save their money. It takes a lot of self-governance and self-discipline to adopt FIRE successfully. The trick is to personalize your decisions around finances and focus on saving more than spending.
Mechanics of FIRE Movement
The FIRE model works around the 4% rule and the 25x rule.
The 4% rule
In this rule, retirees can withdraw at least 4% of their saved funds each year. Retirees can adjust the inflation amount in future years. It is the best approach to ensure retirees don’t run out of funds to maintain their retirement.
The 4% rule works on having a goal of a 30-year retirement. But ideally, investors should not generalize their FIRE number, especially if they want to retire even earlier. In short, avoid generalizing your FIRE number and focus on realistic financial savings.
Rule of 25
As per the 25x rule, individuals have to save 25 times on their annual expenses to retire. You can multiply monthly expenses by twelve to hit this number and take a closer look at your annual expenses. Next, multiply yearly expenses by 25 to get a suitable FIRE number. It is the amount you will have to save to retire early.
Who Can Leverage the FIRE Movement?
Whether you’re an employee, entrepreneur, or founder of a small startup, you can leverage the FIRE movement. Oftentimes, the FIRE amount or number comes across as too ambitious for people. So, focus on finding new ways to boost your annual income so that you can make more investments.
Entrepreneurs, independent contractors, and startup founders often see the FIRE movement and employee management in the same light. A survey shows people can go without buying a new item for at least a year. And with enough motivation and guidance, the same people are willing to not buy new items for three straight years. Millennials and Gen X also tend to get a second (or even third) job to speed up their early retirement.
FIRE Movement Types
There is more than one method to use FIRE and achieve financial independence and retire early:
-Fat FIRE
Fat FIRE requires retirees to save significant funds. This model might not work for people who have a limited budget. Like all the FIRE models, The Fat FIRE works on making lifestyle changes. For instance, you may want additional retirement income for shopping or traveling. In short, you need to save aggressively to hit Fat Fire.
-Lean FIRE
Lean FIRE caters to people who have a modest lifestyle and can plan/change their lifestyle to achieve early retirement. This FIRE movement focuses on covering fundamental needs and saving at least 25 times your annual expenses.
-Barista FIRE
Barista FIRE works on the assumption that you’ve already saved enough money to retire from your full-time job. You can implement Barista FIRE to create a work-life balance. Barista FIRE involves partial coverage of annual experience for people. In Barista FIRE, people don’t have to make strict lifestyle changes like the Fat and Lean FIRE methods.
Benefits of FIRE
- FIRE helps you retire earlier than usual.
- With lifestyle changes, expense management, and solid investment strategies, you can achieve FIRE in your 30s or 40s.
- FIRE propels people to closely monitor their expenses and retirement goals.
- Despite the type of FIRE you want to adopt, you’ll get a full picture of your current retirement goals and savings
- The FIRE model encourages people to make more future investments to gain financial freedom at an early age
- FIRE strategy influences people to lead a healthy life on minimum funds
How to Adopt the FIRE Model
Increase Annual Income
Besides, in the gig economy, it has become more accessible for people to get two or even three jobs remotely while working a full-time day job. In short, find new sources to earn more income. It would be a bonus if you could get a consistent stream of passive income.
v Reduce Expenses
Your first step to implementing FIRE is to cut back on your expenses. FIRE followers aim to cut at least 50% to 70% of their annual earnings to save enough money for retirement. Many people learn to live on a quarter of their salary. And if this sounds doable to you, you can become a FIRE follower. For instance, you can benefit from credit card rewards and cashback apps to get free cash on your spending.
v Clear Debt
Make sure to pay off all your debts before you start your FIRE journey. You should also avoid potentially taking a big financial responsibility that might put you in debt and create a major barrier to retiring early. Whether it’s credit card debt, personal debt, or loan debt, these can become major hurdles to achieving financial independence and retiring early.
v Invest and Save More Money
To successfully implement the FIRE model, you have to prioritize saving and investing money. Follow the lead of successful FIRE followers who leverage the best investment opportunities in real estate and the stock market. You have to think bigger than retirement account investing. For instance, you can also purchase storage facilities or parking spots and put them up for rent.
Calculate FIRE Number
A FIRE amount or number is the money you need to achieve financial independence and retire early. Most FIRE followers put into practice the 4% rule to get their FIRE number. The idea is to withdraw 3-4% from your saved funds each year and maintain your current lifestyle for 30 straight years.
But in the 4% rule, you have to consider elements that can impact your future finances and savings. When it comes to the 25x rule, multiply your average living cost of, say, $60,000 by 25. In this case, you’ll need $1.5 million to retire early.
The Flip Side of the FIRE Movement
Fire is undoubtedly one of the most practical ways to achieve financial independence and retire early. But when you look past the feasibility, the requirements can overwhelm people. In fact, it is the main reason FIRE is not for everyone. After all, it demands you to sacrifice your current lifestyle and make significant cuts in expenses to achieve long-term saving goals.
On the surface, early retirement sounds like a great plan, but it comes with certain risks and no guarantees. If you struggle to manage expenses and get sufficient funds, adopting FIRE will be difficult.
While many people can save 50%-70% of their annual income, it is not an achievable goal for every investor. And if you don’t earn enough money to save and have debts – you cannot even start with FIRE.
Still, most people want to look for opportunities and hone their skills to get out of the circle of living from paycheck to paycheck. It would be fair to state that the FIRE movement will continue to encourage and inspire millions of people.
Final Thoughts
FIRE comes down to each individual’s personal choice. If you want to pursue FIRE, ensure it is a personal decision. It is up to you to decide whether or not a trade-off or an investment is worth it. Only you can decide how much faster you want to accumulate funds to get closer to early retirement.
If you think you cannot pull it off, you’d be surprised how many people have successfully executed the FIRE model and are now enjoying a life of personal fulfillment and relaxation. Combine robust financial planning and make diversified investments to achieve financial independence and retire early.
In the grand scheme of things, FIRE is about making specific financial adjustments so that you can accelerate your retirement. The truth is that the FIRE movement in 2023 is kicking off, and now people have more awareness to put this model into practice and reap long-term benefits.
