Complete Guide to Financial Independence & Retiring Early
You’ve probably heard of a story at some point of a friend or colleague choosing to retire well before the typical age of 65. How did they do it? How can they afford to pay their living expenses?
It’s called F.I.R.E.
In this guide, you’ll find everything you need to know about financial independence and retiring early including what it is, who should consider FIRE, the benefits of FIRE, how you can reach it, tips to achieving FIRE, and a FIRE calculator to help you determine how much money you will need.
What is FIRE?
FIRE is an acronym that stands for Financial Independence, Retire Early.
So what exactly is that?
Financial independence is the ideology that you do not have any worries regarding your money. You are free to do the things you want without having thoughts of how you will afford or pay for them.
Some people deem that financial independence comes when you do not have to work a full-time job. And this might be true for you.
The second piece of the acronym is about the ability to retire before the normal retirement age. It’s important to note that there is a difference between them. You can reach financial independence without retiring early. You can also retire early without financial independence (although not recommended).
As the average age of retirement increases, so does the desire to FIRE. Some research suggests that over 54% of people are plan to continue working past than the age of 65.
Is FIRE the same for everyone?
No! Because people have drastically different lifestyles, FIRE can be completely different from person to person.
For example, someone who is extremely frugal might be capable of reaching financial independence much earlier than someone who would like to live a lavish lifestyle upon retirement.
Some people might choose to only work part-time while achieving FIRE. The choice is yours.
It’s completely up to your wants and needs.
FIRE allows you to live life on your own terms, without a full-time job or boss holding you back.
The FIRE movement challenges the idea that you must be 65 to retire. Once you reach the age of 65, your body starts degrading physically, not giving you the opportunity to enjoy activities that you could have participated in earlier in life.
When did FIRE start?
The FIRE movement has become mainstream as of recent years due to the increase in high-stress work environments, especially those in tech or financials.
Paired with major publishings including Your Money or Your Life and a boost in online resources, many are just starting to grasp an understanding of what FIRE really is about.
Who is FIRE for?
FIRE is not for everyone. It will require significant work, dedication, discipline, and patience.
Those who are dedicated and willing to work hard while saving cash can become capable of reaching financial independence. FIRE is a journey, it is not an overnight process.
Benefits of FIRE
Becoming financially independent has many benefits. It will allow you to enjoy your life while you are still in good health, instead of waiting until you are 65 to start reaping the benefits of retirement.
Financial Worry & Anxiety
The largest benefit for most is the decrease in stress that finances brings. No longer having to worry about how your bills will be paid or when your next day off of work is can drastically change your lifestyle.
This decrease in stress has many different health benefits which can compound into other aspects of your life.
Additional Time for Family and Friends
Retiring early allows for much more time spent with family and friends. For those with children or older relatives, this might be increasingly important to you.
Most people will dream of being able to wake up with little responsibility, allowing them to spend time with whoever they desire and FIRE enables this.
No More Stress from Work
Many jobs will come with some sort of stress that can mount on your shoulders over time. This can easily transfer over to your non-work life, causing problems related to your relationships and family.
What if all of the stress your work brings was cut out?
There’s a good chance this would benefit your friends, family, and overall mental health.
Because there is no full-time job holding you back, you are free to travel all of the places you’ve ever wanted. Many people will choose FIRE for this reason alone.
Keep in mind, that you’ll need to include your traveling expenses when determining how much money you need to reach financial independence, but there are many travel hacks allowing you to travel on the cheap.
Types of FIRE
There are a few main categories when it comes to FIRE.
- Lean FIRE, or those who choose to live extremely frugal without a large income.
- Regular FIRE, or those who plan to withdraw 4% of their savings annually.
- Fat FIRE, or those who have saved enough to withdraw well over 4% of their savings annually. These people typically live the most lavishly.
- Barista FIRE, or those who choose to work a part-time job to supplement their income after quitting their full-time job. This is a relatively new form of FIRE but can be perfect for those looking to expedite the process.
Each type of FIRE will require a different strategy.
For example, those who want to achieve Fat FIRE will need to have a larger income or savings to support their wants.
When starting your journey to FIRE, you’ll need to decide which one suits you and plan accordingly.
If your goal is to achieve Fat FIRE, but you do not have a large income, that’s OK!
Part of FIRE is about setting goals and crushing them. We believe that each individual is capable of achieving any form of FIRE they desire.
How Much Money Do I Need to Reach FIRE?
Just as mentioned earlier, FIRE will be different for each person. You’ll need to calculate your needs in order to determine how much money you need to reach financial independence.
For those who want a more lavish lifestyle, you’re going to need much more than someone willing to live extremely frugal.
It’s all about YOUR wants.
Steps to Reach FIRE
There are quite literally thousands of ways to reach FIRE.
In this section, we’ll cover some of the most common and give tips to help you on your journey.
To achieve FIRE, you’ll need to follow a simple (yet difficult) process.
1. Determine How Much You Need
The first step in creating your path to FIRE is knowing your needs.
It’s wise to start with a number of what you can live off of. For many, they’ll start with a 4% withdraw rate. This means, each year they will withdraw 4% of their savings to live off of.
This money will be used to pay for all of your expenses.
For example, if you had $1,000,000 in your savings, this would amount to $40,000 annually for you to live off of assuming a 4% withdrawal rate.
Is this enough for you?
You need to determine how you want to live BEFORE you can calculate how much is needed to reach financial independence.
For example, if you currently spend $50,000 annually to maintain your lifestyle, you’ll need a little more than $1,000,000 to reach FIRE.
But if you currently spend $50,000 annually but WANT to spend $1,000,000 annually, you’re going to need well over $10,000,000 to reach FIRE.
You’ll also need to consider your return on investments. As you start saving and investing money, that money will grow and provide additional gains beyond your savings. It is common for a well-diversified portfolio to increase in value by 7% annually. You can use this as a baseline for your calculations.
You can use this FIRE calculator and input your variables to determine how much you will need to save and when you can achieve financial independence.
2. Save, save, save
Saving money is essential to the FIRE journey. You simply will not be capable of achieving financial independence without it.
This doesn’t mean you have to save over 70% of your income either (but some people do!).
A good way to determine how much you should be saving is by figuring the year you want to reach financial independence and the amount needed (calculated in the first step).
Then, divide how much you need by how many years until you want to reach FIRE.
This will output how much you need to save.
You can break that down, monthly, weekly, or even daily. Whatever suits you. Then, you can work towards that goal.
Here are some of the best ways to save money:
- Reduce your waste – between groceries, water, and electricity we waste more resources than we think. By eliminating or reducing as much waste as possible, you can save more money.
- Lower your housing costs – because your housing expenses amount to the largest portion of your budget, this provides a great opportunity to save some additional cash. Consider renting out space in your home or even moving into a cheaper home to lower your costs.
- Ditch the car payments – new cars are considered some of the worst investments. They will often depreciate in value by as much as 50% in the first 4 years. In addition, if you financed your vehicle, you can end up spending hundreds per year in interest alone. Instead, purchase an older vehicle that you can pay for with cash.
- Refinance high-interest loans – if your mortgage or student loans have a high-interest rate, consider refinancing them to save money. Even if it’s just a few percentage points, this can save you thousands per year.
3. Grow your money
Cash alone will not help you on your journey to FIRE. You need to make it work for you.
That means investing it in some form or fashion.
This doesn’t mean it has to be in one specific area. For example, you don’t have to invest your money in stocks or bonds.
Instead, you could choose to invest your money in yourself through education, helping to boost your income. You could also consider starting a business or purchasing real estate.
When it comes to growing your money, there is no right or wrong answer. The best investors will make calculated decisions to maximize their earnings with a set amount of cash. You should do the same.
Here are a few options you can consider:
BONUS: Does your employer offer some sort of 401k match? Perfect, this is a great way to receive tax-free money that also grows tax-free. You should aim to max out this incentive as it is a great way to save money for FIRE.
4. Earn more money
This step works simultaneously with growing your money. As you advance in your FIRE journey, you should find ways to make more money. This might mean picking up a side hustle or working to get a promotion at your current job. Either way, your goal should be to make more money, enabling you to save more.
You don’t need to think of making more money as a get rich quick scheme, either. Even just a few bucks extra each month will help you on your journey.
Here’s an example to show how earning more money can help you reach FIRE.
By picking up a side hustle like driving for a ride-hailing service, let’s assume to you profit an additional $200 per month after taxes, fees, car maintenance, and any other costs.
If you invest this $200 each month and assume a 6% annual return on your investment over the next 20 years, it would be worth over $88,000! This is almost double your actual earnings.
This is how making more money and growing your money together can help you achieve FIRE faster.
Here are a few ways you can increase your income:
- Pick up a side hustle like flipping furniture or detailing cars
- Become a more valuable employee to receive a raise
- Consider finding a new job
- Start a business
When you starting making more money, your goal is to save as much of it as possible, not spending it on things you want! This will help you to decrease the time it takes you to reach financial independence.
5. Reach Financial Independence
After years of discipline, saving money, increasing investments, and boosting your income, you should be ready to retire early!
If you reach this point, CONGRATULATIONS!! You’ll be in a very exclusive club of others who have achieved financial independence. You can now sit back and enjoy life on your own terms.
How Not to FIRE:
Just as there are thousands of ways to reach FIRE, there are also thousands of ways to not reach financial independence.
In this section, we’ll detail some of the most common hiccups when it comes to achieving FIRE.
Not Saving Enough
You need to remember inflation when it comes to determining how much to save. And you should always overestimate your needs.
If you were to keep $1,000,000 in cash, it would be worth significantly less 25 years from now.
How Inflation Affects Your Money
Inflation is a measure of your purchasing power relative to the value of your money. In other words, how much you can buy for the value of $1. Do you ever wonder why a gallon of gasoline used to cost less than $.50 per gallon, but currently costs well over $1? That’s all thanks to inflation (and an increase in demand).
Because the Federal Reserve’s benchmark is 2% inflation, this can be used as a guide to how much your money will be worth in the future.
For example, let’s consider you have $100,000 saved in 2020 and you leave it in a non-interest-bearing savings account for 30 years. In 2050, that same $100,000 only has the purchasing power of a little more than $55,000 in today’s money (given a 2% annual inflation rate).
Changing Their Lifestyle
If you decide to change your lifestyle halfway through your journey, this could prevent or stymie any progress you have made.
Purchasing a new home is typically the most common culprit of this. As families or individuals save money and start increasing their income, they may be tempted to splurge on a large house in a nice neighborhood.
This is a no-no when it comes to achieving FIRE.
You need to keep your lifestyle steady as your income rises and your savings increase.
By doing so, you will have the funds to achieve financial independence while others wait until the age of 65.
Getting Burnt Out (Pun Intended)
Achieving FIRE is not easy. In fact, less than 5% of people are capable of retiring before the age of 40.
When you first start your journey, you’ll be motivated to do as much as you can. You’ll try to save as much as possible and perhaps even pick up a side gig to give a slight boost to your income.
As time goes on, you’ll likely lose some of that initial motivation.
It’s wise to keep a steady pace when on your journey to FIRE. This means sometimes spending money on things you normally wouldn’t to keep you sane.
Here are some of the best ways to stay motivated on your journey:
- Keep progress – look at your bank accounts as you start to grow your money. It might be slow at first but it will build gradually.
- Remember why you started – did you hate your job? Or were you tired of not being able to travel as desired? Reminisce over the bad days to stay motivated.
- Use your imagination – do you imagine spending every day waking up next to the beach? Think about what you will do with your newly found free time when retiring early!
- Have a partner or friend group – using others is a great way to stay motivated. By telling others about your journey, you’re more likely to keep up and stay motivated throughout the process.
- Forget the hard days – some days will be more difficult than others. You might get some bad news or an unexpected expense. Forget these days on move forward.
Do I Have to Retire Early?
No! Just because Retire Early is a piece of the FIRE acronym does not mean it is required.
Some people like to work and the feeling of accomplishment that comes with it.
These people might seek financial independence alone, not choosing to retire early.
Just because you choose not to retire early, doesn’t mean you cannot FIRE.
Do I Have to Be Frugal to Reach FIRE?
Nope! Not at all. Financial independence is ultimately determined by your income and expenses. If you have a large income, you might not need to be frugal at all. You can choose to live under your means, leaving you with enough cash to reach financial independence without living frugally.
Those chasing FIRE with lower incomes might find it beneficial to be frugal, but it is not required.
Tips for Achieving FIRE
As we mentioned, achieving FIRE is not for the weak. You’ll need to be extremely disciplined if you want to reach your goals. Below are some tips you can use to help you on your journey!
FIRE is a lifelong process. Hiccups happen. You might have a bad month budgeting or have an unexpected emergency.
How you deal with these occurrences is what separates you from others.
If you move on and continue your journey, you’ll have a much easier time achieving financial independence.
If you sit back and do nothing, your journey to FIRE will be much more difficult.
It’s common for many to become overwhelmed with the constant feeling of pressure that FIRE can bring. Thoughts of not saving enough or making enough money can pile on.
Try not to stress over these things.
Keep Track of Progress
Because FIRE is such a long process, you need to keep track of your progress and adjust your strategies based on your results.
Not saving enough? Maybe it’s time to cut out an expense.
Are you ahead of your plan? Great, keep going!
Need a couple of months off? You can do that!
It’s wise to keep a journal or spreadsheet that details your monthly income and expenses each month as well as how much you saved at the end of the month.
After each month, you can refer back to previous months to see if you are still on track to reach your FIRE goal.
Think of any and all expenses
Whenever determining how much money you’ll need to achieve FIRE, it’s a common mistake to forget a few expenses.
One of these is healthcare. Your healthcare costs without a full-time position can be extremely costly.
Make sure you estimate these costs and consider them into your calculation.
Don’t fall into societal traps
We’re taught from a relatively young age that we should get a good job and move our way up the latter to earn more money and eventually retire.
This couldn’t be further from the truth.
By taking risks and working hard, you can become massively successful. Further more than any job could ever provide.
What about purchasing a home?
It is common for us to purchase a nice home with a 30-year mortgage paying hundreds of thousands in interest to the bank.
While we aren’t going to argue whether this is a good investment or not, we will argue that you should not feel obliged to do so.
Instead, consider purchasing a less expensive home or renting a portion of it out to save on these costs.
Have an encouraging partner
For those who are married, having your partner buy into your plan is vital.
Many will say that your partner is your largest financial investment, so ensure that you are both on the same page before starting your journey.
Having a dual income is a great benefit on your journey of achieving financial independence. Take advantage of this if possible.
Celebrate small victories
Did you just reach your first $10,000 in savings? Awesome, it’s time to celebrate.
Just as you need to track your progress, you should also celebrate any and all victories, no matter the size.
This will help to keep you motivated and savings rolling.
How do retirement accounts play into FIRE?
You’re probably wondering about your 401k or IRAs when it comes to financial independence and retiring early. Just because you “retire” early, doesn’t mean you’ll get to make withdraws from these accounts penalty-free.
You’ll still be required to wait until you are at least 59 1/2 to withdraw from your retirement accounts without penalties.
Let’s see some examples of how you can achieve FIRE with a few different scenarios.
Let’s assume your household income is $75,000 annually and you are capable of saving 30% of that money ($22,500). Therefore, your annual expenses amount to $52,500.
If you are planning on a Regular FIRE, you would need 25 times your annual expenses, enabling you to withdraw 4% per year.
This would mean you need to save $1,312,500 to achieve financial independence.
How on Earth can I save that much!?!?
Well, it doesn’t have to be all cash.
This includes your investments. All of those years you’ve been contributing to your retirement accounts count too.
What about your other investment accounts?
If you were to invest all $22,500 annually, assuming a 6% return on your investments, you would be left with $1,308,518.61 after 25 years.
Let’s play with the numbers slightly. Let’s assume you can save 40% of your income or $30,000 annually. This means that your annual expenses would amount to $45,000. To achieve FIRE, you would need $1,125,000.
If you were to invest all $30,000 annually, assuming a 6% return on your investments, you would be left with $1,169,781.80 after 20 years. This means you could achieve FIRE in less than 20 years by saving and investing more of your money!
Who can achieve FIRE?
You might be thinking you need to make a certain amount of money to achieve financial independence, but this is nothing further from the truth.
The great thing about FIRE is that any person or family is capable of achieving it no matter your income.
FIRE is all about what you do with your money, not necessarily how much you make. While increasing your income will certainly make it easier, it’s not required.
FIRE vs Typical Retirement
When evaluating FIRE, many will compare it to a typical retirement. We’ve weighed the costs and benefits of both.
Age of Retirement
The largest difference between a typical retirement and FIRE is the age at which you retire.
For a typical retirement, it is commonly 65 years of age.
For FIRE, it is commonly between 40 and 55 (sometimes even younger!).
Amount Needed to Retire
The amount of money you’ll need to retire will be less for a typical retirement. This is because you’ll be retiring at a later date, therefore needing less cash as your life expectancy decreases.
Lifestyle Until Retirement
There’s no doubt that those on the journey to FIRE will live a different lifestyle than those aiming for a typical retirement.
You’ll most likely take fewer vacations, live more frugally, and decline luxury possessions.
If you are okay with this, FIRE can be a great decision for you and your family.
Final Thoughts on FIRE (Financial Independence Retire Early)
As we’ve mentioned numerous times, FIRE may not be for everyone.
FIRE is for those looking for a sense of freedom in their life. You must be extremely motivated, disciplined, and patient to achieve financial independence as the journey will take years to accomplish.
Understanding the process to FIRE is quite simple. You must determine how much money you need, and then begin saving that much money through one of three ways: investing, increasing your income, or cutting your expenses. By doing all three, you can expedite your journey to financial freedom.
Have you considered FIRE? What’s stopping you? We’d love to hear your thoughts or comments below!
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