On FIRE: Achieving Financial Independence and Retiring Early
65 is the age we usually think of as the standard retirement age. But more and more, we’re starting to see people wanting to retire earlier – and sometimes, much earlier.
There is a growing movement for people who want to retire super-early – it’s called FIRE (Financial Independence Retire Early). Those practicing FIRE are saving very aggressively for retirement while living extremely frugal lifestyles with the goal of retiring long before they reach 65. Some of them are retiring as early as 30 years old!
The idea of retiring super-early has been around for about a decade, starting with a blog called Early Retirement Extreme that was first published in 2009. This was followed in 2010 by the launch of a website many of our readers will be familiar with — Mr. Money Mustache (or MMM), who retired at age 30. The MMM blog gets over 7 million monthly page views, so clearly enthusiasm for the FIRE movement is alive and well.
The concept of FIRE boils down to five main things:
1. Extreme Saving
Retiring after just a decade or so in the workforce (as many FIRE followers aspire to do) requires saving considerably more than just the 10% of gross income that many financial experts recommend for a financially secure retirement.
Many FIRE devotees save as much as 50 percent to 70 percent of their gross income, living on what’s left after making their retirement savings contributions. This is the opposite strategy of many people who save whatever is left over after they’ve paid all their bills and splurged on items they want to own now.
2. Frugal Living
Putting this much money toward retirement is going to force most people to take drastic steps in order to reduce their current expenses. This requires a “delayed gratification” mindset that will mean you’re willing to forego current wants and desires in order to achieve the longer-term goal of retiring early.
Common expense-reduction strategies among many FIRE devotees include cutting the cable TV cord, opting for bare-bones cell phones and data plans, keeping vehicles well-maintained and driving them for as long as possible, and limiting eating out and entertainment expenses to once or twice a month, if at all. So if you’re going to join the movement, be prepared for this!
3. Regular, Tax-Efficient Investing
One of the best ways to accumulate enough money to retire super-early is to sign up for automatic investing into a tax-advantaged retirement plan sponsored by your employer, such as a 401k or 403(b) plan. Or you can open your own Individual Retirement Account (IRA) or self-directed IRA.
Your employer might also match a percentage of your contributions, which can help you build your retirement savings faster. Be careful to choose investment options with the lowest cost. Target-date retirement funds can also help you stay on track for an early retirement.
4. Debt Elimination
It’s almost impossible to retire early if you are carrying excessive, high-interest debt. This debt can be like a financial millstone hanging around your neck, keeping you from achieving your goal of financial independence and early retirement.
Therefore, most FIRE devotees make it a priority to aggressively attack their debt, especially high-interest credit card balances. Many also strive to pay off their home mortgages early, since a mortgage is the largest monthly expense (and source of debt) for most people. However, as a financial advisor, I do have to add here that paying off your mortgage early isn’t always the right move – read more on this here.
5. Income Maximization
It’s logical that the more income you’re earning, the more money you can devote to paying current expenses, saving and investing for retirement, and eliminating debt. Many FIRE devotees work multiple jobs in order to maximize their current income.
The good news is that today’s “gig” economy offers more opportunities than ever to earn extra money by working side jobs and starting side businesses. Examples include selling merchandise on Amazon and Etsy, starting a for-profit blog, driving for Uber or Lyft, doing freelance writing and graphic design, and providing consulting services.
Is Financial Independence, Retire Early (FIRE) Right for You?
It’s an admirable goal to retire at an early age – we only have one life to live. But just be aware of the sacrifices that pulling off an early retirement will likely entail, and make sure you take into account realistic lifestyle costs in your early retirement, delayed social security collection, having to wait to withdraw money from your retirement accounts like your 401k until you reach 59 1/2, and health insurance costs.
Retiring early is harder than many people think, even if you have a hefty sum of money at a young age. Make sure you really have a good sense of what your costs will be over the next 30,40,50 years of your early retirement. I’d recommend consulting a financial advisor (even though yes, FIRE proponents usually choose to self-manage) or use our free Retirement Planner tool to project your chances of success. It’s also important to know if you would have the ability to weather a storm if it should happen in your early retirement. Should you have a major medical emergency, would you have the funds to cover it? Should the market move into bear market territory, would you still be ok?
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The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.