The FIRE Method: How To Retire In 10 Years Or Less
Looking for a reliable path towards financial stability? Exhausted from the frustration of living paycheck to paycheck? The FIRE (Financial Independence Retire Early) method could be the answer you're looking for.
This blog post will provide an overview of the Financial Independence and Early Retirement Movement (FIRE) – what it is, how it works, and why it might just work for you!
What Is The FIRE Method?
The FIRE (Financial Independence, Retire Early) Method is a popular financial technique that seeks to attain financial independence as soon as one can, usually between the ages of 30 to 40. Its origins can be traced back to Vicki Robin and Joe Dominguez, who authored "Your Money or Your Life" in 1992.
In the book, Robin and Dominguez suggested that people should retire earlier and spend their post-retirement days engaging in activities that bring them joy, such as pursuing hobbies and spending time with family and friends, instead of continuing to work up until their 60s just to earn an income. Consequently, Robin and Dominguez's ideas sparked the FIRE movement, inspiring and encouraging people to save and invest their money judiciously, adopt a frugal lifestyle, and retire early.
FIRE Method Variations
Over the years, there have been many variations to the FIRE method. Here's an overview of the most popular versions of FIRE:
Traditional FIRE Method
The earliest iteration of the FIRE movement involved maximizing savings for retirement by reducing expenses or increasing income, mainly through investments. The objective was to achieve a particular portfolio size that equalled or exceeded 25 times their current expenses.
This approach allowed individuals to withdraw a passive retirement income matching their current expenses. The goal was to retire traditionally as soon as possible, which meant quitting 9-5 jobs or careers and enjoying retirement to the fullest. Theoretically, the assets accumulated during their working years were expected to last for the rest of their lives.
The yearly expenses for someone following this path can range between $40,000 to $150,000.
Lean FIRE Method
Those aiming to achieve Lean FIRE aspire to accumulate sufficient assets to cover basic expenses, often leading to a frugal lifestyle that they intend to maintain in retirement. By adopting a very minimalist approach, they are often able to save a significant portion of their income, reducing the amount they need to set aside to attain financial independence.
For someone following the Lean FIRE method, a yearly expense of $30,000 to $40,000 might be sufficient to retire.
Fat FIRE Method
The Fat FIRE method is suitable for those who have a more lavish idea of retirement and plan to lead a life with above-average expenses. They aspire to indulge in activities and experiences that may not have been accessible during their working years, such as frequent travel or pursuing costlier hobbies. Consequently, planning for an extravagant retirement requires a more substantial financial cushion.
The yearly expense amount expected in retirement for those aiming for Fat FIRE would generally be above $150,000 or even up to $1M per year.
Check out this Retirement Calculator to determine your estimated retirement expenses!
How to Choose Which FIRE Strategy is Right for You
Choosing the right FIRE strategy depends on your life goals and financial circumstances. Each type of FIRE comes with its own advantages and challenges, which you should consider before selecting the approach that is right for you.
The key is finding a balance between your current lifestyle, spending habits, and the resources you have or can save up, ensuring you have enough money to sustain yourself during retirement. Ultimately, it's important to remember that the best FIRE strategy is the one which allows you to achieve your financial goals without sacrificing too much in terms of quality of life.
Consider the following questions when deciding which FIRE strategy is right for you:
What are your retirement dreams and goals?
How much money do you need to fund those retirement dreams and goals?
How much risk can you afford to take on in order to reach financial independence?
Are you willing and able to make significant lifestyle changes in order to save for retirement?
How much money do you currently have saved and/or invested?
What is your current income level, and how much could you realistically save each month?
How long are you willing to wait before achieving financial independence?
Are there any additional opportunities, such as side hustles or investments, that you could pursue to increase your savings?
Answering these questions can help you determine the best FIRE strategy for you and give you the confidence to take control of your finances and achieve financial independence.
Top 5 Mistakes To Avoid With The FIRE Method
Be careful not to fall into common pitfalls while attempting to achieve your goals! Here are a few common mistakes to be aware of when going for FIRE:
Not Having A Backup Plan: Make sure you have a backup plan in case of unexpected events or circumstances, such as the sudden loss of a job or an illness.
Not Considering Inflation: Rising inflation can significantly affect your retirement plans over time, so it's essential to plan ahead and factor inflation into your calculations.
Not Having Enough Insurance: Adequate coverage is necessary while planning for retirement in case of any unforeseen events.
Ignoring Tax Considerations: Always consider tax implications when investing in stocks, bonds, and other assets.
Not Factoring In Health Care Costs: Retirement healthcare costs can be high, so it's crucial to account for them in your retirement plans as early as possible.
Making Smart Decisions When Reaching Financial Independence
Once you've reached financial independence, continue to make wise financial choices, such as budgeting and saving, so that you can enjoy a comfortable retirement in the long term. Here are some things to keep in mind:
Develop a budget and stick to it: Developing and maintaining a budget is vital to control your expenses and ensure you're living within your means.
Consider creating an emergency fund: Having some money set aside for emergencies can help you avoid dipping into savings needed for retirement.
Invest in low-risk options: Investing for long-term growth should be done in low-risk options such as index funds and ETFs.
Invest in yourself: Find ways to build skills, increase your income potential, and diversify your income sources.
Stay informed: Always stay up-to-date with the latest news and information related to financial independence in order to make informed decisions.
Conclusion
FIRE is a great retirement strategy for those looking to achieve financial independence and enjoy a comfortable lifestyle in their later years. However, it's essential to make sure that you are aware of the various pitfalls associated with this method and plan accordingly. Investing smartly, budgeting adequately, and creating an emergency fund can help you stay on track and achieve financial independence.
Let us know in the comments below if you have any questions related to FIRE or tips that could help other aspiring FIRE participants. Happy Saving!