Have you heard about the trendy retirement movement called FIRE? It is based on the attractive idea of retiring early, but what does it really stand for? Does it actually help you retire earlier? In this blog post, I’ll share everything you need to know about F.I.R.E so you can decide for yourself if you’re able to maintain this lifestyle. Yes, it’s a lifestyle!
What is the F.I.R.E movement?
FIRE stands for financial independence and retire early. It’s a lifestyle movement that became popular among millennials around 2010. The interesting thing about FIRE is that it first spread online through blogs, podcasts and forums.
The core element of FIRE is to maximize savings and leverage the appreciation of assets. In a nutshell, you want to earn more but spend less. You can increase your savings in a number of ways, and find ways to increase your income or decrease expenses. Many people who feel drawn towards the FIRE movement will follow certain spending and saving rules.
We will have a closer look at those in a minute. For now, keep in mind that maximizing savings is a core part of FIRE.
If you want to follow the FIRE lifestyle, the second thing you want to do is accumulate assets. Assets are possessions that give you some sort of return over time. It could be stocks, bonds, real estate and other things. The idea is that passive income from your assets
will cover your living expenses throughout your retirement. The goal is not only to maintain your buying power – meaning you can still afford to eat a double cheeseburger instead of a single cheeseburger now and in the next 20 years – but also multiply your income without using your time.
But how does all of this help you to retire earlier? Well, the idea is this: because of the passive income from your assets, you don’t have to rely on the retirement plan from traditional work. Paid work becomes optional for you and you can choose to retire early.
F.I.R.E. Strategy & Tactics
Most financial planners recommend saving 10-15% of your income, but the FIRE lifestyle is much more aggressive. Let’s look at a simple example to show you how aggressive saving could help you retire early: let’s assume your income is constant and you get no returns from investments. If you save the recommended 10%, it will take you 9 years to save for 1 year of living expenses. But what if you save more? Let’s say you save 25%, now you only need 3 years to save for one year’s living expenses. At 50% it takes only 1 year and at 75% it’s down to a third of a year!
See how increasing your savings allows you to retire a lot faster? Now, for sure the idea that strict saving allows you to retire faster seems attractive at first. But being able to save 75% of your income is just not feasible for most people. It would mean you live below your means
pretty much all the time. That’s why If you want to retire early, there is no way around putting some of your money in investments that will earn you big returns such as stocks or real estate. However, not all followers of the FIRE movement do this.
Over time, it becomes apparent that there are 3 main types of FIRE. Which one can you identify with?
- Lean FIRE – Lean FIRE stands for people who want to retire early with small wealth and live more frugally during retirement. This is an option for people who want freedom and don’t have high expenses. But it can mean moving into a small, cheap apartment and collecting coupons for groceries.
- Fat FIRE is the exact opposite of Lean FIRE – It’s for people who want to accumulate huge wealth and passive income and want no concerns about living expenses in your retirement. If you want to follow Fat FIRE, it might mean that you will be working a lot in the years before your retirement. Most of your money would go into stocks or real estate so you can earn returns.
- Barista FIRE is like a middle ground between Fat FIRE and Lean FIRE. It describes a semi-retired lifestyle where you might do part time work for supplemental income, but either way, to retire early, you don’t only have to keep track of your savings but also of your expenses.
They are two sides of one coin after all. When it comes to spending money, most followers of the FIRE movement recommend the 4% rule.
What is the 4% rule in FIRE?
The 4% rule is an idea that got popular as a rule to calculate retirement spending. It says that in the first year of retirement, you can safely spend 4% of an investment portfolio.
For the rest of your life, you then adjust the amount according to inflation each year. The 4% rule was established by the financial planner William P Bengen.
He first introduced the 4% rule in 1994 and frequently updates his findings throughout the years. Today, Bengen’s withdrawal rate is adopted by several major financial firms. He created this rule based on historical data on stock and bond returns over a 50-year period. According to his calculations, the 4% rule is perfectly safe for a retirement that lasts about 30 years. Unfortunately, the 4% rule is not perfect. You can still apply it as a rule of thumb but be aware that times have changed since Bengen’s calculations. It’s not a rule that is set in stone.
Critics of the 4% rule say that it’s too easy of an answer for the complex topic of retirement spending. FIRE is about retiring early, which likely results in a retirement much longer than 30 years. But the 4% rule was based on the assumption of a 30 year long retirement.
Now here’s where it gets interesting. If we assume you retire at age 40, the 4% rule has only a success rate of 87% assuming your returns are coming from a 50-50% portfolio. The longer your retirement, the more likely the 4% rule will fail. Some calculations even indicate that, if you retire at age 40 and live until age 95 then your withdrawal rate is only 2.2%. What’s more, the 4% rule was calculated on historical US data. This data might not be representative for the world we live in today.
As you can see, the 4% rule has its flaws and is therefore not a rule to live by to extremes.
It can be helpful as a rule of thumb but you want to supplement it with other rules and strategies. It is a good idea to follow a spectrum of spending rules and not one single, inflexible rule. For example, you can practice variable spending, where you spend more when times are good and less when times are bad.
Pros & Cons of the F.I.R.E Movement
Pro – If done right, you can enjoy a long retirement with time freedom, location freedom and financial freedom. FIRE is not a strategy but a lifestyle, and therefore you can customize it to your needs.
Con – Some principles of FIRE like the 4% rule – might be flawed. It’s hard to predict what will happen during a long retirement. You might see yourself forced to save every last penny and live below means.
If FIRE is attractive to you but you don’t know how to deal with the downside, here’s my advice as a financial consultant of over 10 years:
- Keep educating and informing yourself so you can manage your wealth yourself and make informed decisions
- Understand your desired retirement lifestyle
- Calculate the expenses you want to have during your retirement
- The key is to increase savings and have a tax shelter strategy
- And always remember, the sooner you start planning, the easier it gets
Keep in mind, FIRE is a lifestyle, not just an investment strategy. so it’s always a good idea to talk to professionals who can help you develop a concrete strategy. They can help you create a blueprint together so you can reach your financial goals much faster. Book a complimentary call with me if you’d like to chat more about your specific situation and to see if FIRE might be right for you.