FIRE movement explained (how Financial Independence, Retire Early works)

For generations, the US has normalized an unwritten rule surrounding the age of retirement: the general understanding is that retirement comes in your early sixties. This timeline didn’t happen by accident but rather resulted from a long-standing influence from social security payouts and access to retirement accounts, both of which become fully accessible starting at age sixty-two and fifty-nine and a half, respectively. 

In recent years, however, a new trend in retirement has entered the scene. It’s referred to as the FIRE movement, the acronym for Financial Independence, Retire Early. 

Today we will explain everything you need to know about the FIRE movement so that you can make an informed decision about how you save for and live out your retirement.

In this article, we’ll discuss:

• What the FIRE movement is and how it works

• The benefits and fallbacks of the FIRE movement

• How to get started with the FIRE movement

What is the FIRE movement?

The FIRE movement is an approach to life and finances that involves strict saving measures to be able to retire early. Far beyond a simple retirement savings plan, the FIRE movement is a lifestyle choice that requires a lifetime of dedication. 

The goal of most FIRE movement followers is the ability to retire early. Half of that comes from extreme savings during your working years, and the other part of the equation is limiting your annual expense allowance to a mere 3-4% of your savings. 

What does the FIRE movement depend on?

The FIRE movement's foundation is built upon extreme frugality and a long-term commitment to the lifestyle. FIRE movement practitioners commit to placing around 70% of their income every month into their retirement accounts. Once they have reached roughly 30 times their annual expenses, they are able to retire. It varies depending on when you start, but many FIRE folks are able to pursue retirement as early as their thirties and forties. 

The catch is that once all of that saving and frugality has paid off and they’ve achieved early retirement, the journey doesn’t end. Extreme frugality is required in the long term as well. FIRE movement participants must lead a life that can support living off of 3-4% of their savings annually. If you retire with one million dollars, that’s committing to keeping all of your annual expenses under roughly $40K, for the rest of your life. 

Is the FIRE movement realistic?

The FIRE movement is not for everyone. But for those who feel like they are naturally inclined to live within the parameters, then yes, it is realistic.

It is not unheard of to live a comfortable life on $40K a year. A lot of FIRE movement practitioners are involved in the outdoors or alternative lifestyles. 

One major concern with the FIRE movement is that it doesn’t leave a lot of space for the unpredictability of life. If you or a loved one face a medical emergency or natural disaster, want to go back to school, or just have plain bad luck, the FIRE approach might not be able to financially support you on such a limited annual allowance.

Is this movement for everyone?

The FIRE movement is an extremely nuanced lifestyle that is certainly not for everyone. Most people will find traditional retirement savings plans, like IRAs and 401Ks, support their needs just fine.  

The major discipline that needs to be maintained when practicing the FIRE method is habitually keeping your expenses low while also committing to consistently working towards more and more income. 

As with every retirement saving approach, the population that will benefit from the FIRE movement the most is those who start young. The later you start saving for retirement, the more aggressive you’ll need to be once you do begin saving. Because of its already-strict saving goals, the FIRE movement takes that idea to the next level.

Why is the FIRE movement so popular?

The largest demographic pursuing the FIRE movement are millennials. Many millennials were impacted by seeing generations before them work away their glory years. The result is an attempt to live life differently, while still being financially independent. The FIRE movement allows people to take back some of their lives while still setting themselves up for the same level of financial security as a traditional approach. 

What is the benefit of the FIRE movement?

The greatest draw that people feel towards the FIRE movement is the freedom it allows. The parameters of financial independence are kept open to interpretation; it's entirely customizable. For some, financial independence means being able to work a part-time job, while others might choose to budget in a way that allows for full retirement. The benefit is that the FIRE movement gives people the choice. 

How do I get started?

So after hearing more about the FIRE movement, you’d like to join. . That’s great! Use these tips to help launch your FIRE savings.

Make a plan

The most crucial step in every financial goal is to make a plan. Take a critical look at your income and expenses, consider your health and lifestyle, and plan accordingly. Ask yourself if an annual expense of $30-40K is realistic for your household. 

Regardless of which route you choose for your retirement savings, it’s best to take action when you already have a plan in place. Speak with a financial advisor, head to the personal finance section of the library, or look into informational videos on YouTube. There are a lot of resources available and even more ways to pursue it. The bottom line is that it’ll be harder to propel yourself forward if you don’t have a plan you can refer to. Retirement saving is a lifetime project. Help out your future self by creating a blueprint you can refer to for years to come. 

Optimize your income

An important component of the FIRE movement is having a high earning income during your working years. It’s not a requirement to have a six-figure income, but you’ll be continually striving for more if you don’t. 

Consider the following examples, where the individual is investing 70% of their annual income into their retirement: 

• 100K income = 70K annual retirement growth = a little over 14 years to save $1M

• 60K income = 42K annual retirement growth = about 24 years to save $1M

Of course, these examples don’t take into consideration other elements like compounding interest or investments, but it aims to illustrate the effects that income has on the FIRE approach. 

Diversify your income

Your main salary doesn’t have to be your only form of income. Many FIRE participants have a side gig, operate a small business, or own rental properties. There are a lot of ways to give your income a boost, and doing so will make a big impact on your savings at the end of the day. 

Passive income is a popular desire for many adults in the US, and even more so among FIRE movement practitioners. Active income refers to the money you receive for your W-2 job or primary career. On the flip side, passive income is money received from unmonitored projects. This could be a rental property, a product, or a Youtube channel. If you can earn money from it and it doesn’t require much effort from you in the long run, it’s considered passive income. 

Think about your hobbies and passions and consider some routes you could use to pursue passive income. There are many resources available online to help you figure out the best choice for you. 

What should I invest in for the FIRE movement?

The best investment plan for a FIRE savings approach is to start early and make low-risk investments. 

Exchange-traded funds (ETFs) are groups of stocks that can be bought together. They are generally considered safe long-term investments because they are inherently diversified. The success of the ETF is based on how well several individual stocks perform. 

Whichever investments you choose to make, the rule of thumb is that you want them to be earning the cost of inflation, at minimum. Inflation typically sits at around 7% annually, so most investors would say that an investment that earns 7-10% is considered good. 

Key takeaways

1. The FIRE movement requires a long-term commitment to a strict lifestyle, which will last beyond the age of retirement. 

2. The FIRE movement might not be for everyone, but retirement savings plans are!

3. To get started, first make a plan. Then optimize and diversify your income while living frugally.