If you’ve heard this term before but aren’t really sure what it means, this is a great place to start. FIRE is an acronym for Financial Independence Retire Early. Since there’s actually two distinct parts to FIRE, so you may sometimes see it written as FI/RE or Financial Independence / Retire Early. I’ll explain what these two parts mean in just a minute, but in summary, FIRE is a mindset about saving money as quickly as is possible in order to not have to worry about earning money. There are different variations of FIRE (Lean FIRE, Coast FIRE, Fat FIRE, etc), but they all really boil down to that same principle.
Financial Independence, or FI, just means having enough money saved (and invested), such that the financial returns from those investments can satisfy your needs. In other words, you’re able to live off of your investments. What that means from one person to the next will vary, which is why you’ll find so many different definitions as to exactly how much money you need in order to be financially independent (is it $500k? $1M? $3M?). What does not vary, however, is that to be Financially Independent you should be living off of your investment returns, without having to touch the principle. For example, if you have $1,000,000 in total investments, which return about 5% a year, then you’re Financially Independent as long as you can live off of $50,000 per year (note that this is a simplified example, not accounting for inflation, or for long term projected growth). If, on the other hand, you had to live off of $60,000/year, then you may still have enough money for a traditional retirement, but since you are spending more than your annual investment returns, you may eventually run out of money and therefore need to factor in your life expectancy to your calculation.
Personally, I’m striving to have enough saved to cover all of the expected costs for my family each year. Others, may choose to have enough saved in order to cover their “core” costs of housing, food, taxes, medical, utilities, clothing, etc, and will earn more on the side (part time jobs or side hustles) in order to cover additional expenses such as vacations, shopping, and other “nice-to-haves.”
It’s the second part of the FIRE acronym where most people get hung up. Does Retire Early mean that upon reaching Financial Independence people stop working completely and live a life of pure leisure? Though there are people that do commit to that lifestyle upon reaching FI, in my experience they are a small minority. Generally speaking, everyone needs purpose in their life, and need something to keep them busy. Some people will dedicate themselves to hobbies, or volunteering, others may take on lower paying jobs that they are more passionate about and give them a greater sense of fulfillment. Still others travel the world and experience everything that different cultures have to offer. Most do a combination of these things as well as other activities. I have yet to meet or hear of a single FIRE advocate that, upon reaching FI, spends the rest of their life sitting in front of the TV all day accomplishing nothing (though some may initially go through this phase!).
The key aspect to the “Retire Early” part is that one is actually “retiring” (however you define retirement) early, meaning before the traditional retirement age (typically around 65). For some people, that might mean at 60, but you’ll also find amazing stories on the internet of people implausibly retiring in their 30s, as well as plenty of stories at ages in between. Take each story with a grain of salt. No one person’s individual situation and needs is identical to your own. Many of the people that retire very early in life typically define retirement as no longer working a full time 9-5 job, but that doesn’t mean they don’t have income streams (often, from their blog!) to cover a portion of their expenses.
My goal, currently, is to reach FI by the time I’m 40, about 5 years away. What I do at 40 is still to be determined, and though I will gradually firm up my plan, I also want to stay flexible. The point is that at 40 I want to have flexibility and optionality
Why do FIRE?
Which leads me to the main reason for doing FIRE: flexibility and optionality. People who pursue FIRE want to have control and confidence in their long term plan. I don’t like the fact that I’m fully dependent on having a full time corporate job in order pay for my expenses and live for another 50+ years (note: this is not the same as saying that I don’t like my job, in fact I do like my job, I just don’t want to be so dependent on it). By continuing to save and invest aggressively, I gradually move up the date at which I no longer need to work, and instead have the flexibility to focus on other passions, if I so choose, and to have the option of going to where I want to go.
I’m fortunate to have a good job, in a team that I like, doing work that is important and makes a difference, but I also know that good things don’t last forever. Perhaps I’ll get cancer or get in a debilitating accident, or maybe my company changes direction and I get laid off. Or maybe it’s something positive, like my wife gets a terrific opportunity abroad and we want to move to pursue that. By achieving Financial Independence we’ll have the flexibility to pursue these opportunities, or adapt to these shocks, without having to worry about the financial impact of our choice.
Is FIRE for you?
Some of you may already be fully on board with FIRE, while still others are a bit skeptic. Maybe it all sounds a bit sketchy or unrealistic. The truth is that FIRE, as an acronym, is a fairly recent invention, but as a principle (save money so you don’t have to work for the rest of your life), it really isn’t anything new and certainly isn’t radical. When the traditional retirement age was set at 65 in the mid 1930s, the life expectancy was in the low 60s, meaning the government set the retirement age at the age they thought people would die. So as it is today, by saving to retire by the age of 65 at least, and then living another 2 decades or so without having to rely on a full time job, you’re already practicing many of the same principles of FIRE. The difference with actually committing to FIRE is that you take a more proactive role in trying to move up that date even sooner, perhaps even by a couple of decades.
I think FIRE is for everyone, and has added benefits beyond what I’ve described hear (but will touch on in a future post). So what do you think? Is FIRE for you? Share your point of view in the comments below.