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What Is FIRE Investing?
FIRE stands for financial independence retire early. It's a movement of people who believe that with willpower and investing knowhow, anyone can achieve financial independence and early retirement.
Although FIRE investing has gained traction in the last decade, its origins date back to "Your Money or Your Life," by Joe Dominguez and Vicki Robin, which is seen as the seminal book of the FIRE movement. Dominguez and Robin reported that they had left their jobs and lived on a combined $12,000 annually from their savings (even in the early '90s, this was an enormous feat). Dominguez and Robin, who never used the term FIRE, found that a simple life of simple pleasures away from the pressures of jobs and heavy financial obligations was a recipe for profound happiness.
Of course, not everyone is cut out for that life. It takes a lot of sacrifice to save that much - and rarely does it lead to a lavish lifestyle in retirement.
If you think you might be a candidate for FIRE investing, but you aren't sure, here are some pros and cons of that lifestyle, plus advice on how to achieve it if you do decide you want to pursue it.
What Are the Pros of FIRE?
Financial independence and early retirement. Those are the pros. End of story. What else needs to be said? And with that financial freedom comes the ability to, within limits, do whatever you feel like doing in life. Travel. Go back to school. Volunteer for your favorite cause. Learn a craft. Heaven (for most of us).
What Are the Cons of FIRE?
That future freedom requires a major commitment and willpower and a life of extreme ascetism in the present.
FIRE boils down to three things:
- Spend less
- Save more
- Earn more
Spend less. For many, achieving FIRE means severely cutting down on or avoiding the daily and weekly spending that makes life a little easier or more enjoyable in the present: restaurants and takeout meals; theatre, film, and music performances; new clothes; new cars; and vacations. You probably are not going to have a large house. (On the bright side, you are also not going to have the large mortgage to support it.)
Save more. A lot of bloggers and writers in the FIRE space revel in finding the best deal and are good sources for tips on how to save money on groceries and insurance. They have methods for keeping your savings plan on track while everyone around you is on a never-ending shopping spree. But not everyone can or wants to go through the trouble of driving a half hour out of the way to find bargains on a carton of milk now, while the reward of early retirement is decades away. If you are committed to FIRE, you probably have to get used to this kind of savings discipline.
Earn more. You may also have to take a second job, or, in current parlance, start a side hustle, to meet your savings and retirement goals.
If you are not the kind of person who can deny yourself many creature comforts, think long and hard about undertaking FIRE investing.
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How to Know Your FIRE Savings Amount
Remember, you aren't just trying to save a "normal" retirement amount in less time than the typical saver. You also have to save more money in less time.
Normally, if you retire at 65, you probably need 25 years' worth of savings, assuming a lifespan of 90 years. And if you start saving around 25, you have 40 years to save it. However, if you retire at 45, you need 45 years' worth of savings - and you have only 20 years to hit that goal.
By the way, for anyone in their 20s now, it may become common to live into your hundreds. So you will have to save correspondingly more to make sure your funds will last until your death.
So how do you know what your FIRE number is?
It's commonly said in blogs and in the many Reddit threads about FIRE (According to vox.com, "There are currently more than 700,000 members in an active Financial Independence subreddit...") that to achieve it you must save somewhere between 50% to 70% of your yearly income. For many people today in the United States, where the median household income for a family of four was $68,703 in 2019, such a savings rate is probably not possible.
If you are one of those, your goal will have to be scaled appropriately. Maybe you can retire five years early instead of 15, or you can plan to work part time to supplement your savings to get you to your goal.
On the other hand, if you are a high earner, making $250,000 annually or more, you can probably save more than this amount and reach FIRE sooner than you expect.
You Need a Financial Professional to Start a Successful FIRE Portfolio
As soon as you decide you are serious about FIRE, you need to move on from the general - albeit valid - advice found in books or websites to specific financial advice for your situation.
For this, you'll need to work with an experienced professional who can tell you whether and how to achieve FIRE in your circumstances. They can give you specifics on how much you need to put away and where to invest your savings to achieve your FIRE goal, based on your current age, your desired retirement age, your income, your risk profile, your lifestyle, your ongoing financial obligations, and myriad other factors.
Even if you decide you cannot achieve FIRE, you will benefit from the financial advice of an experienced advisor. So make an appointment to discuss a financial plan anyway.
If you find FIRE is not doable, maybe one of the alternative FIRE styles mentioned below would be a better fit. But first, whether you choose a FIRE path or not, here's what not to do when saving for retirement...
What Is the 4% Rule for Retirement Savings?
The 4% rule is a piece of common generic advice from about 25 years ago. It states that with an initial annual withdrawal rate of 4% (and adjusted for inflation yearly), a retirement portfolio will safely last for 30 years.
The rule was first described in a 1994 article in the Journal of Financial Planning titled Determining Withdrawal Rates Using Historical Data, by William Bengen. The analysis was based on historical stock market performance and inflation rates from 1926 to 1992. Bengen concluded, "Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe."
What may not be safe, though, is basing your current and future financial wellbeing on data that is decades out of date. Remember Bengen's conclusion doesn't take account of the last 29 years of stock market behavior or inflation.
You cannot simply use this model to plan your future. But a financial professional can put some more recent information to work to create a realistic plan based on today's economic realities.
What About the 25X Rule?
This is another "rule" you'll hear a lot about in discussions about how to achieve FIRE. It states that you should save 25X the annual amount you expect your savings to cover in retirement.
For example, if you estimate that you will need $50,000 from your retirement savings annually (excluding social security, pensions, or any other income available to you) you will need to save 25 x $50,000 or $1.25 million, assuming a portfolio lifespan of 25 years.
Today many experts recommend a 33X rule - accumulating 33 times your yearly need - to account for longer life spans.
Like the 4% rule, the 25X rule was more of a ballpark figure than a rule. And the main weakness of both from the perspective of FIRE is that they are based on a traditional retirement age of 65.
But here's the thing - if you are planning a FIRE retirement, you are not doing a traditional thing. And you need a financial plan based on your age, your lifestyle, your income, your goals, and your timeline that speaks to those specifics.
What Kind of FIRE Should You Start?
If the frugal lifestyle described here is just not for you, take heart. Other adherents of FIRE have felt the same way and blazed the path to create fatFIRE, leanFIRE, baristaFIRE, and coastFIRE. By the time you read this, there may be even more options.
According to U.S. Census data, average annual household expenditure in the United States is about $60,000. If you're meeting your FIRE savings goals and living on approximately this amount, you are achieving FIRE.
Some people find $60,000 a year too restrictive and revise their budget upwards to add some indulgences. They're doing fatFIRE. Former anestheiologist Leif Dahleen, who retired at 43, is one of these. As quoted in Business Insider, "FatFIRE is early retirement for the entrepreneurs and high-income professionals that choose not to fully embrace frugality or give up certain creature comforts that have become customary. It's financial independence for the well-heeled...With a fatFIRE portfolio, you can do things others can't afford to do, at least not as often...You can travel regularly during the high season, even flying first class if it suits you. You can pick up a Tesla or an Acura NSX because you want one and you know it won't derail your FIRE plan."
Sounds like a dream - and of course, not one most people can achieve.
LeanFIRE is for those who want to get to FIRE as fast as possible and adhere to an extreme savings plan and live on less than the average amount to do it. BaristaFIRE comprises those who work a side job (like barista) to make their FIRE savings goals. Then there's coastFIRE. That happens when someone has saved a significant portion of their retirement nest egg but determines that they don't have to add to it anymore to reach their FIRE figure. Interest and dividends will allow it to grow enough to ultimately "coast" to the goal.
Any of these FIRE lifestyles are doable if you have the determination and a clear-eyed view of what's required to get there. And the best chance of making a clear-eyed plan is to do it in conjunction with an experienced investing professional.
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