Playing with FIRE – A Complete Breakdown of the Financial Independence, Retire Early Movement

Early retirement is a goal that most of us share. This is why the FIRE movement, or “Financial Independence, Retire Early,” has become so popular.

You might be asking yourself, how are so many people able to achieve financial independence AND retire early?

The short answer is that they aren’t.

While it is popular in theory, it is extremely difficult to accomplish in practice. Most people struggle with debt and cost of living, so setting aside money to invest can be difficult.

However, under the right circumstances, hard work and a fixed plan can bring about FIRE for many people.

What is FIRE?

It sounds catchy and you probably get the gist of it, but what exactly is FIRE?

In short, it is a movement for people who want to defy the traditional conception of retirement and financial well-being. For decades, the standard retirement age has been 65. Some people who have done especially well can retire in their 50’s, while others who have struggled to save for retirement continue to work past the standard “cut off” age.

According to the Social Security Administration, you can begin withdrawing your Social Security payments at 62, however, this is technically considered “early,” therefore you will only be able to withdraw about 75% of your calculated benefits.

If you begin withdrawing at 65, you will get about 93% of your benefits. Finally, at 66 years old, you can withdraw the full amount per month.

However, most people don’t want to work up to (or past) their 65th birthday before receiving retirement income. In fact, most of us would prefer to retire much, much earlier. So, we know what we want, but how can we achieve it? This is where the FIRE movement steps in.

Let’s break it down into its two primary components:

Financial Independence

Financial independence is a term that means different things to different people. When you were a teenager or young adult, you wanted to be financially independent of your parents, which meant leaving home and getting a job.

For working adults, it can still have varied definitions.

A man or woman may want to be financially independent of their spouse to have a sense of personal liberty, or simply to prepare for unexpected events, like a sudden decrease in household income.

However, in the context of the FIRE movement, financial independence refers to the state in which you are not reliant on an individual or employer for your income, and the income that you do receive is more than enough to live the kind of lifestyle that suits you.

Retire Early

If you were to breakdown the process of achieving FIRE into two simple steps, early retirement would definitely come second. Financial independence is more of a process, and retiring early is the intended result. Nonetheless, it is vitally important, as it is the goal that most working adults dream of reaching.

In a sense, early retirement is a much simpler concept than financial independence, though it still means different things to different people.

For example, using 65 years as a rule of thumb, some might consider early retirement to be anywhere between 50-60 years. However, for many, this is still not enough. There are those out there who want to retire in their 30s and 40s, and some even hope to retire in their 20s, though, even with ideal conditions, this is still a longshot.

No matter your goals, early retirement just means retiring sometime before the traditional 65-year mark. The earlier you retire, the more time you have to sit back and enjoy the fruits of your labor.

How can you achieve FIRE?

It is important to reiterate that FIRE is not for everyone. It is an unfortunate fact that, given the rising cost of living, stagnant wages, and ever-increasing consumer and student debt, FIRE is a mere pipe dream for many hard-working adults.

However, don’t stress. Even if your finances are tight and you cannot imagine being able to retire early, there is still hope. You may not be able to retire on a private island before your 30th birthday, but you can still make choices that can cut years off of your working life.

In principle, achieving FIRE is actually incredibly simple. All you need to do is spend less than you make, and use the excess funds to make low-risk investments, like ETFs or mutual funds.

From there, you will see your wealth and income steadily grow, to the point where you no longer need to work.

Sounds simple enough, right?

Naturally, the hardest part is creating a budget that allows for excess funds to be invested, and then having enough excess funds to bring about early retirement. Nonetheless, it is still possible with the right plan and work ethic.

So, if you are not in a position to MAKE more money going forward, then the only solution is to SAVE more money.

Here are just a few tips to help you save and work toward financial independence and early retirement:

  • Cut food costs – middle-income households usually spend between 10-20% of their income on groceries. It may not seem like much, but cutting out unnecessary food items (extra snacks, desserts, soda, etc.) can have a huge effect on your long term savings.
  • Chip away at your debt – it is extremely hard to save when debt is weighing you down. Focus on paying down your debt first, so that interest charges don’t work against you.
  • Cut down on recurring charges – cell phone, cable, Internet, gym memberships, and other recurring charges can drastically decrease your savings potential without you even realizing it. Evaluate your priorities and see if there is a way to reduce or even eliminate some of these costs.

Securing your financial future could be as simple as cutting back on a few unnecessary expenses, or looking into new opportunities to diversify your income stream.

The biggest advantage of having this mindset is you are now battling on two fronts. To explain this, we are going to dive into something called “The Replacement Rate.” The replacement rate is the amount of income during your working years we need to replace in retirement. Let’s imagine your income as a pie (I know the picture is of a pizza, but pizza is also a kind of pie and I like pizza pie more than dessert pie).

Your “pie” is currently divided to account for a few things, but let’s narrow them down to three: Your living expenses, Your Savings, and Taxes. When you retire, the slice earmarked for savings will disappear and your taxes will also be a smaller slice. Suddenly, the size of the pizza you need is a lot smaller! If you follow the advice above though, you are increasing the Savings slice while you are still earning income and learning to make the Expenses slice smaller. In retirement, the Savings slice disappears altogether, and you have learned to live on less. Meanwhile, since you’ve been saving more in your earning years, you have a lot of leftovers. This means the size of the pie we need to replace is MUCH smaller, meaning we can get there earlier! You can learn more about Replacement Rate in a short video HERE.

While FIRE is difficult to attain and may be out of reach for some, it is definitely a goal worth setting. No matter your circumstances, setting your budget and making a plan of action are the first steps to reach financial independence and early retirement.