FIRE Movement: Financial Independence, Retire Early

The FIRE movement prioritizes saving and investing 50% to 70% (or more) of your income so that you can retire early.
Elizabeth Ayoola
By Elizabeth Ayoola 
Updated
Edited by Pamela de la Fuente

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Nerdy takeaways
  • FIRE followers dramatically reduce their expenses, seek ways to increase income, and invest heavily.

  • Many FIRE followers also go by the rule of 25, saving 25 times your annual expenses to retire, and the 4% rule, withdrawing 4% or less per year.

  • FIRE is popular, but because of the strict expense cuts, it may not work for everyone.

What is the FIRE movement?

Financial Independence Retire Early (FIRE) is a lifestyle movement that prioritizes extreme saving and investing in order to retire earlier than traditional methods might allow. FIRE investors aim to achieve financial freedom so they can choose how to spend their time.

"Your Money or Your Life," a book by Joe Dominguez and Vicki Robin first published in 1992, helped popularize the FIRE movement. The book discusses changing one's relationship with money to achieve financial independence and live a life that aligns with one's goals and values.

Your Money or Your Life. Welcome to Your Money or Your Life | Life > Money . Accessed Jun 11, 2024.

“It's basically having the financial flexibility to have the ultimate life flexibility,” says Rachael Burns, a certified financial planner at True Worth Financial Planning, based in Folsom, California.

» Use our retirement calculator to see if you’re on track for retirement.

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How does FIRE work?

People who use FIRE to retire early do so by drastically reducing their expenses, looking for ways to increase their income, and investing the money they save in a mix of tax-advantaged accounts as well as regular brokerage accounts.

But living the FIRE lifestyle comes at a cost that not everyone can afford — it often requires cutting expenses to the bare minimum so you have more income to invest.

FIRE followers could be saving 50% to 70% of their income or more, and that’s not possible for everyone, Burns says.

"Some people are not able to live as simply, maybe because they have a family,” she says.

Still, if you're curious about the philosophies underpinning the practice, followers of FIRE often consider the following things when nailing down a strategy:

Rule of 25

The rule of 25 says you need to save 25 times your annual expenses to retire. To get this number, first multiply your monthly expenses by 12 to figure out your annual expenses. You then multiply that annual expense by 25 to get your FIRE number or the amount you’ll need to retire.

So, for example, if your monthly expenses are $6,000, you multiply that by 12 to get an annual expense of $72,000. Multiply that by 25 and you’ll have your FIRE number of $1.8 million.

If a FIRE number seems too ambitious, some people explore ways to increase their income and then invest that extra money.

The 4% rule

The 4% rule says that retirees can withdraw 4% of their savings the first year and then adjust for inflation in future years if necessary to not run out of money in retirement. The 4% rule also assumes a 30-year retirement goal, so if you plan to retire earlier than that, this may not work for you.

Burns says investors should be cautious about following advice designed for the masses, especially when it comes to determining a FIRE number.

“I see a lot of people saying, ‘Oh, you need to have this much money and then you can retire,’ or ‘You can safely withdraw 4.5%.’ These rules of thumb are really big generalizations, but like any of that financial advice, it's never one size fits all,” Burns says.

» Dive deeper into the 4% rule

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The right savings rate

If you’re interested in early retirement, think about how much money you plan to save and invest annually to reach your goal.

“Figure out a savings rate that matches the speed at which you want to go,” says Paris Woods, New Orleans-based author of “The Black Girl's Guide to Financial Freedomand a FIRE supporter.

If your goal is to achieve financial independence in 10 years or less, Woods suggests saving about 70% of your income.

The magic of compound growth

Because of inflation, physical cash saved in a bank account probably wouldn’t be enough to sustain you for the next 40 years. However, saving and investing money in tax-advantaged retirement accounts can help you — thanks to compound interest.

IRAs and 401(k)s are accounts you can use to invest for retirement. Roth IRAs require you to pay taxes up front, but your investments grow tax-free and you can make qualified withdrawals tax-free in retirement. Traditional IRAs and 401(k)s, on the other hand, are subject to taxes when you withdraw money in retirement, but you still enjoy the benefits of tax-free growth and compounding returns.

Both IRAs and 401(k)s have annual contribution limits, though. So what happens if you’ve maxed out all of your retirement accounts? Where do you save and invest next?

“Invest as much money as you want in a regular brokerage investing account,” Burns says. “There's no limit to how much you can add to that.”

What you invest in — stocks, bonds, or funds such as ETFs — depends on your risk tolerance. “It does need to be invested fairly aggressively, and aggressive means something different to everyone,” she says.

FIRE also requires you to stay invested, even in times of market turmoil, Burns says.

"FIRE is a long-term strategy, and you can't be too reactive to short-term economic events. You may need to adjust spending or saving in certain years based on market events, but the underlying strategy should stay the same."

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Tax-efficient strategies

A question you should ask yourself when devising a strategy is how much money you’ll need between your goal retirement age and the age you can start withdrawing from your retirement accounts penalty-free, which is usually around 59½.

Once you come up with a number, you could consider saving that amount in your regular brokerage account. That way, if you do want to retire early, you don't run out of cash before you’re eligible to start taking qualified distributions from your retirement accounts.

While you’ll still have to pay taxes when withdrawing money from a regular brokerage account, you won’t have to pay early withdrawal penalties. You will also have to pay taxes when your investments earn dividends and interest, as well as when you sell investments for a profit, Burns says.

“There's no way to get around paying taxes — it’s just part of the game, and if you're paying taxes, it probably means you're making money. So it's kind of a good thing.”

» Learn more about strategies for tax-efficient investing

Types of FIRE

Some people assume following the FIRE movement means you have to avoid splurging. But there are various forms of FIRE; some are extreme, while others are milder.

These are three popular FIRE approaches:

Lean FIRE

Those who believe in minimalist lifestyles and can live off very little tend to fall into the lean category. They may save more than half of their income to achieve financial independence faster.

“For those people who care really deeply about liberating themselves from needing to go to work every day, I think it would be compelling to take this lean FIRE approach,” Woods says.

Fat FIRE

If your motto is to “live a little,” fat FIRE may be for you. The goal of fat FIRE investors is to save a large amount of money so they can live it up in retirement. For instance, if you live on $200,000 annually and would like to continue living on that amount in retirement, you’ll need to save and invest a larger amount than someone who plans to live on $50,000.

Barista FIRE

Individuals who do barista FIRE aren’t necessarily trying to escape work; the focus is on saving up enough to retire, but then work less or part time. To do this, barista FIRE investors save enough so that they don’t need to earn huge amounts of money from work to fund their lifestyles. Some people are drawn to barista FIRE because it’s a way for them to focus on work that matters to them.

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Limitations of FIRE

Retiring early might sound appealing, but there are risks, and it’s not for everyone.

For instance, if you stop working, you’ll have to foot your own medical expenses until Medicare kicks in around age 65. There's also the possibility that your investments may not perform as well as you thought. Either one of those scenarios could have consequences such as having to raise your withdrawal rate or needing to re-enter the workforce. FIRE also requires getting strict with your spending, which is not always doable. That can mean sacrificing lots of things, such as vacations, meals out and other purchases

If you don’t earn enough to cover your basic needs and save aggressively for early retirement at the same time, FIRE may not be for you, Burns says. Lacking an emergency fund or owing high-interest debt are other reasons that FIRE might not be attainable.

If someone's making minimum wage, FIRE is not going to be doable for them, Burns says. But if they make enough to live comfortably on half their income and invest the rest, that's how you get started.

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