FIRE Movement: Financial Independence, Retire Early

Many Americans are taking early retirement into their own hands by joining the FIRE movement, but it’s not for everyone.
Elizabeth Ayoola
By Elizabeth Ayoola 
Updated
Edited by Pamela de la Fuente

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Nerdy takeaways
  • The FIRE movement prioritizes saving and investing 50% or more of your income so that you can retire early.

  • 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 among millennials, 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 to be able to retire earlier than traditional methods might allow. The goal of FIRE is to achieve financial freedom so investors can choose how to spend their time.

“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.

The term FIRE came from a 1992 book called "Your Money or Your Life," written by Joe Dominguez and Vicki Robin. The book discusses changing your relationship with money to achieve financial independence, and live a life that aligns with your goals and values.

Your Money or Your Life. Welcome to Your Money or Your Life | Life > Money . Accessed Oct 17, 2022.

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And despite recent inflation, market volatility, recession fears and rising interest rates, early retirement is still a goal for many. A 2023 NerdWallet survey found that of Americans who aren’t retired yet but plan to retire, 25% want to retire before age 50 and 18% want to retire in their 50s. The average age was 57, 10 years earlier than the full retirement age to get Social Security.

Early retirement is still popular because even though economic turmoil can be concerning, it's relatively normal, and it should be built into your financial plan, Burns said in an email.

"FIRE is a long-term strategy, and you can't be too reactive to short-term economic events," she said. "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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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 FIRE retirement does come at a cost that not everyone can afford. It often requires cutting down expenses to the bare minimum so you have more income to invest. As mentioned above, FIRE followers could be saving 50% 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.”

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The rule of 25 and 4% rule

Followers of FIRE often consider two things: the 25x rule and the 4% rule.

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, and then you’ll have 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, and not run out of money in retirement.

The 4% rule assumes a 30-year retirement goal, so if you plan to retire earlier than that, this may not work for you.

And Burns says investors should be cautious about following advice designed for 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 really like any of that financial advice, it's never one size fits all,” Burns says.

» Dive deeper into the 4% rule

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 prepare for retirement, thanks to compound interest.

Both IRAs and 401(k)s are accounts you can use to invest for retirement. Roth IRAs require you pay taxes up front, but your investments grow tax-free and you can withdraw your money tax-free in retirement. Accounts such as traditional IRAs and 401(k)s are subject to taxes when you withdraw money in retirement, but you still enjoy the benefits of tax-free growth and compounding returns.

There are annual contribution limits for both IRAs and 401(k)s. 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.”

In terms of what to invest in, be that stocks, bonds, or funds such as ETFs, it just depends on your risk tolerance.

“It does need to be invested fairly aggressively, and aggressive means something different to everyone,” she says.

» Explore NerdWallet's picks for the best brokerage accounts

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 give Uncle Sam a piece of your pie when withdrawing from a regular brokerage account, you won’t have to pay early withdrawal penalties. You will have to pay taxes when your investments earn dividends and interest, as well as when you sell investments for more than what you bought them, 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, but we obviously don't want to pay more taxes than we need to.”

» Learn more about strategies for tax-efficient investing

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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 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, as Woods says she is doing.

“I think I might find myself in the category of folks who are doing work that is meaningful and see working as playing some role in their lives for the foreseeable future, but want the freedom to only do work that is meaningful and accept roles that meet their personal requirements,” Woods says.

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, and 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.

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 may be other reasons that FIRE may not be attainable.

“If someone's making minimum wage, this is not going to be doable for them,” Burns says. “But if their income is high enough to where they're like, OK, I can, I can comfortably live off of half of this and just sock away the rest, then that's, that's how you get started.”

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