Understanding FIRE (And Its Many Variations)
The FIRE movement is an approach to saving, investing and lifestyle choices aimed at helping followers achieve the goals laid out in the acronym: financial independence, retire early.
FIRE isn’t new. Its origins trace back to the 1992 book Your Money Or Your Life, in which Vicki Robin and Joe Dominguez laid out a plan for financial independence based on frugal living and investing.
FIRE became especially prominent in online personal-finance communities in the late 2010s for people (largely millennials) looking for a way to escape the rat race on their own terms, rather than waiting for a conventional retirement age.
FIRE remains a popular concept, with active online communities devoted to the strategy.
Establishing financial independence, let alone retiring early, is a tall order at a time when life can be painfully expensive. So how do people pursuing FIRE try to make it work?
FIRE in four steps
Calculate your FIRE number. This is how much you’ll theoretically need to save in order to reach “financial independence.” A common calculation is to multiply your total annual expenses — include everything — by 25. If this figure is $50,000, for example, your FIRE number would be $1.25 million.
Slash your spending. FIRE only works if you can commit to living frugally for years on end. You might need to save as much as 50% or even 75% of your income to hit your FIRE number, which can require significant cuts to spending.
Save and invest. The money you aren’t spending has to work for you. Investing in a diversified portfolio can can hedge against any localized downturns. A TFSA or RRSP may also offer tax advantages.
Withdraw modestly. Once you hit your FIRE number and retire, you limit withdrawals from your portfolio to 4% a year.
Ideally, your FIRE number and a 4% withdrawal rate will cover up to 30 years worth of retirement. But costs will rise over time, so your true FIRE number might be higher than the 25x target.
FIRE types
There are different versions of FIRE, which makes sense since retirement can’t be the same for everybody. Some FIRE variants include:
Coast FIRE. A focus on investments creates a portfolio that generates enough growth to meet your retirement goal without major additional contributions. You continue working to cover current expenses, but no longer need to save as aggressively for retirement
Fat FIRE. Typically an option for high net worth individuals. If you’re gunning for a retirement income in excess of $100,000, this may be the version of FIRE for you.
Lean FIRE. This one’s for people planning a bare-bones retirement. An example might be $20,000 per year per household member.
Barista FIRE. More of a semi-retirement strategy in which investments cover part of your expenses while part-time, freelance or lower-stress work covers the rest.
Is FIRE realistic?
FIRE might work for some people, but it depends on estimates that are hard to make decades in advance.
First, is ballparking how much retirement will cost years, or decades, from now feasible? A person really doesn't know how much life they’ll be able to afford 10 years from now — at their current income level — so how can they know how much cash they’ll need to survive in 2050?
Second, let’s assume you hit your FIRE number at 40 and your 4% withdrawal rate covers about 30 years of retirement. What’s the plan for the remaining years of your life?
Third, where is the safety net in all of this careful planning? If a stock market crash, health emergency or black swan event douses your FIRE after retirement, how do you reignite it? Going back to work might not be the easiest thing if you’ve been retired for years and the job market’s passed you by.
On the other hand, there’s something to be said for having an ambitious financial goal that inspires you to live frugally and be intentional with your income. FIRE requires sacrifice, investing know-how and sustained hard work, all of which can provide benefits that go way beyond crafting an early retirement strategy.
DIVE EVEN DEEPER
