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In a nutshell
The Financial Independence Retire Early (FIRE) movement is a group of people who commit to extreme savings and investing to achieve early retirement.
- According to the American Psychological Association, 77% of workers in the U.S. experience work-related stress.
- A movement that started in the early 1990s stressed extreme frugality and savings at the beginning of your career in order to retire at a relatively young age.
- Early retirement has some downsides, however; for example, retiring early can expose you to longevity risk, which is the chance that you may outlive your savings.
There are many good reasons why you might want to retire early. Like Or, maybe you'd like to have more freedom and flexibility to pursue a passion project or spend more time with family.
If early retirement is something you've been dreaming of, this article will walk you through the basics of the FIRE movement, how it works and who it's designed for.
What is the FIRE Movement?
The FIRE movement was born in 1992, in the book “Your Money or Your Life.” It gained wider exposure and increased popularity in the years following the financial crisis of 2008. Here are the basic tenets of FIRE:
- Commit to extreme frugality and savings at an early age.
- Save and invest as much as possible (usually 50% to 70% of one's yearly income).
- Retire far earlier than the average retirement age of 65-years-old.
Movement members share different metrics that supposedly allow you to quit working early and live off your savings. Some use the 4% rule, while others say you should multiply your forecasted yearly expenses by 25. All movement members have unique circ*mstances, however, and they generally employ a mix of methods to save enough to feel secure not working.
How does FIRE work?
Those who follow the FIRE movement usually abide by these rules:
- Practice extreme frugality: Spend as little as possible on food, rarely go out to paid activities with friends and live with roommates to save on housing.
- Find ways to boost income: Start a side business, invest or find ways to earn more money in your current career (a significant raise at work, earning sales commissions, job-hopping to boost one's salary, etc.)
- Invest as much as possible to stockpile money for retirement: The goal is to have 25 times your annual living costs. So, if your yearly living expenses are anticipated to be $50,000, you'll want to stash away $1,250,000 to hit the amount of savings you need to retire — your "FIRE number."
- Hit your number and quit your day job: Most people’s Fire number is around $1 million, but it can be more or less depending on your situation, expenses, living situation and lifestyle goals.
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Who is FIRE designed for?
The FIRE method works well for high-income earners in their twenties with little debt. People who work in the tech industry or who are able to rack up passive income at a young age are more likely to be able to meet the high savings targets of the FIRE method.
Anyone who chooses this method must be prepared to practice extreme frugality.
Types of FIRE
There are a few variations of the FIRE method and some might feel more realistic for you.
Coast FIRE
In your twenties and thirties, you try to save as much as possible in your retirement savings. Once you've front-loaded your retirement investments, you can stop and let them grow. Thanks to the power of compound interest by the time you reach 65 you should have enough in your retirement savings to leave the workplace. Another option once you've hit your retirement savings goal is to work less or find another line of work that's more fulfilling.
With the “coast” method, you’ll still be working once you've reached your target retirement savings. While you might still be able to retire early, once you are “coasting” you can focus on saving for other financial goals and worry less about saving for retirement.
Barista FIRE
The “Barista FIRE'' method also focuses on saving as much as possible, but the goal of this method is to achieve a form of semi-retirement. Once you've hit your target savings amount, you can either get a part-time job to ensure you have health benefits or work a different, more enjoyable job.
One common concern with retiring early is paying for medical insurance. If you follow the FIRE method, you may have to pay out-of pocket for health insurance until you are eligible for Medicare at age 65. Some people may be able to join their spouse or domestic partner's healthcare plan. For others, getting a part-time job with health benefits can help cover healthcare costs.
Fat FIRE
The “Fat FIRE” method is a luxury version of FIRE. Instead of simply having enough to live, you also have a robust reserve of retirement savings to enjoy greater comfort in your retirement years. This requires you to earn, save and invest more aggressively, and it can be hard to attain. If your “FIRE number” is $3 million, you'll have approximately $120,000 to live on each year.
Risks of FIRE
Running out of funds
One potential problem of early retirement is you don't know how long you'll live. Similarly, a life-changing event early in retirement can change your entire financial outlook. For example, consider what would happen if one of your children needs to move in with you or you experience a change in your health that leads to higher medical bills.
Feeling deprived
Another criticism of the FIRE method is that one might feel as if they're living a joyless existence while they’re saving at a high level. Similarly, those who become obsessed with saving might have trouble spending their money once they retire.
Spending more than anticipated
It's easy to splurge on travel and hobbies when you retire. If you're not working anymore, you have more time to shop and indulge. The unintended consequence is you may need more savings than you predicted, which means you will either have to make lifestyle adjustments or get a part-time job.
Experiencing boredom
As the saying goes, it's important to “have something to retire to, not just to retire from.” Some people end up returning to the workplace because their identities were deeply shaped by the work they did during their careers. Success with FIRE means knowing yourself and your goals well.
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FIRE is appealing for obvious reasons: by achieving financial independence, one has the power to choose how to spend all their waking hours. To achieve early retirement, most people need to earn a high salary in their twenties and thirties and be willing to practice extreme frugality to save at least half their income.
The FIRE method of saving for retirement isn't for everyone. It requires you to commit to an unconventional way of living and spending money. However, there are other ways of saving for early retirement that may be more realistic, including the “Coast FIRE” method and the “Barista FIRE” method.
Frequently asked questions (FAQs)
What is the 4% rule for FIRE retirement?
The 4% rule refers to how much early retirees can spend during their retirement years. It's designed for a 30-year timeframe. Once you add up all of your investments, take 4% out of the pool of funds for your first year of retirement. In the following years, adjust your withdrawals to factor in inflation.
How much do you need to retire early for FIRE?
The amount you need to retire early depends on your lifestyle preferences, anticipated budget and expenses. Once you achieve approximately 30 times your annual expenses — or save approximately $1 million —they might leave their jobs or work without worrying about "making a living."
Do people regret retiring early?
Some people regret retiring early if they run out of money, or some people might feel that life is not as enjoyable if they don't hit the traditional career milestones with their peers. Similarly, some people grow bored or feel like they need a greater sense of purpose if they retire too early.
This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised and edited by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we may earn commissions from our partners’ links in this content. Learn more about AP Buyline here.
