When you think of retirement you probably think of someone in their late 60s. A retired person has saved his whole life and has a huge pension fund. This way of retiring is the social norm and is used by plenty of people. A norm that we all know well, but it is certainly not the only way to retire. There are lots of other ways to prepare for your retirement and to retire at a young age! One option is to go for FIRE: Financial Independence Retire Early.
What is financial independence retire early?
Financial Independence Retire Early or FIRE is a movement that can make investments through extreme savings. FIRE supporters can retire earlier than most retirement plans offer.
Financial Independence Retire Early is a rapidly growing movement of people, usually in their 30s and 40s. Especially in the tech scene where people are earning high salaries at a relatively young age, this movement is very popular (source).
How to financial independence retire early
The first step in FIRE is to identify want you to want. Where do you want to be in 10 years? Do you want to move to another location? Sail across the world? Be financially free? Or maybe you want to travel full-time.
Write down your big hairy audacious goal and discuss them with your partner.
The next question is how can you achieve your goals and have enough money to enjoy a financially independent life as you want it.
The philosophy of FIRE is to save as much money as you can. Many FIRE supporters are saving a minimum of 70% of their income and plenty of people are saving 90% or more. We suggest to at least save 50% of your net income to become financially independent in the long run.
Achieving FIRE is easier when you start at a young age. Changing your current lifestyle is a big part of this. But as you will experience, getting into the groove of saving more money is quite a fun challenge. It will change the way you look at your money and change your life!
Cutting expenses
Cutting expenses means cutting expenses for real. You need to change your mindset to do this thoroughly. First, make a list of all your expenses and write down every dollar you spend per month. Is that dollar directly contributing towards your goal?
Question yourself what you really need to spend money on. You can basically boil every spending down to 3 main items, food, shelter, and transportation. Use that list to start questioning your lifestyle.
Probably that big house is nice. But do you really need it to be that big? Do you need a BMW to commute to work or can you drive a smaller car, go by bike or catch a ride? And what about all those fancy dinners, are they necessary? If you have so much debt for your house, why don’t rent a small house close to work so you can save on your housing and transportation expenses?
There are so many reasons why cutting expenses is way more interesting than raising your income. For example; every dollar that you earn from working is taxed heavily before it is in your bank account (income tax) and then spending that dollar it’s taxed again (VAT). You basically have to work for 2 dollars to spend 1 dollar, which is not very interesting and super expensive money, right?
Do I have to give up all the fun things in life when doing FIRE?
No of course not! It’s questionable if driving a big BMW is really fun and worth the extra money you have to pay for it. In my opinion, it’s not worth it to drive such a car. I have friends that buy big and expensive cars and that have expensive houses.
I personally get more fun and satisfaction from outperforming the materialistic system and still having a great life.
For me it would definitely be the other way around: I would miss my freedom and my independence when I had to pay (and work hard) for all this luxury.
For me, the luxury is knowing that I can afford things I don’t want or need.
As a couple, we are following the FIRE philosophy for years now, even before the term FIRE existed (or at least I haven’t heard about it).
We currently save 100% of our income where we work for. We put 100% of our income in real estate and it enables us to invest in a rental property without a loan.
To create a passive income we rent out these houses, which we use to save extra. This approach gives us complete freedom. We do not need our day jobs to pay the bills, which is great. Tips on real estate investing are in the articles using the double win factor in your financial choices and in create assets to reduce financial risk
Is becoming FIRE really possible?
The feasibility of FIRE depends on how and when you want to retire. A nice calculator is Networthify. You can put in your income and savings in the Networthify calculator to see how many years you need before you can retire.
It’s very personal when you can retire and it depends on how conservative you are, but when you really want to become financially independent you have to take big steps.
- Be realistic about how old you are going to be because you would probably not going to be 120 years of age. So you do not have to save for that
- Cut your most costly expenses first. Get rid of your debt within 1 or 2 years. When you have too much debt, sell your house and rent something small. Or buy/change your house that you can partially rent it out to break even
- Start young and save a minimum of 70% of your income, try to stretch your saving to a maximum for instance by working with a weekly budget or create money-making assets
- Don’t be afraid that you miss any luxury when downscaling. Knowing that you can afford the luxury is better than actually having the luxury 😉
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FAQs
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.
What is the financial independence retire early rule? ›
So, What Is the Financial Independence, Retire Early (FIRE) Movement? In a nutshell, the goal of the FIRE movement (sometimes written as fi/re) is to save and invest aggressively—somewhere between 50–75% of your income—so you can retire sometime in your 30s or 40s.
What is the average income for financial independence? ›
The cost of living comfortably: On average, Americans feel they'd need to earn over $186,000 to feel financially secure or comfortable, a 20 percent drop from 2023 but still more than two times what the average full-time, year-round worker earned in 2022 (about $79,000), according to Census Bureau data.
What is the average age of financial independence? ›
45% of young adults say they are completely financially independent from their parents. Among those in their early 30s, that share rises to 67%, compared with 44% of those ages 25 to 29 and 16% of those ages 18 to 24.
What is the $1000 a month rule for retirement? ›
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.
Is $50,000 a year enough to retire on? ›
However, it may help you to know that according to recent Motley Fool research, the average American aged 65 and over spends $48,872 a year. As such, if you have access to a $50,000 annual income in retirement, it may be enough to cover your expenses.
What is the 5 year rule for retirement? ›
The 5-year rule regarding Roth IRAs requires a waiting period before you can withdraw earnings or convert funds without a penalty. To withdraw earnings from a Roth IRA without owing taxes or penalties, you must have held the account for at least five tax years.
What is the 25x rule? ›
The 25x rule entails saving 25 times an investor's planned annual expenses for retirement. Originating from the 4% rule, the 25x rule simplifies retirement planning by focusing on portfolio size.
What is the 4% rule for financial independence? ›
Key Takeaways. The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
At what point are you financially free? ›
You'll know you've achieved financial freedom when you have enough income streams or assets to cover your basic living expenses, as well as any additional discretionary spending you desire, without having to rely on a traditional job or career.
Key Findings. On average, an individual needs $96,500 for sustainable comfort in a major U.S. city. This includes being able to pay off debt and invest for the future.
Can I retire at 40 with 500k? ›
Yes, it is possible to retire comfortably on $500k. This amount allows for an annual withdrawal of $30,000 and below from the age of 60 to 85, covering 25 years. If $20,000 a year, or $1,667 a month, meets your lifestyle needs, then $500k is enough for your retirement. Is $500k nough?
How much money is considered financially independent? ›
Americans say they'd need to earn about $94,000 a year on average to feel financially independent. That's about $20,000 more than the median household income of $74,580.
At what age do you feel financially stable? ›
Many Americans Are Not Financially Independent Until Their Mid-30s. According to the Empower survey, the majority of financially independent Americans (92%) said they only started to feel that way once they reached the age of 36 — that's nearly two decades after reaching adulthood.
What age do people peak financially? ›
What Are Peak Earning Years? According to the U.S. Bureau of Labor Statistics, the median income of American workers is highest between the ages of 45 and 54. These peak earning years are a critical time to take control of your finances and hone your money management strategies.
What is a good amount of money to retire early? ›
Estimate your total savings needs
The first is the rule of 25: You should have 25 times your planned annual spending saved before you retire. That means that if you plan to spend $30,000 during your first year in retirement, you should have $750,000 invested when you walk away from your desk.
Can I retire at 55 with 500000? ›
The logic behind a 500K pension pot is that it's reasonable to expect an average annualised return of around 5% from a balanced and diversified portfolio over the long term. So, assuming this is your return, if you withdraw up to the same 5% each year, you'll never deplete the nominal value of your pension over time.
What is the 4% rule for early retirement? ›
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
What is the 25x rule for retirement? ›
If you want to be sure you're saving enough for retirement, the 25x rule can help. This rule of thumb says investors should have saved 25 times their planned annual expenses by the time they retire, according to brokerage Charles Schwab.
Do I have to give up all the fun things in life when doing FIRE?