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What is FIRE (Financial Independence, Retire Early)?

What is FIRE (Financial Independence, Retire Early)?

December 11, 2023

Financial Independence, Retire Early (FIRE) 

Man Discovers FIRE

Take a journey with me back in time to the year 2014. I was in the midst of my fourth year working for the corporate man and starting to wonder how on earth I was ever going to make it working in a cubicle for the next 40 years. Investing had become a healthy fascination for me and I continued learning more about building my own wealth while putting a healthy amount of my paycheck away each month towards my future without a real plan on why.

During my quest for financial knowledge, I came across a man that went by the moniker "Mr. Money Mustache." He retired in his mid-thirties on a relatively modest nest egg and a paid off house. He wasn't the son of diamond miners or the CEO of a large tech firm. He was a run-of-the-mill software engineer (his salary out of college was $41,000 per year and he had a $0 net worth) who learned the power of frugal living and investing. It was as if a warm glow (pun intended) came over me when I found FIRE. I realized the power FIRE could have in my life. It ignited (yeah, I am going to keep the puns coming) in me a desire to save and invest early and often. I eventually became a financial advisor and no longer strive for early retirement but for those of you laboring away at jobs that aren't nearly as fun, pull up a seat and let's roast some marshmallows.

Framework For FIRE (say that three times fast)

Here are the core steps: make as much as possible, spend as little as possible, and invest the rest into an investment strategy that gives you the highest likelihood for success. But how much do you need to save and where should you invest? 

Practitioners usually start their journey by estimating how much they need to save. They typically will use the 4% Rule to calculate this amount. I cover off on the 4% Rule in this article but to summarize, the 4% Rule was a finding from the Trinity Study that states that you can pull 4% of a portfolio's value out each year and have a 98% chance of having enough money to fund a 30 year retirement. BUT there were some key assumptions:

 - "success" of a trial as the investor having $1 at the end of a 30 year period. This may not be the same definition most of us would have. 

 - the study assumes a 30 year retirement. If retiring early, you most likely will be retired longer than 30 years. Success rates drop precipitously the longer your retirement is.

 - it assumes past returns will continue in the future. No one can guarantee this to happen.  

Using the 4% rule, a typical way FIRE followers estimate their asset goal is to take their yearly expenses and multiply it by 25. For example, if you spend $50,000 per year you would need $1,250,000 ($50,000 * 25) to retire on. This is a good starting point but further analysis is likely needed to ensure comfortability because who wants to go back to work at 70 because you ran out of money?

Is FIRE Realistic?

My initial reaction to this question is the same as when my wife asks, "are you ever going to stop leaving your plate on the counter?" I don't know the future and neither does anyone else. The best we can do is use assumptions based on the data we do have and leave room for variability.

Here are some facts we do know:

  • the S&P 500 has averaged around 10% returns per year and inflation averages between 2-3%
  • we can keep track of and closely estimate our current expenses
  • Trinity Study results around 4% and the statistical analysis used to find them. 

Here is what we do not know:

  • what our future returns will be
  • our future expenses, future taxes
  • how long we will live (BIG factor)

We can make a plan but we can never plan for everything. If concrete answers are what you are looking for, FIRE is likely not for you. Planning for a 40+ year retirement will require lots of checking and adjusting. Data and calculations can provide you with a starting point but flexibility is likely needed at some point.

Yes, FIRE is definitely possible but building a plan to get there and understanding when you can pull the trigger need to be decided on a case by case basis.

Sequence of Return Risk

I wanted to specifically call this out as this is one of the bigger risks to a long retirement. Sequence of return risk is the risk that your investments will go down considerably early in your retirement when you need to withdraw from them to pay for your expenses. The reason this is so detrimental is that you lose twice. Not only are your investments down in value, you lock these losses in by having to withdraw funds.

Let's use a quick example. Suppose you have $1,500,000 in investments and retire at the young age of 40. At this level of assets, the 4% Rule says we can pull out $60,000 for yearly expenses. Now assume the market drops 30% and investments are now worth $1,050,000. We still need to pull out $60,000 this year so we now sit at $990,000. At $990,000, our $60,000 in expenses now accounts for 6% of our investments. Our likelihood for success can drop considerably if the market takes some time to recover. 

This scenario is not only possible, we have seen it happen. Look at this hypothetical situation for how this would have played out if we would have retired in 2000 and put all of their money into the S&P 500.

*Please note this is purely for instructional purposes and does not factor in all variables, such as inflation. 

YearYearly ReturnYearly ExpensesInvestments
2000-10.1% $             60,000 $       1,500,000
2001-13.0% $             60,000 $       1,293,984
2002-23.4% $             60,000 $       1,073,072
200326.4% $             60,000 $          776,317
20049.0% $             60,000 $          905,282
20053.0% $             60,000 $          921,273
200613.6% $             60,000 $          887,111
20073.5% $             60,000 $          939,764
2008-38.5% $             60,000 $          910,819
200923.5% $             60,000 $          523,339
201012.8% $             60,000 $          571,992

Steps to Early Retirement

Most people assume that in order to retire early you need to be making an extraordinary level of income. While this certainly helps, it is not the only path. In fact, I would argue that keep expenses low is far more important. Making a large income will do no good if your expenses don't allow you to be socking away your money. Yes, having a high income gives you a leg up but the name of the game is investing the excess. 

The next piece of the puzzle is that you likely can't just leave your money in your bank account collecting low levels of interest. You need to maximize your returns by utilizing a sound investment strategy. The FIRE community typically likes diversified portfolios of low-cost index funds but there are other methods to maximize your growth, including working a financial advisor. Have a plan. Ensure you do your research and feel confident enough to stick with the plan during the tough times.

Most FIRE followers will save somewhere around 40-50% of your income to give them the best chance of success. Hypothetically, let's say you are 25 years old making $100k a year. If you can afford to save 40% of your income, here is what this might look like: 


Salary: $100,000

Yearly savings to be invested: $40,000

Inflation Adjusted Rate of Return: 7%

Time to FIRE Goal of $1,500,000: 18.5 years

This is to say you MIGHT be able to consider FIRE in 18.5 years at this savings and spending rate. To reiterate, I am not saying 25 times your yearly expenses means you can retire early. It is simply a data point to use for simplicity sake. The situation is complex enough that a much more thorough analysis would be needed, likely with the help from a financial advisor. 

The other FIRE's: Fat FIRE, Lean FIRE, and Barista/Coast FIRE

When it comes to retiring early, there is not one single way of doing it. Over the years, people have adjusted the FIRE picture to look based on their individual goals. I wanted to cover off on a few of the variations just to give you some idea on how others have approached this dream:

Fat FIRE: Does your retirement dream consist of fancy cars, trips to Europe, and porterhouse steak? Followers of Fat FIRE don't want to sacrifice at all in retirement and want to live a plush lifestyle in high cost of living areas during their non-working years. This means having higher yearly expenses and in turn having to save more before pulling the trigger. Living big means saving big.

Lean FIRE: As you can probably guess, this is on the other side of the spectrum of FAT Fire. This is eating rice and beans, clipping coupons, living in a tiny house, or anything else that you can do to minimize expenses. The upside is that because you're expenses are low, you don't have to save as much. The downside is the age old question around whether living with bare essentials leaves you feeling content.  

Barista/Coast FIRE: This is my personal favorite. This is where you calculate at what point your retirement investments have accumulated enough that their growth will allow for a traditional retirement with no more contributions. In simpler terms, you no longer have to contribute to retirement and in a calculated number of years can fully retire. You will still need to work in order to cover your current expenses but this could allow you to have to only work part-time or a job that you would enjoy that pays less. 

Final FIRE Thoughts

The idea of retiring at 40 is a romantic thought but the one thing I have seen people regret in pursuit of this goal is sacrificing enjoyment during your 20's and 30's. You are only young once and you only get one life. Find enjoyment in each day. This may not always mean spending money but understand that everything has a tradeoff. Spending extra hours at the office to earn more means less time with your family. Choosing to spend money on a vacation may set you back financially but will leave you with happy memories and pictures. There is no correct answer to any of this. It is up to you to decide what you value. I will leave you with one of my favorite quotations that I think articulates the conundrum. 

"No one on his deathbed ever said, "I wish I had spent more time on my business." 

-Arnold Zach (as quoted by Paul Tsongas)

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