If you’re new to the “FIRE Movement,” F.I.R.E. stands for “Financial Independence / Retire Early.”
In essence, individuals who achieve “FIRE” or “FI” have replaced their traditional income through a portfolio of investments capable of producing enough passive income to sustain their lifestyle.
Those who “retire early” typically have astronomical savings rates. This extreme savings rate allows them to retire decades earlier than usual. Often, those who reach FIRE in their 30s or 40s save 50%-75% of their annual incomes.
How can they possibly invest this much?
The answer is simple. They cut lifestyle expenses to the bone, avoid debt, and invest as much as possible.
Once they have an investment portfolio of ~25x their annual expenses, the gains and dividends should allow for 4% of the portfolio to be withdrawn each year without digging into the principle.
The FIRE Community
Those who achieve FIRE certainly take a different outlook on life compared with the average American. They bargain shop, rarely dine-out in restaurants, drive older vehicles, and even may “house-hack.” Often, they work multiple jobs or start side-hustles that eventually allow them to exit the traditional workforce.
By investing 50%+ of their incomes over 10-15 years, they’re able to build a portfolio of stocks, bonds, and/or real estate that generates substantial passive income. This passive income sustains their lower-than-average lifestyle. Now, they no longer NEED to work a 9-5 job.
However, some (if not most) still generate active income doing what they LOVE even though they do not need the extra income. Often, they’re able to negotiate part-time, remote work with their current employer. Sometimes, their side-hustle passion earns them more than their old job!
After years of sacrifice and diligent investing, they now have FREEDOM to live the life they’ve dreamed!
By contrast, most Americans are slaves to their job
For most Americans, we work 40+ years at a job we despise while only managing to save ~10%-15% in our 401(k) (if we’re lucky).
Along the way, we buy new cars every few years, a fancy house in the best school district, and spend thousands on clothing, restaurants, and drinks out with friends.
When we don’t have the savings, we simply borrow the money and finance the purchase. We turn to car loans, credit cards, and “leverage” to buy the things we think will make us happy or provide a better life for our family.
Essentially, we trade our TIME and FREEDOM for a paycheck that we spend on things we don’t really NEED or bring us long-term happiness.
Instead, we dream of hitting the lottery. We long for the day we reach 65 and can retire, collect Social Security and receive Medicare coverage. Then, we can finally live out our remaining days “living out our dreams.”
Hopefully, we still have our health so that we can start living and doing what we want!
Are these REALLY our “Golden Years?”
Surely, there’s a way to shape our lives to look like WE want rather than what is normal in our American society.
In the end, wouldn’t we be more happy if we had control of our lives rather than having our daily routine dictated by our boss, company vacation policy, or creditors?
The FIRE Movement flips traditional retirement on its head
The FIRE community takes a difference stance on how their lives are structured.
Most (if not all) start out in the traditional workforce. Many come out with six-figure student loans and/or have fallen prey to what is considered “normal” in our society.
However, after a few years of working their normal 9-5 jobs, those who found FIRE decided to take a different approach to making their dreams a reality.
By the average American’s standards, these strategies are extreme and counter-cultural. After all, saving 50%+ of your gross income takes incredible sacrifice. However, this extreme savings rate ultimately allowed them to achieve financial independence much sooner.
Do they save for traditional retirement along the way? ABSOLUTELY.
The FIRE community is a huge proponent of investing for traditional retirement. Pretty much everyone advocates for contributing enough in employer-sponsored plans to get match. The community almost unanimously agrees that Roth IRAs provide an exceptional, tax-advantaged way to invest.
However, the FIRE community goes beyond investing for traditional retirement. Their goal is to expedite retirement 20 or even 30 years sooner!
Since these accounts (other than contributions to a Roth) can’t be tapped until age 59 1/2, those who achieve FIRE also invest outside of traditional retirement accounts.
Most open ordinary brokerage accounts, invest heavily in index funds, and/or purchase real estate to provide income during the “bridge years” between now and when they can begin tapping retirement accounts.
These are the core accounts that provide the building blocks to achieve independence. But, why is financial independence important?
Financial independence is financial freedom
Financial independence BEFORE traditional retirement provides optionality and security to our lives.
Even if you love your job today and couldn’t dream of quitting, who is to say your circumstances won’t change? Your wonderful boss could quit or get fired. Your company could be sold to a competitor. You could be laid off in an economic downturn. Maybe, you encounter a health issue that precludes you from being able to work.
Having financial independence PROTECTS you from circumstances outside of your control. Hence, the word “independence.”
When you achieve financial independence, you have sole discretion of how you want to spend your time.
Even if you plan to work until the day you die, when you achieve financial independence, that becomes YOUR CHOICE. As your life evolves, you can adapt to the lifestyle you desire with FI.
Retiring Early
Ah, retiring early.
The thought of retiring early connotes laying on a Florida beach and sipping pina coladas. For you, retirement may involve playing golf, tennis, or fishing.
However, “retiring early” in the FIRE movement probably looks a lot different than the typical retirement at age 65.
Do those who have retired early enjoy traveling the world and occasionally relaxing? You bet!
Many of those who have retired early indulge in extended vacations often for months at a time by travel-hacking with credit card points and miles. Some live in multiple locals or travel to different countries throughout the year.
While they certainly enjoy traveling and the freedom retirement from their 9-5 job provides, very few truly retire from work altogether.
After all, who wants to spend the next 40+ years of their lives with no purpose?
The FIRE community has REDEFINED what early retirement means
Instead of quitting work altogether, most early retirees start their own business or expand their side-hustles to earn even more money.
With 8 extra hours per day, they can take their income-producing hobbies to the next level! Sometimes, this means actively working MORE than they ever did at their W-2 job. However, the rewards can be much more lucrative and the work way more enjoyable and meaningful.
Many blog about their personal finance journey and generate income through their personal websites or YouTube channels. Some early retirees write books on their early retirement investing strategies. A few in the FIRE community have written courses to teach other how to invest in real estate.
Speaking of real estate, many “early retirees” quit their traditional jobs to manage their portfolio of rental properties. Often, they will spend their days looking for the next undervalued property.
Then, many real estate investors implement the BRRRR Strategy in their real estate investments by doing the following:
- Buy the property,
- Rehab and create value through equity appreciation
- Rent the property to generate passive income
- Refinance the mortgage to pull equity out of the property
- Repeat the process by purchasing another property
Even if you prefer investing in asset classes other than rental real estate, retiring early is certainly plausible.
“Retiring early” gives you freedom to pursue work that matters to YOU
For virtually everyone in the FIRE community, retiring early doesn’t mean stopping work.
Retiring early simply means altering what work looks like and how traditional employment interferes with their ideal life.
In fact, many in the FIRE community don’t even quit their day jobs! Instead, they have the courage to request concessions such as the ability to work from home, negotiate fewer hours, or even work part-time.
With their newfound financial independence, they have the ability to walk away from their employer if their requests for flexible working arrangements go unanswered.
While they may not even need to work, they could simply find another company that better fits the lifestyle they are looking to achieve.
Ultimately, financial independence provides the catalyst to make “retirement” look like YOU want it to look – even if it means continuing to work at some capacity.
How to Achieve FIRE
If you’ve ready ANY articles on the “FIRE Movement,” you probably understand the importance of investing inside tax-advantaged retirement accounts on your path to FI.
In order to maximize the number of dollars invested, the FIRE community is a big proponent on spending as little money as possible. Instead, allocate your money to the things that matter MOST to you. Cut out expenses large and small that don’t add value to your life and aren’t in alignment with your long-term goals.
After cutting back on your expenses, find ways to earn extra income. Many in the FIRE community start side-hustles by blogging, selling items on eBay, Amazon, or Etsy. Some work extra at their current job and rake in the overtime pay.
After increasing your income, eliminating any debt, and cutting back on lifestyle expenses while finding ways to reduce your housing expense (taking on roommates, sub-renting rooms in your house through Airbnb, etc.), you should be able to invest 50%+ of your gross income.
At a 50% savings rate, you should be able to retire completely in 10-15 years. If you plan to keep up your income-producing side-hustles, the timeline could be even shorter!
Investing for FIRE
FIRE investing takes a variety of shapes and form. However, investing for FIRE should be approached from two angles.
- Cash flow and income generation (in early retirement)
- Long-term growth (for “traditional retirement”)
On one hand, early retirees need monthly income to pay for their living expenses. On the other hand, their portfolio must last much longer than the traditional 20-30 year retirement.
Balancing the risk of relying on their investments for income coupled with the risk of running out of money is always present for those in the FIRE community.
Just a 20% market decline early in their retirement journey could jeopardize their future needs.
Therefore, much of an early retiree’s portfolio may be allocated to more stable investments that produce income. For instance, an early retiree’s portfolio may be concentrated dividend-paying stock funds or more stable asset classes that produce cash flow (such as real estate).
To mitigate the risk of short-term market declines, an early retiree may also have a larger than normal emergency fund. This extra cash would cover catastrophic events or sudden market declines.
This liquid savings would provide protection by keeping an early retiree from dipping into their portfolio at market bottoms just to pay bills. Instead, they can leave the balance invested until the market inevitably rebounds. To pay their normal bills, they can simply pull money from their cash pile.
Early retirees must also invest “aggressively” for decades in advance
Those who choose to retire early rely on their investments to produce cash flow so they can pay their monthly bills.
On the other hand, those who leave the workforce in their 30s or 40s could have 20+ years of “early retirement” until they can tap the bulk of their retirement accounts without penalty.
How can they ensure their portfolio will last in their “Golden Years?”
For the portion of their investments that they won’t touch until “traditional retirement” (aka 59 1/2 and onward), a more aggressive portfolio may be appropriate.
After all, who wants to be retired for 40 years only to run out of runway in their 80s?
By investing a segment of their portfolio in growth-oriented index and mutual funds, the compounded returns over the long run should appreciate into a portfolio large enough to stay retired.
The efficiencies in a FIRE lifestyle
The FIRE community strongly advocates for efficient lifestyles.
Those who manage to achieve financial independence in their 30s and 40s do so through INTENTIONALITY. They win and stay motivated because they have a PURPOSE.
Those who retiree in the 30s or 40s are willing to forego the temptations to “keep up with the Joneses” because they understand these choices lead them to their long-term goal of financial freedom.
Instead, they look for ways to gain cost efficiencies. They may house-hack by renting out rooms to pay off the mortgage faster. Most bargain shop when they need newer clothes. Those in the FIRE community avoid dining out and instead opt to cook healthy meals at home. Some even drive for Uber along their commute to offset the cost of gas and car ownership. All of these examples take sacrifice but are ways to gain cost efficiencies.
Efficiency in lifestyle also extends into the investing arena. Just like other areas of the FIRE lifestyle, those in the FIRE community love the efficiency of tax-advantaged investing.
Why pay $1 in taxes that can be legally avoided and invested?
Tax-advantaged accounts for FIRE
Most of the prominent voices in the FIRE community strongly advise their followers to max out 401(k)s or similar work-place plans while they’re still working.
After all, once you retire, you’re limited in how much you can contribute to tax-advantaged retirement vehicles. If you no longer have an earned income, you can’t contribute ANYTHING into these tax-advantaged accounts.
Therefore, take advantage of Roth 401(k)s/403(b)s/TSPs while you can! With any extra savings, consider contributing to a Roth IRA.
What’s so special about retirement accounts?
Essentially, the federal government helps us to save for future needs by offering tax advantages when contributing to designated accounts.
Traditional Accounts (IRAs/(401(k)s/TSPs)
With traditional accounts, contributions are tax-deductible. Each dollar you contribute to a traditional retirement account, your adjusted gross income is reduced on your Form 1040 come tax time.
By contributing to traditional retirement accounts, you save your effective tax rate on each dollar you contribute.
For instance, let’s say you contribute $10,000 to your employer-sponsored Traditional 401(k). If your effective tax rate is 25%, your total tax bill will be $2,500 ($10,000 x 25%) LESS than you would have otherwise owed.
Your investments in a traditional account are tax-deferred. Basically, your capital gains and dividends are temporarily shielded from taxation. This allows 100% of your portfolio to compound without incurring tax along the way.
While you receive a tax deduction in the year you make a contribution and your investments grow tax-deferred, distributions in retirement (after age 59 1/2) are taxed as ordinary income.
Those who choose to contribute to traditional retirement accounts generally expect their tax rate to be LOWER in retirement.
Roth Accounts (IRAs, 401(k)s, TSPs)
Roth accounts offer another lucrative tax-advantaged way to save for retirement.
Unlike traditional accounts, contributions are NOT tax-deductible. However, distributions from Roth accounts in retirement are TAX FREE!
Since the bulk of your portfolio in retirement will likely be composed of capital gains and dividends rather than contributions, Roth accounts are a lucrative option for most retirement investors.
For instance, if you had $1 million in a traditional account, you’d likely only be able to actually use ~75% of the balance. Instead, ~25% would go to taxes. If you would have instead opted for the Roth and contributed the SAME amount, the full $1 million would be at your disposal.
Further, Roth accounts provide another valuable benefit for those in the FIRE community. Contributions to Roth accounts can be withdrawn tax and penalty free!
By contrast, early distributions from traditional accounts will incur taxes and a 10% penalty.
Therefore, Roth accounts provide considerably more flexibility – especially, for those on the path to FI!
Retirement accounts aren’t the only tax-advantaged accounts provided by the IRS.
Invest in a triple tax-advantaged Health Savings Account (HSA)
One big deterrent of retiring early is the cost of healthcare.
However, if you enroll in a qualified, high-deductible health plan (HDHP), you will likely save on premiums AND have the ability to invest in a HSA.
With a HDHP, you bare the brunt of your healthcare costs. You pay 100% out of pocket until your deductible is met. However, once you reach your higher deductible, your health insurance provider begins covering most of the costs.
Further, your HDHP will have a maximum out of pocket each year. Once you reach this limit, your healthcare expenses are capped and any further costs are fully covered by insurance.
To help save for your healthcare costs, qualified HDHPs allow for those enrolled to save in a special account – the HSA.
HSAs are tax-advantaged in 3 ways:
- HSA contributions are tax deductible
- Contributions can be invested and grow tax-deferred
- Distributions are tax-free when used for qualified healthcare expenses
However, if you make unqualified withdrawals from your HSA, you will be taxed and penalized another 20%. Therefore, it’s very important to only use your HSA for medical expenses.
HSA Strategies for FIRE
For many, the thought of locking up a significant amount of money in an account that can only be used for medical expenses may be worrisome.
However, you WILL inevitably spend money on doctor’s visits, medication, and other qualified expenses. Over your lifetime, you qualified expenses are likely to be fairly significant.
Even if you don’t max-out your HSA, contributing and investing in this triple tax-advantaged account can provide some interesting options
Delayed reimbursement
With a HSA account, you have the ability to delay reimbursement from you account. This (coupled with the 3 tax advantages outlined) provides an additional opportunity for those looking to retire early.
By simply keeping your receipts (or scanning and saving to your computer or an online share drive), you can reimburse yourself for DECADES of medical costs at some point in the future. (If you do decide to implement this strategy, keeping your receipt documentation is key in case of an unlikely IRS audit!) Along the way, your contributions will stay invested and compound into a meaningful sum.
When you finally near your “F.I. number” or identify a lucrative investment opportunity, you can reimburse yourself all at once and withdraw 100% of the qualified expenses TAX FREE from your portfolio.
This offers considerable flexibility for when you need to tap your account for additional money.
HSA for traditional retirement (at age 65)
Let’s say you’ve managed to accumulate a hefty nest egg in your HSA by the time you turn 65.
Even if you don’t have enough backlogged, qualified medical expenses over your life to withdraw the full amount tax-free, the IRS allows you to withdraw from your HSA WITHOUT the 20% penalty.
Instead, you will only incur taxes on the gains. This is just like a Traditional IRA or Traditional 401(k) plan. In essence, your HSA acts just like a traditional retirement account when withdrawals are made for non-qualified expenses after age 65. Therefore, you don’t need to worry about “over-funding” your HSA on your path to FI!
Achieving Financial Independence and Retiring Early
Achieving FI and retiring early is no easy feat.
Living substantially below your means, saving 50%+ of your salary, and diligently investing your savings each month requires hard work and incredible lifestyle sacrifice.
However, at the end of your FI journey, you will have the ability to take control of YOUR life. When you reach your financial independence number, you will suddenly have options and CHOICE.
You no longer have to work that job you hate. Even if you love your job and career trajectory, achieving FI provides opportunities for flexibility and protects your future for if circumstances change.
Perhaps, achieving FI gives you the courage to pursue something greater and more meaningful. Maybe, it allows you to work part-time, start your own business, or volunteer with your favorite causes.
Financial independence represents much more than a monetary number. It’s taking charge of your future and shaping your lifestyle to align with your hopes and dreams!