Your Guide to the FIRE Movement: How and Why to Retire Early

Saving for retirement is a necessary part of our personal finances. Americans are now spending an average of 20 years in retirement, which means we need a nest egg to stay afloat as we age.

For many Millennials, the new goal is to retire early, even in their 30s or 40s. One early retirement craze called the FIRE movement is gaining popularity as a way to take savings to the next level and create financial freedom earlier in life. 

Instead of merely budgeting, FIRE adherents are setting aside as much as they possibly can. Rather than maintaining a career, they’re looking for ways to increase their income as fast as possible. 

Here’s what you need to know about the FIRE movement and whether it's right for you.

Key takeaways

• FIRE is a financial movement that requires a frugal lifestyle and aggressive savings and investment strategies.

• Planning, discipline, and a heavy reliance on stock investing are key components of the FIRE method.

• FIRE followers withdraw 3% to 4% of their savings annually to cover living expenses in retirement.

• By saving a large portion of their earnings, FIRE proponents can achieve financial independence and retire in their 30s and 40s. 

What is the FIRE movement?

FIRE is an acronym that stands for “financial independence, retire early.” People who are a part of the movement take extreme measures to make sure they can retire as early as their 30s or 40s. This is achieved through a combination of boosting income and cutting costs.

The aggressive savings tactics of the FIRE method have downsides that may not appeal to everyone. Some would rather strike a balance between spending on the things they enjoy and building wealth for the future. Others simply don’t want to retire early since they enjoy their work and already have a lot of control over their schedule. 

Still, it’s worth learning about the FIRE movement, even if you pick and choose the pieces that are relevant to your financial situation and goals or take another path entirely.

What does it mean to reach financial independence?

Let’s start off by defining what it means to be “financially independent.” To safely retire early, you’ll need to make sure your money won’t run out before you kick the bucket. That means you need to know how much to save for retirement.

The following are two methods of determining how much you'll need to save in order to safely withdraw enough money to live off of each month to be financially independent. The number is often referred to as your FIRE number.

The 4% rule

Based on historical data, experts estimate that you can safely withdraw 4% from your investment portfolio during your first year of retirement. 

This withdrawal rate ensures that you have enough money to live on while also keeping enough of your invested money to last you through retirement. 

To calculate how much you’ll need to retire, divide your annual expenses by 0.04. Your annual expenses should be the amount you’ve determined you’ll need each year to be able to live comfortably by your own definition. 

For example, if you want $40,000 per year to live on, divide that by 0.04 and you get $1,000,000. That means you’ll need to have $1,000,000 saved up in investments so you can withdraw 4% from your portfolio to live the way you want.

Note that the 4% rule only applies to your first year of retirement. Each year after the first you will need to adjust for inflation. 

For instance, if inflation is at 2% the next year you would need to withdraw $40,800. (0.04 x 1.02 x $1,000,000). If the inflation rate rises to 3% the next year, you would adjust again and withdraw $42,024 ($40,800 x 1.03). 

The rule of 25

The rule of 25 dovetails nicely with the 4% rule in terms of helping you calculate how much you'll need to have invested to live off of. According to many FIRE followers, you should have 25 times your yearly expenses saved up by the time you're ready to retire. 

So if you decided that you want $40,000 to live off every year, you'll need to have $1,000,000 saved up in investments (25 x 40,000 = 1,000,000).

Who is the FIRE movement good for?

The FIRE movement is a good fit for someone who can live happily on a limited budget for an extended period of time. To decide if FIRE is right for you, consider what you’d be willing to give up in exchange to retire early. 

Our own FinanceBuzz survey revealed that about 36% of respondents would be willing to go two years without buying something new, and 32% of respondents would be willing to get a second or third job if it meant early retirement was in their future.

Since saving for FIRE is an aggressive project, you may need to practice some extreme frugality. That could mean completely cutting things like shopping for fun, dining out, and entertainment. You also might need to secure additional income, which means working more now so you can enjoy time off later on.

Advantages of FIRE

• May allow you to retire earlier: The goal of the FIRE method is to use aggressive investment strategies when you're young in order to enjoy financial freedom earlier in life. Many FIRE method proponents have a goal of retiring in their 30s and 40s.
• Keeps you on track for your retirement goals: No matter how you approach the FIRE method, using its techniques can give you a clearer picture of your retirement savings goals and where you stand on them now.
• Helps you live below your means: The FIRE method can teach you how to live well on less money. It's common for people who increase their income to also increase their spending. The FIRE method encourages you to invest more for the future to give you financial freedom sooner rather than later. 

Disadvantages of FIRE

• May require a large income: Some studies show that people who achieve financial freedom early on in life have done it with an annual income between $50,000 and $99,000. However, the FIRE method is designed for people who have an annual six-figure income through passive means.
• You might now be able to cut your spending: If you're already barely getting by, it can be hard to live a more frugal life and put aside more money as outlined in the FIRE method.
• Your investment might not perform as expected: Many of the calculations used in the FIRE method depend on a certain predictability of your investments. However, stocks can fluctuate in price leaving you with less to live on if you take an early retirement.    

How do you get started with FIRE?

If reading all this has you excited about the possibility of early retirement, and you’re ready to jump on board the FIRE movement, here’s what you need to do:

1. Cut your expenses

If you plan to retire early, you’ll need to do more than just cord-cutting or couponing, though those can be great places to start. You may need to do things like:

• Sell your car
• Move somewhere with a lower cost of living
• Move somewhere that will pay you to live there
• Live in a smaller space or with roommates
• Cancel memberships and subscriptions
• Prepare all your meals at home
• Stop taking traditional vacations
• Learn about free festivities in your area or hit up the free museum days
• Buy used clothing and home items instead of new ones
• Give up cigarettes and alcohol
• Forego having pets
• Skip having kids or at least work on reducing your kid-related expenses
• Eliminate holiday gifts

FIRE movement followers typically aim to set aside 50% to 75% of their earnings toward savings. Imagine living on just a quarter of your current salary. If that feels doable, you might be a great candidate for the FIRE movement.

To make sure you don’t overspend, create a strict annual budget. And any time you’re able to come under budget, invest that extra money or deposit it into a high-yield savings account.

2. Increase your income

You’ll need to think beyond just asking for a raise. You may need to take on a second or third job, pick up a side hustle, or find ways to earn passive income. You may even need to spend most of your time working, especially if your full-time salary isn’t that high. 

Here are some other ways you can increase your income:

• Rent out your spare room (or couch)
• Rent out your car
• Sell your old stuff
• Drive for a delivery service or rideshare service
• Monetize your online presence
• Sell your skills by teaching online courses
• Become a reseller
• Start a small business venture

3. Prioritize saving and investing

Prioritizing saving means that any extra cash immediately gets put aside in a savings or investment account. Many FIRE participants also choose investment opportunities beyond just a retirement account. These can include:

• Investing in real estate or rental properties
• Investing in the stock market
• Becoming a peer-to-peer lender
• Buying parking spots or storage facilities to rent
• Purchasing bonds

If you're new to the stock market, consider investing in something straightforward like index funds. As you get more comfortable investing, you can diversify your investment portfolio. 

You can also try one of the best investment apps which lets you get into investing without a lot of money.

Prioritizing saving and investing for FIRE also means you won’t have room for certain other financial goals. For example, you may have to give up your annual vacation or build your emergency fund a little slower in favor of investing money for early retirement.

4. Pay off any debt

Student loan debt, credit card debt, and personal debt are all major roadblocks to early retirement. If you want any hope of retiring early, it’s essential that you pay off all your debt. 

Not only does debt increase your monthly overhead, but you may be wasting money by paying a high interest rate on that debt.

You may need to consolidate or refinance your debt in order to lower your interest rate and pay off your debt. You could also use a strategy like the debt avalanche method to pay down your debt faster.

If you have concerns or questions about pursuing FIRE, then you might find that spending a few dollars on a financial advisor saves you a lot more money in the long run.

FIRE movement terminology

In addition to defining what it means to be financially independent, the FIRE movement is full of acronyms and jargon. Here are some terms that are helpful to know as you explore this movement:

• Early retirement: Full Social Security benefits are available at age 67 for people born after 1960. Financial planners often consider early retirement as any time before the traditional retirement age of 65. In the FIRE method, early retirement means you stop working decades before that.
• Lean FIRE: Lean FIRE is a way to retire early on a minimalist budget by spending less on living expenses than the average household. Census data shows that the average American household spends about $61,000 annually.
• Fat FIRE: This term describes a way to retire early while spending more than the average household does annually.
• Barista FIRE: With Barista FIRE, a household is still earning income, either because the early retiree’s spouse still works or because the retiree has a part-time job or side hustle. It's named for the dream of having fun while slinging coffee and not having other responsibilities.
• Tax-advantaged savings/investing: A savings or investing plan that is exempt from taxation or otherwise offers tax benefits is known as tax-advantaged. This includes retirement plans such as traditional or Roth IRAs and 401(k) plans.
• Bridge account: Most retirement accounts won't let you take money out until you’re around 55 to 59.5 years old. This time between when you want to retire and when you can withdraw your retirement funds is a bridge period. A bridge account lets you set money aside to get you through these in-between years.

Frequently asked questions

Bottom line

You have to save up quite a stash of cash if you're ready to retire early. You’ll also need to make sacrifices, work hard for extra income, and adopt a frugal lifestyle. 

But even if you find the FIRE movement too extreme, there’s plenty you can learn about retirement planning from its devotees.

The next time you’re about to purchase a pair of shoes you don’t actually need, think about whether it’s really worth trading in your time for something you could live without. 

Every little bit of extra money you’re able to save for retirement counts, and it will help you live life on your own terms when you retire.