By Lee Sherman
Most people retire between the ages of 62 (when you can start receiving Social Security benefits) and 65 (when Medicare kicks in). But a growing number of people are retiring far earlier than a traditional retirement plan would allow. A relatively new movement, called “Financial Independence, Retire Early (FIRE) proposes a plan of extreme savings (up to 70% of your income) that will allow you live off small withdrawals from your portfolio and retire decades earlier than you normally would.
The idea comes from the 1992 best-seller, “Your Money or Your Life” by Vicki Robin and Joe Dominguez and the 2010 book “Early Retirement Extreme” by Jacob Lund Fisker. The basic premise says you need to consider every expense in the context of the time you need to spend at work to earn it. Common sense, right? Maybe, but this is really the opposite of the kind of “set it and forget it” retirement plans advocated by most financial planners and requires an attention to detail and austerity that not everyone can handle. The kind of mindset that has you questioning whether you can not only afford a particular item but whether purchasing that item means you will have to work longer before you can retire can help you save but it can also have a negative psychological impact.
If you struggle to maintain your budget, FIRE may not be for you. But the idea behind it makes sense. Why not take fuller advantage of your income earning years so that you can live comfortably when you are either unable to work (perhaps due to illness) or unwilling? If, like many young people, you are earning far more than you really need now, you may want to consider a fast-track retirement plan.
Millennials were among the first to embrace the FIRE movement in the early 2010s, as the movement first gained traction in blog posts, podcasts, and online forums. The idea is to accumulate enough assets such that you can live off the passive income from your portfolio. For most people, once your savings reaches approximately 30 times your yearly expenses, say $1 million, it’s time to quit the day job. After retiring young, FIRE advocates withdraw 4% yearly for living expenses.
Before adopting FIRE, you may need to re-examine your attitude toward money. Depending on your income, it may mean foregoing certain luxuries such as travel, dining out, buying new clothes, or pursuing an expensive hobby. I know what you’re thinking. While we’re in lockdown during the coronavirus pandemic, you’re not doing those things anyway. If you are not one of the 14.7% of US workers who are currently unemployed, FIRE could work for you.
There are variations on the FIRE theme. Fat FIRE means you’ve accumulated so much wealth you can retire early without having to worry about living expenses, while Lean FIRE means retiring early with a smaller nest egg while needing to maintain a more frugal lifestyle in retirement. Barista FIRE is a hybrid in that it lets you quit the 9-to-5 job but requires you to work part time during “retirement” to cover certain living expenses (perhaps while your partner continues to work).
Critics say that FIRE only works for the rich. It’s true that few people can realistically manage to save 70% of their income without resorting to a ramen diet. And, FIRE is so new that there isn’t enough evidence to suggest that its adopters are able to live comfortably in retirement. Like any retirement plan, there are no guarantees.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.