What if someone told you that you could retire in your 40s, 30s or even maybe late 20s if you put your mind to it? This sounds like some sort of fantasy to many people, but to a small group of dedicated budgeters it is anything but. They are members of the FIRE Movement, which stands for Financial Independence / Retire Early. If a very early retirement sounds like something you might enjoy, follow along to learn about the FIRE Movement and how you can get on track to your own early retirement.
How FIRE Works for Early Retirement
Early retirement has been a long-time dream for many American workers, but the FIRE movement emerged over the last decade as a viable method for many workers to escape their daily 9-5. One of the first noteworthy FIRE movement members is Mr. Money Moustache, an early retirement blogger who left his job at age 30.
FIRE recognizes that early retirement requires the ability to pay for your monthly expenses for the rest of your life after leaving a job. There are two primary levers you can use to reach that goal. One is increasing savings while the other is lowering your monthly expenses. To reach a higher savings rate, the FIRE movement advocates a form of extreme frugality that lets you save upwards of 50 percent of your monthly income.
This extreme frugality requires making some sacrifices that many would scoff at. It ranges from big financial savings through driving older cars a lot longer, cutting monthly overhead by cancelling cable and moving to a lower tier cell phone plan to saving by cutting down on shopping, restaurant visits, movie theaters and other fun spending.
While cutting on that spending may not be fun, it does add up quickly. Imagine if you could cut $1,000 a month, $2,000 a month or more from your spending and put it into savings. That means getting to retirement much faster, as your monthly need in retirement goes down while your savings accelerate.
Implementing FIRE Movement Strategies in Your Own Personal Finances
While you may not be ready to give up your daily latte, you can take steps to incorporate FIRE concepts into your daily life. Most Americans would be better off if they spent less, saved more and invested for a long-term horizonâ€“all tenants of the FIRE movement.
- Cut excess spending – Look at your monthly spending and dig into the numbers to find out where your money really goes. Look for places you can find recurring savings or places you spend that donâ€™t add much value to your life as places to start.
- Boost your retirement savings – With your now lower spending, increase your retirement savings. Aim for more than the minimum 10 percent to 15 percent experts recommend to maintain the same standard of living in retirement. Look at your 401(k) plan website, if you have one, and look for the options to increase your current contribution and automatically increase it in the future.
- Plan for a lean lifestyle – If you currently spend $5,000 per month and plan to do so in retirement, imagine what would happen if you could cut that spending plan in retirement to $2,500 per month. You could retire roughly twice as quickly! If you can adjust your lifestyle before retirement to a lower level, you can also save more to reach retirement sooner in addition to needing less in retirement.
One investment trick FIRE movement participants use is the 4% Rule. The idea here is that you can withdraw 4 percent from your investments in perpetuity as they will always beat that rate in the long-run. Using the 4% rule, you can back into a targeted savings level for a specific monthly estimated cost of living. If you want $2,500 per month in retirement, you would need $30,000 per year in withdrawals. $30,000 is 4 percent of $750,000, which means if you want to live on $30,000 in retirement, you need $750,000 saved.
If you want to live on $50,000 per year in retirement, that requires $1,250,000 in savings. But if you can pay off your mortgage and go extreme on frugality and can lower your annual expenses to $20,000 per year, or $1,667 per month, you only need $500,000 in savings. While that is still quite a hurdle for most families, it is much easier to reach $500,000 than $1.25 million. Adjusting your future lifestyle can quickly shave time off of your target retirement schedule.
Sprinkle FIRE Principles Into Your Finances
If living on under $2,000 per month in retirement sounds like a stretch for your lifestyle goals, donâ€™t be discouraged. Even if you plan to live it up with higher spending in retirement, you can use FIRE movement strategies and principles to improve your personal finances and retirement planning.
If you can save a little more now and add it to investments each month, that is a step the right direction. If you can add to your income or increase your 401(k) contributions, it will add up over time. Now is a good time to stop trying to keep up with the Joneses. Who knows how much credit card debt the Joneses carry. Â Focus your spending on what you care about most.
Much of personal finance, and FIRE, can be distilled into one simple rule: Spend less than you earn, save and invest the rest. If you are doing that, you are ahead of many Americans. If you can improve from there, you may have a little bit of FIRE in your future. Even if you donâ€™t retire in your 30s, if you can retire a little earlier than planned, you are making great strides. That is what personal finance management is all about.
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