FIRE. For most, when you see that word, you're thinking of a hot, orange fiery image. You're thinking of ‘fire’. But for a small select group of financial enthusiasts, the term ‘FIRE’ represents so much more. It represents a break from the cycle of work. It represents freedom. It represents financial independence. Across the internet, the term ‘FIRE’ as an acronym has come to represent the “Financial Independence, Retire Early” movement. Frugal financial enthusiasts have come together in this tight-knit community to advocate for their mission to save and invest enough to retire early - far before the usual conventions of ending work in your mid-sixties. But what exactly does it mean to FIRE? What do you need? And surely there’s a catch, right? Who wouldn’t like to retire and live lavishly from the age of 35 onward?
So what exactly does it mean to be financially independent? What does it mean to FIRE? According to most active users on the ever-growing popular online subreddit ‘r/FIRE’ - FIRE (or financial independence) refers to the ability to sustain living expenses for the rest of one’s life without being employed or relying on work. In other words, if you can kick your feet up every day for the rest of your life and have enough money to buy groceries, pay rent and meet all your other living expenses - then you have FIRE’d. For many though, financial independence doesn’t necessarily mean to completely cease work - but it can instead provide the freedom to switch to a more meaningful career.
Naturally, the place to start with FIRE is why? What’s behind this relentless desire to retire early? For many, the motivation to FIRE is to escape the so-called “Rat Race” of a 9-5 job. For these people, outright disdain toward their daily job is not a foreign concept - and is often how they feel toward their jobs. Whilst when we are young, aiming toward that “dream job” feels achievable - for the sake of pay or job security - many 20-somethings find themselves in careers they feel no passion for. It’s for these people that FIRE offers a route out of the mind-numbing daily ritual of a job they can’t stand. On top of this, FIRE offers an easy solution to the job security anxiety issue. An increasing casualisation of the workforce and uncertainty for entrepreneurs and gig economy workers creates an endless cycle of anxiety about whether one can provide for themselves and their families. By reaching financial independence early, individuals can transcend the inevitable mental stresses that come with job security and live a more intentional life.
One thing to note here however is that people aiming toward FIRE are not necessarily fixed on never doing any kind of work at all. Instead, FIRE offers the freedom to take risks and work on projects that would otherwise be unviable and careless within the confines of trying to make ends meet with their given salary. Whilst for some FIRE is about being able to kick their feet up - for others it’s a gateway for more meaningful work. Philanthropy in local communities is something many of us wish we could participate more in, but are bound by money and time (since we are likely spending 40+ hours a week on our careers). FIRE offers that financial and time freedom to instead work on these charitable, meaningful projects.
Okay - so we’ve established why you might like to FIRE. And if I’ve done my job right writing this article, hopefully, I’ve piqued your interest into how you can FIRE. So what needs to be done to FIRE? Well, the first step is to reflect on your lifestyle requirements and consider what kind of life you’d want to live in retirement. Specifically, what we need is an annual amount that would comfortably cover expenses, indulgence purchases, holidays and everything else. This of course will vary substantially depending on where you intend to live in retirement and what things you’d like to do. Let’s run through an example.
Phil is 51 and nearing a point where he’d like to declare financial independence. He knows he wants to keep living in his recently purchased property with his wife and pays half of a $3,000 a month mortgage. He also splits the total grocery, energy and other living expenses which amounts to $700 a month. He pays $180 a month for a car repayment. He also intends to go on 3 holidays a year for which he wants to set aside $2,000 each. Phil would also like $1,000 a month for miscellaneous and indulgent purchases such as taking his wife out for an infrequent dinner at a nice restaurant. To cover all this, Phil will therefore want $42,360 a year.
Once we have an annual amount to cover expenses, we can therefore calculate how much we need saved up and invested to FIRE! Assuming the majority of your life savings and retirement accounts are invested in safe, low-volatility investments such as broad index funds and bonds - a conservative estimate on the annual return you can expect is usually 4-6%. Some years, you’ll outstrip this and hit double-digit returns. Some years, you may lose money on your investments. But ultimately, over a long-term period, you can conservatively expect to average out at 4-6% return compounded annually. To be even more conservative, let’s assume a 4% average return for our FIRE calculation. In this case, we therefore will simply need 25x our annual expenses in order to comfortably FIRE. In Phil’s case, this would amount to having $1,059,000 saved/invested. Should he earn the expected average return of 4% - then withdrawing $42,360 would not even the value of that lump sum down. He’s essentially living off the passive income that his investments are generating for him.
Gone are the days of just waiting till 65 to pull the plug on work and finally retire. Should it be something you seek - early retirement really is a plausible goal for many. Taking the $1.059 million figure that Phil calculated, assuming you start working at the age of 18 and can earn a 5% average return on your investment - you would need to save $2300 a month to retire by 40. Whilst that certainly isn’t easy - a frugal budget and a high-paying job can help you get there. Sipping margaritas at the beachside at the age of 40 endlessly isn’t impossible. Yes it’s difficult, but after applying the FIRE formula - retirement might not be as far away as you might think.
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