FIRE, What Is The Hoopla All About?
Financial Independence, Retire Early (FIRE)
This is a concept that has literally caught fire in the USA and Canada (at least going by Reddit) over the last few years. It is becoming popular in our part of the world too.
Let us look at what FIRE means.
The idea behind this is quite simple and if I may say so, elegant.
You save enough, as early as possible, so you can spend the rest of your life doing whatever you want to. You no longer need to trade your time for money, your financial needs are served by your investments.
It is a simple and powerful philosophy. The FIRE movement has several enthusiastic followers.
It has also spun off a few variants.
FATFIRE: This is for those of us who want to live a life of luxury within the FIRE philosophy. You will want to set aside a very large corpus for your post-retirement lifestyle.
LEANFIRE: This is in contrast to FATFIRE. You will live a very frugal lifestyle. However, you will depend only on your savings and not need to work for sustaining your lifestyle.
Coast FIRE: This is an interesting variant. You will save enough so that you can quit your high-stress, high-engagement job. You will need to work to sustain your lifestyle but a bulk of your expenses will be paid for by your savings.
How do you do this?
The savings rate is what defines FIRE enthusiasts.
Many FIRE advocates speak of a savings rate of up to 80% of your income. This is an extremely aggressive savings rate and might not be for everyone.
The other commitment is to a frugal lifestyle while you are building your FIRE corpus.
There is a whole meme-fest about how paying for a Latte does not take away from your FIRE corpus. Also, about how living an extremely frugal lifestyle might just suck out all the joy of living.
Why should anyone FIRE?
At its core is the belief that you are doing something that you don’t actually want to do. That you are trading your time and effort for money, in a pursuit that is sucking away your life. While this might be true for some, it might not be true for all.
Therefore, each one of us needs to take our own decision on whether the FIRE life is something to aspire to.
Of course, there is a certain joy in sitting down for a chilled beer on a Monday afternoon and sending that picture to everyone you know. Evil joy in that.
How do I know if I am ready?
Well, this is a pretty simple mathematical thing.
Basically, figure out your expenses and build a corpus where you can withdraw between 2.5% to 4% of that corpus to sustain your life.
Investing sensibly in conservative instruments should still mean your corpus will last your lifetime.
There is a popular concept of 25x or 40x depending on your thought process and of course the local inflation rate.
You can read about the 25x rule here and here.
I bring in the 40x / 2.5% rule because we live in a country with much higher inflation than somewhere like the USA. The 25x rule is being questioned in the FIRE circles even in the USA. Therefore the 40x rule compensates for the higher inflation and is a better number to last you through your retirement period.
The most important thing here is to realize that you cannot afford to run out of money before you run out of time. It would be the worst thing to do in the sunset of life when the potential to earn is compromised.
The 4% (25x) rule came from a study about sustainable withdrawal rates for a 30-year retirement life, irrespective of market conditions. Ref.
Of course, each one of us needs to do our own calculation of what is a realistic FI number. 30 years might not be a realistic length of time either. Life expectancy and retirement age will both vary.
Financial Independence is more important
Whether you retire or not, it is worth having a FI goal and working towards that number.
It will of course depend on your particular life situation. Whether you consider yourself stuck in a rat race or having a ball of a time in your chosen career.
I have previously written about the Financial Independence number.
It is useful to revisit this process on an annual basis and make sure you are on course and that some of your core assumptions haven’t changed.
Where can I learn more about FIRE?
There are a few very interesting characters/blogs in the FIRE world. I would recommend looking up the following three at a minimum.
Mr. Money Moustache is one of the early FIRE advocates. His philosophy might not gel with you but it is worth reading through his ideas.
The Mad FIentist. He is also a frugal FIRE person. He has been living the FIRE lifestyle for a few years now and has an annual update about how it is going.
There is also the Financial Samurai, this is a very informative blog, well worth bookmarking.
Finally, I would recommend visiting some of the Reddit forums related to FIRE. Here you will probably learn that all is not hunky-dory in FIREdom. There are a number of sad stories too. People suddenly find that not having a clear purpose for the day is very unfulfilling. Others find that the journey to the FIRE milestones is too sapping.
In case the concept interests you, then you should dive deeper into it and understand both the good and the bad side of it.
Key Takeaways:
- FIRE: Financial Independence, Retire Early. It is a new moniker for an old concept of having enough money so you don’t need to work anymore.
- The FIRE movement is about saving a large part of your income so you can retire early and do whatever you want with your time.
- There are variants such as luxury FIRE (FAT), Frugal FIRE (LEAN) and having just enough so you can sustain a lifestyle with a stress-free job (Coast FIRE).
- There are rules such as 4%, and 2.5% withdrawal rates. Understand these rules but do your own math to figure out if you are ready to FIRE
- Whether you FIRE or not, it is worth having a number for Financial Independence, so you can aim for FI.
- There are two sides to every coin. Read more about FIRE before you take the plunge.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
