What Is FIRE Investing?

Posted on March 27, 2021 in Investing

No matter how far away it may seem at times, retirement is waiting for us all at the end of the line. The best time to start preparing for retirement is yesterday, but today is the second-best option since that’s not possible. Most people with a steady job probably pay a few percent of their wages to their 401k retirement plans. 

This is a great start for a retirement plan, but there are many other plans that should be included as well. There are many ways to budget for retirement and maximize savings along the way, but one of the most dedicated programs to accomplish these goals is FIRE investing. 

What Is FIRE Investment?

Finance Independence, Retire Early, otherwise known as (FIRE), is a movement that is dedicated to a program of extreme savings and investments that allows its proponent to retire far earlier than most budget and retirement plans. As a result of dedicating as much as 70% of income toward savings, the FIRE movement followers are often able to quit their jobs eventually and live solely off small withdrawals from their portfolios decades before the more conventional retirement age of 65. 

Now, of course, FIRE isn’t a surefire path toward early retirement, and extremely high rates of savings will come at the expense of your current quality of life and lifestyle in general. Still, this method is worth considering if your end goal is to retire early and comfortably. 

How Does FIRE Investing Work?

FIRE investing stems from the 1992 best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez. One of the book’s core premises is to juxtapose expenses and time spent at work against the hours of your life. Every expense is compared to the amount of time that’s spent at work in order to earn the purchase. 

In recent years, the program has particularly been embraced by Millenials as they aim for financial stability and retiring before 65. Participants of this extreme savings lifestyle often begin by remaining for several years in the traditional workforce to save up 70% of their yearly income. Once these savings reach approximately 30 times their yearly expenses, usually around $1 million, they quit their day jobs or completely retire from any form of employment altogether. 

To cover their living expenses after retiring at such a young age, FIRE proponents will make small withdrawals from their savings, normally around 3% to 4% annually. Depending on the size of the savings and desired lifestyle, this will require extreme diligence to monitor expenses and continued maintenance and reallocation of investments. 

Variations on FIRE Investing

The movement has inspired many people with different ideas for investing and lifestyles. As a result, there are a few different types of FIRE investing. Some of them include:

  • LeanFIRE: The best way to think of this option is to operate just like a traditionally extreme savings-oriented FIRE budget, only much tighter. The goal with this option is to live on much fewer expenses than you or the average person. The whole plan is based on living as minimalist a lifestyle as possible, and being frugal is an enormous part of this life. It’s paramount that you become a master of managing expenses, keeping costs down, and finding new ways to simplify your lifestyle. The goal of LeanFIRE is to end up retiring and living with under $40,000 a year in expenses.

  • FatFIRE: This option is for people that want to reach early retirement but have much larger yearly budgets and/or higher expenses. As opposed to living under $40,000 a year or being in a more modest range for the traditional FIRE plan, this option will have living expenses exceeding $100,000 a year.

    Obviously, the people in this category will be high earners with more disposable income to live with larger expenses. The average yearly household expenses range from about $50,000 to $60,000, so anyone pursuing FatFIRE will have the spending potential of roughly two times the average person’s spending potential.

  • BaristaFIRE: A newer variation of FIRE investing but an increasingly popular one is BaristaFIRE. This method focuses on saving enough to only need a little bit of income each year from work. As opposed to outright retiring from work altogether, you will be part-time retired. Instead of a full-time and 40+ hour a week job to maintain expenses, you will only need a part-time income to survive.

    By withdrawing money from your portfolio and taking on a job such as working at a coffee shop (hence the name) or taking part in the gig economy, you are free to enjoy more free time during the week. Some of the advantages of this method are not having to work so hard to achieve FIRE, obtain some financial independence earlier, and have health coverage that won’t fully come out of pocket.

  • CoastFIRE: This option is fairly similar to BaristaFIRE but has some key differences. CoastFIRE is all about having enough money invested at an early age that you no longer will need to invest because the compounding of interest will be able to support your lifestyle. Once enough money is invested to eventually reach the financial independence necessary for retirement, you will simply “coast” to the number while still working to current living expenses. Since no money will be needed to be saved or invested, you will be free to take on less stressful jobs and reduce hours worked per week.

How Much Money Is Needed For FIRE Investing?

The easiest method of calculating your FIRE number, the amount of money needed to reach financial independence, is to first calculate your annual household spending and then multiply it by 25. This is the amount of money that should be invested in low-cost, passive stock funds. Most early retirees aim to have saved up over $1 million before quitting their day job. Once retired, the standard rule is to only withdraw a maximum of 4% each year, increased by inflation each year. 

This is known as the Safe Withdrawal Rate or the 4% Rule. This rule is based on two financial averages: First, a stock portfolio will grow at an average rate of 7% annually. Second, the average annual rate of inflation is 3%. The thought behind this rule is that if you only spend the average incremental growth from your portfolio per year, you would never run out of money in theory. 

Potential Drawbacks Of FIRE Investing

The harsh reality is that this extreme savings method and early retirement are not applicable and unrealistic for most people working today. For those with high salaries, such as engineers or lawyers, this is an attainable goal, but for a majority of people, it will be extremely difficult to maintain a comfortable lifestyle and save 70% of their income. Additionally, while the 4% rule is a good idea, in theory, finances can be much more turbulent in practice. 

If a recession were to hit after retirement, you could quickly lose a lot of critical money. This method also fails to take into account the unpredictability of life in general. If you were to experience a serious illness or have your house burned down, then all the hard work of FIRE investing will erode instantly. 

While there may be good lessons to take from FIRE investing when it comes to retirement in general, it’s important to know your finances and what you are realistically capable of achieving. 

The Takeaway on FIRE Investing

FIRE investing is a newly popular financial method that prioritizes saving and investing to retire early. While there are lessons to take from this practice, it may not be a realistic goal for everyone working today. 

Creating and maintaining a monthly budget that emphasizes savings and minimizes spending should be a top financial priority for anyone in today’s society. There are so many different methods, and types of planning and saving, but not every option will work for every person. FIRE investing can be an easy path to early retirement but the amount of money that it would take, coupled with the years of investing, makes it a viable option only available to some people and not to all. 

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