After years of slowly kindling among fringe enthusiasts, the trend of penny-pinching to quit work is catching on like wildfire.
FIRE (Financial Independence-Retire Early), first popularized as a core tenant in the 1992 best-seller Your Money or Your Life, has come to define the personal finance ambitions of a whole new generation.
The trend has caught on among Millenials and, increasingly, Gen Z, 48% of whom aim to retire on $2 million before age 60.
FIRE encourages saving and investing at least half of your income so you can retire as soon as possible. FIRE influencers often cite metrics like the “4% rule” or the “rule of 25” to base their forecasts on how much savers may need to retire, with inflation factored in.
Quitting work earlier is moving higher up priority lists, and many Americans are reportedly willing to make significant life sacrifices to make it happen.
Annuity.org surveyed 3,000 Americans on their retirement ambitions in 2021 and found one-third of respondents would give up eating out to retire early. What's more, nearly one-half would give up having either kids or pets to leave the workforce younger.
Yet retiring decades early is no small feat, and many give up early and become dejected when they encounter headwinds. This post will look at how to customize FIRE to suit individuals' needs, achieve financial security before independence and simplify investing for early retirement.
Finding Your FIRE
As the movement diversifies, there are many different ways to achieve FIRE. One size of financial independence does not fit all.
For those who want to live large in retirement, there is FatFIRE. This grants retirees a lot for lavish spending, defined as a generous annual budget of $100,000. Yet for those who've already tamed their spending by pursuing FIRE and see no reason to abandon their frugal ways in retirement, there is LeanFIRE – typically living on less than $40,000 per year. Due to their tighter budgets, LeanFIRE followers can retire earlier with less overall savings. This allows for an accelerated path to quitting work.
There are also other variations, such as CoastFIRE and SpouseFIRE, each having its own comparative advantages.
FIRE was previously associated with simply being frugal and retiring early, but these new varieties demonstrate the movement's versatility. Those who needlessly chase anothers' definition of financial freedom are more prone to burnout. Yet those who take the time to customize FIRE to reflect better their lifestyle and values will be more motivated to achieve their financial goals, empowering them to live their best life.
It may also help to aim and celebrate reaching halfway milestones rather than hold out for the grand prize of retirement itself. For instance, rather than focus exclusively on whether you have saved enough to retire, you can first build so-called “FU Money.”
As the name implies, the aim here is to have enough money to not fully depend on a particular job to survive so that you can always walk out the door if need be.
FU Money is typically not enough to retire on, but it is also more than just some emergency savings. It offers adequate financial security to fall back on during intermittent periods when someone may need to take a break from the workforce, for health, family, or personal reasons; transition to another industry; or seek better employment after telling their old boss where to go.
Along with spending less and earning more, investing is the third key pillar for reaching FIRE. Yet, the dizzying array of investment assets available can often be confounding. Getting clear and consistent on an investing strategy that works for you is essential to sticking the course to financial independence.
For example, while the “buy low, sell high” mantra may sound like great advice for stocks, it is a hard-to-replicate strategy for all but the most seasoned traders.
For the average retail investor, there are better options. For instance, as renowned value investor Warren Buffett said in 2020, “In my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there's more money in it for them if they do.”
By dollar-cost averaging and passive investing in index funds, many long-term investors have successfully accumulated wealth through equities. Although, as always, past performance is no guarantee of future results.
People encounter a litany of obstacles along the long and winding road to financial independence. Compound interest calculators can make future savings projections look deceptively simple to reach, but life often interjects in surprising ways. Emergency setbacks and tempting splurge expenditures can blow a hole in budgets and threaten to throw FIRE enthusiasts off track. Staying the course means keeping a level head and playing the long game. By designing a suitable FIRE style, acknowledging one's mid-term achievements, and investing consistently, it becomes easier to move closer to their post-work future.
This article was produced and syndicated by Wealth of Geeks.