Don’t want to wait until you’re in the 60s to retire? Consider participating in the FIRE or financial independence, retire early movement, which is gradually becoming more popular among Americans seeking to reclaim control over their time and finances.
In a nutshell, FIRE proposes that you save and invest aggressively a sizeable portion of your income to become financially independent and eligible for retirement early. However, the downside is that you must be highly frugal—sometimes even rejecting small rewards—to maximize your savings.
Like any financial strategy, weighing its pros and cons is essential. Take a closer look at FIRE’s fundamental tenets and potential risks, with insights from a financial planner’s perspective to help you assess whether it’s the right path for you.
What is the Fire Movement?
The movement called FIRE (Financial Independence, Retire Early) is a strategy that sets you up to retire younger by saving and investing a significant slice of your employment income. The goal is accumulating enough assets to live off your returns, eliminating your need for traditional jobs sooner than usual.
This tactic originated in 1992 when Joe Dominguez and Vicki Robin published their book Your Money or Your Life. Here, the authors advocated for transforming people’s relationship with money by focusing on maximizing life value rather than consumption.
Over time, FIRE gained considerable momentum, especially with personal finance bloggers and online communities embracing it. Today, it has several variations catering to different financial situations and retirement goals, the most common of which include:
- Lean FIRE is for people who want to retire early with a modest lifestyle. It focuses on extreme frugality and minimalism to keep expenses low. As such, it appeals to those comfortable with fewer material possessions and lower annual spending.
- Fat FIRE is the opposite of LeanFIRE, as it’s ideal for those who want to maintain or upgrade their lifestyles in early retirement. It often has higher savings targets to build a significant financial cushion, so it’s ideal for high-income earners.
- Barista FIRE achieves partial financial independence because retired practitioners continue working part-time jobs to cover non-essential expenses, like luxury purchases or travel funds. It appeals to those who want to retire but still have a sense of purpose or structure in life.
FIRE resonates with various groups for different reasons. For example, Gen Zs follow it because it challenges the traditional career path of working tirelessly until age 65, with no guarantee of a fulfilling post-employment life. Meanwhile, high earners see FIRE as a way to leverage their above-average income to fast-track their retirement goals.
Key Tenets of the FIRE Movement
Achieving FIRE means practicing discipline in saving, investing, and managing your finances. Here are the principles defining this movement:
High savings rate
Traditional retirement planning assumes you’ll save a small percentage over a long period.
However, since FIRE advocates maximizing your savings quickly, proponents suggest that you set aside a bigger portion of your income—ideally around 70% or more. It requires you to be extremely frugal by cutting back on unnecessary spending. The faster you save, the sooner you’ll reach financial independence.
The rule of 25
How much do you need to retire early? The rule of 25 presents a simple formula: multiply the amount you plan to spend annually by 25.
Say you expect to live on $50,000 per year in retirement. In this case, you need $1.25 million in savings or returns to sustain your lifestyle post-employment. Note that the rule of 25 assumes your investments continuously grow.
Safe withdrawal rate
The safe withdrawal rate (SWR) is the percentage of retirement savings you may withdraw yearly without running out of money. Most FIRE circles follow the 4% rule: if you have $1 million saved, you can safely withdraw $40,000 annually. Keep in mind that it assumes your retirement lasts 25 years. If you want your assets to last longer, withdrawing less is better.
Compounding interest
Compounding interest is the driving force behind the success of the FIRE method, as it allows your investments to generate exponential growth over time. When you invest money, you earn returns on your initial capital. As these returns are reinvested, they start earning interest themselves.
This process of earning “interest on interest” accelerates over time, making your wealth grow much faster the longer it is invested. It is also the key to your fund’s sustainability, as, in theory, the amount you withdraw annually should be lower than the amount your investments earn through compounding.
Tax efficiency
Following FIRE means saving as much as possible, including your taxes. Hence, consider leveraging tax-advantaged accounts like 401(k)s and individual retirement accounts (IRAs) to grow your investments tax-free or tax-deferred. Also, strategies like tax-loss harvesting—selling underperforming securities at a loss and then using those to offset taxes—can help you save more.
Risks of the FIRE Lifestyle
While FIRE offers a coveted shot at early financial independence, it also comes with risks that may undermine your financial stability.
Depletion of funds
Retiring decades before the traditional retirement age means your portfolio needs to last longer. However, unforeseen expenses like medical emergencies can drain your savings. Even worse, returning to the workforce is difficult after years of retirement, making it challenging to build your fund again.
Bear markets
Considering that financial independence heavily relies on investments, prolonged “bear markets” or economic recessions can severely impact your portfolio’s value. This problem makes it nearly impossible to withdraw funds without using up your savings.
Compromises with lifestyle
Cutting back on discretionary spending, such as in LeanFIRE, may work while you’re employed. However, it might feel restrictive and unfulfilling during retirement. Unexpected lifestyle changes like medical emergencies or starting a family can strain even the most well-thought-out financial plan.
What We Think About the FIRE Movement
There are many Americans that absolutely love this moment and investment/lifestyle philosophy. It’s certainly not for everyone! It has been somewhat surprising to many Americans to watch the number of people elect to participate in this movement considering the drastic differences from the traditional American lifestyle.
However, Tencap is in favor of any movement that promotes responsible spending and getting Americans to retirement! Since the FIRE movement is a stand for this, we can support it. Just know there are plenty of ways to get to a place of building and securing your wealth. If this movement is unappealing to you, you can look forward to getting some coaching on how this can be done differently.
Optimize Your Finances Fast
Everyone deserves a fulfilling and financially secure retirement, but FIRE’s aggressive methods may not suit everyone. After all, there’s no one-size-fits-all in financial management. So, consider working with an advisor who can offer tailored advice that suits your unique goals and adjusts to changing living costs and other unforeseen circumstances down the line.
We’re here to help you out. Tencap Wealth Coaching, a team of retirement experts led by a Certified Financial Planner® in Utah, can give you the best chance to achieve your dream retirement life through FIRE or other tried-and-tested financial strategies.
In the meantime, here are 7 Reasons Why Our Advisory Services Are Worth the Fee, which discuss what we can do for you.
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Nick Carrigan
Nick trains and develops families in creating, maintaining, and growing wealth. This includes educating clients on the science and academics of investing, comprehensive financial planning, and ongoing coaching to ensure discipline for a lifetime. Nick has seen this create incredible levels of freedom, fulfillment, and love for the families he works with.
