Retirement is not an age, it’s a savings goal! What age you can retire at depends on your savings rate and how quickly you can accumulate your savings goal.
Imagine how different your life would be if you no longer had to exchange your time for money. Imagine a life without alarm clocks, commutes, 9 to 5 jobs, late nights at the office and worrying about paychecks.
This is the dream based on which the FIRE movement began. Today, it has a community of millions who have achieved financial independence or who are on their journey to achieve their goal.
What is the FIRE movement?
FIRE is an acronym for Financial Independence Retire Early. The aim is that, by decreasing your spending (thereby increasing savings) and investing your money, you can potentially retire decades ahead of time.
Retiring early (in your 30s and 40s) doesn’t mean wasting the next 70 years of your life in front of a television or lounging around the house. We are humans after all and that means we need a purpose in our lives.
What retiring early affords you is independence from the tethers of money and a job. You can use your new found freedom to live your life on your own terms.
- Want to travel the world? Great!
- Wish to start a YouTube channel about gardening tips? You can do it!
- Want to build a canoe in your backyard? Go ahead!
- Want to continue working in the corporate world? That’s an option too!
Once you build a retirement portfolio that can generate enough income every year to cover your annual expenses, you become financially independent!
Key steps to help you achieve FIRE
Decreasing your expenses can lower your target retirement amount. This means that you can reach your target goals in fewer years, making it one of the most important factors in determining your retirement timeline.
Next, investing your savings is crucial. By investing, you are literally putting your money to work for you. It would be impossible to get rich by putting your money in a savings account.
Increasing your monthly income will set you on a faster path to retirement. You could do this by picking up a side hustle or by monetizing your hobby. Also consider negotiating for a higher pay during appraisals or move to a company that values your skills better. Consider shifting your career paths to find better paying roles.
Avoid lifestyle creep. When your salary increases or you get a bonus, choose not to upgrade your lifestyle and instead invest the difference. For example, don’t upgrade your car, home, furniture etc.
Another common mistake is spending too much money on cars. They are depreciating assets which lose thousands of dollars in value every year. Find out how much car you can afford.
Cut back on wasteful household expenses with this helpful list of tips to save money and instantly improve your monthly savings.
Basic principles of FIRE
Retirement savings goal
Based on the 4% withdrawal rule, your nest egg should be 25 times your annual expenses. So if your annual expenses are $60,000, you would need to save $1.5 million in your retirement account. Once you have this amount, you can withdraw 4% of your portfolio’s worth every year and your principal will remain untouched!
Although the 4% rule is a crowd favorite, some financial advisors also support a 3% withdrawal rate. To build this conservative nest egg, you would need to save 33 times your annual spending.
Retirement timeline
Now before you feel disheartened reading these big numbers, remember that whether you intend to retire at 35 or at the standard age of 65, you still need to build your retirement portfolio. If you want to safeguard yourself for your golden years, that bit is not optional.
If you don’t save up enough by the time you are 65, you would have to continue working forever to sustain your lifestyle. According to labor statistics, the number of people aged 65 and above working in retail has steadily increased for the past 13 years. Nobody wants to work at Walmart after growing old. So it’s important to have a retirement plan irrespective of how soon you want to retire.
The biggest factor in determining your ‘retirement’ age is your savings rate! It doesn’t depend on how much you earn! If you have a savings rate of 50%, you can become financially independent in 15.7 years. (Assuming a 4% withdrawal rate, a 6% return on investments after tax and inflation and that your annual expenses remain the same in retirement.)
Learn how to calculate your retirement goals and draft your roadmap to financial independence in 5 simple and smart steps!
Different types of FIRE strategies
Followers of the FIRE movement choose from several different strategies to achieve their goal of early retirement. The path you choose defines how much you need to save for retirement.
1. FAT FIRE
Fat FIRE is for those who envision themselves living a lavish life during their retirement. They may choose to live frugally now while saving up for their financial independence, but they plan to have much higher annual expenses during their retirement.
People in higher income brackets or those with a conservative mindset who want to safeguard their future, tend to pick this strategy. Fat FIRE offers increased protection from inflation, market fluctuations, increased tax rates in the future and a greater flexibility to live life on your terms.
Choosing this strategy means saving up for a larger nest egg than the average. For example, Anna spends 60,000 a year now but she plans to spend $100,000 per year during retirement. This means that she needs a nest egg of $2.5 million.
2. LEAN FIRE
At the other end of the spectrum, we have a strategy called Lean FIRE. This is for those who have embraced a frugal lifestyle and want to continue their minimalist journey even during their retirement. Their target retirement amount would be much smaller and they can potentially retire in a shorter timespan.
Lean FIRE would primarily cover basic necessities but it wouldn’t afford any luxuries during retirement like vacations or a big house. This strategy is better suited for those without kids and whose annual expenses are less than $60,000, which is the national average.
3. BARISTA FIRE
Lastly, we have a hybrid retirement strategy called the Barista FIRE. It’s perfect for those who are in no rush to quit working in their 30s and 40s. But instead they would like the flexibility to work part time, on their own terms, during their retirement.
So if you wish to continue working to supplement your retirement income by doing less strenuous jobs that are more suited to your lifestyle, you have the freedom to do that! For example, if Betty’s annual expenses are $50,000, she would need a nest egg of $1.25 million but if she plans to work part time and earn $15,000 a year during her semi-retirement, she only needs to build a nest egg of $875,000. That’s quicker and easier to accomplish!
Barista FIRE gets its name because working part-time as a barista at Starbucks provides health insurance which eliminates a major expense during retirement. But you can choose to do any part time work!
Parting thoughts
As we have seen, the FIRE movement is NOT just for frugal living followers, it has important financial principles that are a great takeaway for everyone. It helps remind us that retirement need not be an age. It is just another savings goal and well within the reach of us all.
If you are ready to take charge of your finances and plan your roadmap to financial independence, check out these 5 simple steps you need to follow to achieve early retirement. Are you considering the FIRE movement? Share your thoughts with us in the comments below!
Related post: 7 Crucial Money Mistakes to Avoid in your 20s