Financial Independence / Retire Early (FIRE) - SmartAsset

Financial Independence / Retire Early, aka FIRE, has come to connote the idea of saving and growing enough money so that you can stop working for a living at a younger age than your parents did. It involves saving aggressively and being much more frugal than the average person. Read on to learn more about FIRE and common strategies that will help you gain financial independence. If you’re interested in saving more and mapping out a path to early retirement, consider working with a financial advisor who can provide hands-on guidance.

What Is FIRE?

You’ve probably heard at least some of the many stories about people retiring rich before they even turned 45. They’ve written books on the topic, and their names grace the chyrons of morning business news shows. The FIRE method is essentially saving enough money to give people the financial independence to retire early (FIRE).

For many, this means retiring before the age of 50, but everyone’s FIRE number is different. The goal is that everyone is able to take control of their financial lives by not having to rely on a 9-to-5 job because most people end up spending more time punching the clock for those jobs than they do enjoy the things and people they love the most. The movement is really about being financially free to live the way that you want to.

How the FIRE Method Works

When someone decides to take this approach to saving and investing for their early retirement, they commit to saving the majority of their money for many years. Saving up to 70% of their income and investing it aggressively can help them accumulate enough to sustain their lifestyle for a long time. When their savings reach a total of 30 times their yearly expenses then they are ready to retire.

In order to pay for their living expenses after they retire, these individuals make small withdrawals every year of around 3% of their total savings annually. This takes a lot of effort to ensure that expenses are tracked and that they don’t overspend because their money could run out much earlier than anticipated.

Variations of the FIRE Method

There isn’t just a one-size fits all approach to achieving financial independence. A few different FIRE variations have popped up in an effort to give people the different types of lifestyles that they are seeking. The most popular variations are:

Lean FIRE: This is adherence to a very minimalist lifestyle once the “retirement” has been triggered. Many people in this category live on less than $25,000 per year and several end up living in a different country with a more affordable cost of living once they have quit their day job.
Barista FIRE: This is for people who don’t want to quit working entirely but do not want to have a full-time job that owns all of their time. Essentially with this method you would have enough money to quit your 9-to-5 job but would still work part-time to supplement your savings a little bit.
Fat FIRE: This is the traditional FIRE method for people that want to maintain a similar lifestyle but want to retire early. This requires a very aggressive saving and investment strategy, and typically requires a large income for a number of years in order to fund this method.

How to Start Down the FIRE Path

There is no one way to start down the FIRE path other than the fact that you’ll need to start saving a lot of your income. Most will want to invest as much as they can while they still have a full-time job so that they can increase their total funds. Here are some of the best tips for those wanting to get started with FIRE without knowing where to begin.

1. Keep Six Months of Expenses Liquid

FIRE devotees like to discuss investments a lot. But they do follow the traditional recommendation of keeping six months’ worth of living expenses in a liquid emergency fund. For many people that just means in a savings account connected to their checking account. But a FIRE adherent probably wouldn’t settle for the dismal interest rates banks are paying these days.

Instead, they would likely look to optimize the return even on their emergency fund. Perhaps they would park it in a high-yield savings account or money market account, which functions similarly to a savings account but tends to offer a better rate. Or maybe they would take the chance they won’t really need their emergency fund and put it in a certificate of deposit (CD), which typically pays a higher interest rate than savings and money market accounts but also locks down your money for a period of time.

For more info about your savings options, check out our rankings below for the best in each category:

2. Set the Right Asset Allocation

In a world full of investing apps and online platforms, it’s becoming increasingly easy for DIYers to give investing a try. But all too often, newbie investors fall for the hype. They dump their money into the next (insert tech-of-the-month) initial public offering and watch their investment sink as news about falling revenue (forget profit) comes out. Or they stick to one sector that suffers a major downturn.

As any FIRE follower can tell you, diversification is the key to withstanding market volatility while enhancing return. The idea is basically to invest across sectors and within sectors so that one stock’s or sector’s fall won’t take your whole portfolio down. Mutual funds and ETFs make diversifying your portfolio easy. Use our asset-allocation calculator to get a glimpse of what a portfolio that’s right for you may look like.

3. Minimize Investment Fees

Of course, market volatility is only one thing that may hurt your returns. Another thing, which you may not be aware of, are fees. So while mutual funds are great boons to individual investors, many also come with hidden fees and shouldn’t be bought blindly. Always take a magnifying glass to every fund you invest in.

Generally, the lower the expense ratio, the better. Also, ideally, you want to buy no-load mutual funds, which have no sales commissions either when you buy (at the front end) or when you sell (at the back end). Investment companies sell these funds directly. So there’s no need to buy it from a third party who collects a sales commission.

“You want to make sure that you are using low-cost and extremely diversified investment options within your portfolio,” says Michael Mezheritskiy, president of Milestone Asset Management Group. “Internal expenses of funds, sales loads, commissions– all of that eats away at your bottom line.”

4. Open a Retirement Account

If you’re focused on early retirement, you probably aren’t considering an individual retirement account (IRA) or a 401(k). After all, the IRS places strict rules on when you can withdraw money from tax-advantaged retirement plans without penalty.

But you’re going to need money after you reach retirement age, too. So you should be socking away some of your savings in a retirement vehicle. They can help you reach your savings goal, since both IRAs and 401(k)s offer tax savings. What’s more, many companies offer to match a portion of employee 401(k) contributions, padding your balance even more.

If you’re lucky enough to work for a company that offers a 401(k), you should go for it, if only for the match, which is free money. If not, an IRA is still a great option. To help you find the right one for you, we rated the best IRAs out there. Better yet, you could open a Roth IRA. It won’t reduce your taxes, but it has more flexibility than other plans when it comes to making penalty-free withdrawals.

The Bottom Line

FIRE or achieving financial independence and retiring early can sound like a luxurious concept for many. After all, you can’t really save 50% of your pay when you’re living paycheck to paycheck. Indeed, one common critique is that FIRE doesn’t really work for people in low-paying jobs – or who have kids. But the growing-your-savings part of the program can work for everyone who is willing to learn about investing.

Tips on Retiring Early

If you’re not sure where to start you may want to consider working with a financial advisor. An advisor can help create your financial plan to help you achieve your FIRE goals. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re really committed to starting the FIRE, we developed a guide on everything you need to know about retiring early.
Location can have a big impact on how quickly you achieve FIRE. To help out, we compiled a study on the most affordable cities for an early retirement.