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My wife and I’s early retirement is all thanks to the FIRE (financial independence retire early) movement. My first encounter with FIRE movement was around 2010 when I was browsing the internet with search topics like ‘how to retire early’, ‘done with rat race’, and ‘retiring on $200000’.
Let me first set the scene back in 2010...
I had neither $200k nor any real ability to retire early back then. My retirement account balance was under $10000 and I honestly didn’t understand how early retirement could even be within reach. In my hopeless state, I was just hoping to find something out there that can lead me on the right path to financial independence.
I first encountered Jacob Lund Fisker of ‘Early Retirement Extreme’. I read his story of his early retirement in which he lived on $7000! per year, which means he needed about $175k total net worth (value of all assets minus liabilities).
This was my eureka moment! This was what I had been seeking. Retirement seemed like an impossible dream when I thought I needed gazillion dollars to retire. When I saw this, I knew this was something I can actually do. Well, maybe not $7000 per year in spending, but certainly the idea of having 25 times (or more) what you spend yearly saved/invested.
So, what is the FIRE movement?
It is a lifestyle movement to gain financial independence and to retire early. In its simplest form, it requires adherents to set a strict budget for the year and to stick to it. It also requires money to be in appreciating assets like stocks, real estate, bonds, etc., and NOT in savings accounts. Once you have at least 25 times the yearly spending expenses, you can theoretically live on that money by taking out about 4% each year. Taking out 4% a year should allow the principal sum to last a lifetime...
An example of this would be as follows:
A couple saved up $750k in net wealth. They require $30k in yearly expenses. Therefore, they can retire early as they are financially independent. 4% of $750000 = $30000.
To get to financial independence part, most adherents will typically do two things simultaneously:
- Decrease expenses: in most cases dramatically
- Increase savings rates: again in most cases dramatically
Some, like Jacob Lund Fisker had reduced his spending to $7000 per year, which is by most peoples’ standards considered an impossibility while others, like Peter Adeney of ‘Mr. Money Moustache’, had lived on $25000 per year. To reach financial independence, Jacob Lund Fisker saved close to 80% of his income while Peter Adeney saved 50-75% of his income.
Most FIRE movement adherents will seek to generate passive income. Common method is investing in the stock market, more specifically, index funds that track the S&P 500. Others have retired on a combination of stocks, real estate, and others. There is no one size fits all to FIRE movement. What may work for you may not work for me...
In our case, we already had a home we had purchased prior to learning about the FIRE (financial independence retire early) movement. We sold that home which became part of our net wealth, and we have retirement accounts.
The important thing here is to get to the net wealth part regardless of how you get there. For example, it can be strictly a brokerage account, a combination of retirement and a brokerage account, just a retirement account, or real estate/retirement account. Bottom line: different people will do things differently as long as they get there eventually...
It’s important to note that most FIRE movement adherents will keep at least a year or two spending expenses in a savings (liquid) accounts in the event stock market is in a downturn or a bear market (20% or more drop from the peak).
Below are some variations on FIRE movement:
- Lean FIRE: Living on less than what normal household spends per year; typically this is around $25k to $40k
- Fat FIRE: Living on more than what normal household spends per year; typically this is more than $40k and can be as high as you can handle
- Barista FIRE: Person is semi retired; still needs to work part time to get health insurance and/or to supplement income while still drawing money from retirement accounts
- Coast FIRE: Financial independence part is the main draw; person needs income to cover current expenses but no longer need to save up for retirement; person does not need to withdraw from their retirement accounts
Let me give you some examples when you can expect to be financially independent and to retire early:
Scenario One:
Currently has zero retirement savings. Starts to save now. Makes $50k per year. Needs $38k per year to live. Saves $12000 per year.
Verdict: Requires 26 years to reach financial independence
Scenario Two:
Same scenario as above but now saves $20000 per year. Yearly expense is then $30k.
Verdict: Requires 18 years to reach financial independence
Scenario Three:
Same scenario but now saves $30000 per year. Yearly expense is then $20k.
Verdict: Requires 11 years to reach financial independence
***Note: All these scenarios are assuming 8% rate of return. Person is making the same amount of money in all 3 scenarios. The savings amount varies and it inversely changes the spending expenses. As savings amount goes up, the spending amount goes down. Age is not a factor. Money you put away is not age dependent...
As these numbers show, how much you need in yearly expenses will determine how quickly you can retire early and gain financial independence. By needing less money to live on yearly, you can put away more money for retirement, thereby allowing you to retire early.
When looking at these examples, I hope someone out there can have their eureka moment, to want to get to their financial independence goal! Seeing these numbers are what made my journey towards financial independence possible. It turned what was once impossible to possible!
***Google ‘early retirement calculator’ and test different scenarios. Important part of being financially independent is knowing HOW MUCH you need to retire and how quickly you can get there. Enter your income, how much you’re saving, and current retirement account amount to figure out your number.
In conclusion:
To reach financial independence, answer two questions:
Can you reduce your spending as much as you can so it’s easier to save for retirement?
Can you then save as much as you can to reach that 25 times yearly spending in net wealth?
Thank you all for reading!
Jake
Wandering Money Pig
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