The FIRE Movement Explained

This is an update. The FIRE movement is a saving strategy that has been gaining traction lately. “FIRE” stands for “Financial Independence, Retire Early,” and it involves specific strategies aimed at rethinking traditional budgeting and retiring. The movement took a lot of cues from the book, Your Money or Your Life (1992), written by Vicki Robin and Joe Dominguez. However, the F.I.R.E. movement is its own entity now with its own rules.

If you’re interested in learning about the financial independence, retire early movement, continue reading to learn the purpose of FIRE, the different types of saving it advocates, and how you could become a part of the movement if you think it matches your desire for security moving forward.

What is the FIRE Movement?

The full title of Robin and Dominguez’s book is Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence. After its publication in the early 90s, it became popular for its portrayal of “intentional living,” which is a style of living and spending that emphasizes an individual’s intentions for their life.

Its main financial premise is that with the right saving strategy, a nest egg can fund a modest retirement without the need for retirement checks and a traditional budgeting plan. The book proposes a nine-step program to achieve this personal finance dream, which is the basis for the FIRE movement.

Its main goal is to propose a strong sense of saving by cutting expenses and using that money in the place of a traditional retirement fund. While conventional budgets suggest that 10-15% should be saved per year, F.I.R.E. proposes that far more can be saved to achieve early retirement.

The FIRE movement is built on the Rule of 25, which states that you should save your annual expenses multiplied by 25 to retire. Since that number is often large, FIRE also involves principles of investment to increase the amount you earn (and thus, save).

What are the FIRE movement Demographics?

Since the FIRE movement proposes that you can retire before the age of 40 or 50, its main demographic is millennials who are aiming to drop out of the workforce early compared to their parents.

Part of the reason for this rising trend is in the workforce itself. Modern employers are less likely to offer pension plans and 401k plans. The Bureau of Labor Statistics reported that in 2020, only 52% of workers in the private sector had a defined contribution plan such as a 401k. Those with both a 401k and a pension had dropped to 12%. This has left many workers looking for other means of preparing for their retirement outside of the normal employment channels.

According to a research report for the Urban Institute, other contributing factors to millennial retirement anxiety include waiting longer to get married, giving them fewer resources before retirement. Additionally, the housing crisis depleted property wealth for many millennials. For many workers, the FIRE movement represents the possibility of making up for the economic misfortunes of their generation.

What is the 4% Rule in FIRE?

The movement for financial independence, retire early economics relies on knowing not only how much to save for your retirement but also how much to spend during it. The 4% rule describes how those who practice the FIRE movement should spend during their retirement. The answer is 4% of your total investments.

If you do it by the book, the amount you saved would last for 25 years at 4% withdrawal per year. The amount ultimately depends on your income level and the age you hope to retire. However, the financial independence, retire early strategy comes with a certain amount of risk that increases at lower income levels, as well as personalized calculations that determine when and how you will retire (see below).

FIRE Retirement Calculator

The F.I.R.E. retirement calculation will differ depending on the sub-type of FIRE you plan to practice. There are three: lean, fat, and coast.

However, while the goals and timelines of each method differ, the calculation is essentially the same for each method. The amount you should plan to save using FIRE is your annual expenses times 25. The theory is that you can survive on this amount for 25 years of retirement at 4% withdrawal per year.

Of course, your annual income expenditures and financial strength will vary from year to year. Your F.I.R.E. savings probably won’t be the same throughout the years, but you need to stay on a consistent timeline.

This is where more complex financial investment planning comes into play. We can’t get into it all in this overview, but a financial advisor can help you look at the fixed percentage of the expected value for your future real returns on stocks and bonds to help you set a realistic number for your retirement time.

Remember: FIRE finance isn’t just based on your income but on your total rate of return on investments, including your salary over the time planned.

What is Lean FIRE?

Lean FIRE describes an investment strategy for people who plan to spend less than the average American on annual expenses while living off their FIRE nest egg. It is generally considered the easiest FIRE retirement to attain since it requires the smallest nest egg. However, it’s the hardest version once you’ve actually retired since it requires even more strict budgeting after you are no longer working.

Lean FIRE is typically considered the best choice for middle-class Americans since it doesn’t require as high a net worth to attain. Remember that Lean FIRE will require you to adjust your lifestyle in retirement with the inflation rate even more than other methods. This is because the value of your annual savings now won’t be the same in 25 years.

What is Fat FIRE?

Fat FIRE is essentially the reverse of Lean FIRE where instead of planning to spend less than average during retirement, you plan to spend more. This requires a higher net worth overall. For most Americans, Fat FIRE requires $2.5 million or more in net worth to be able to save that much.

Though Fat FIRE is associated with higher spending, it can be due to reasons other than splurging during retirement. Fat FIRE may be necessary if you have many children, expect to provide care for a family member later, or want to move to an expensive city.

What is Coast Fire?

Like all forms of the financial independence, retire early strategy, Coast FIRE front-loads your retirement savings based on your annual saving capacity and spending needs.

With Coast FIRE specifically, the focus is on using compound interest on investments and dividend returns to accelerate your financial growth. The idea is to get to your initial retirement number early, at which point you can start “coasting.”

This means you can stop contributing to your retirement fund in your monthly budget and start living more comfortably without changing your habits. Many people who practice Coast FIRE supplement their income at the point where they start coasting. A great side hustle, renting out a room, or increasing investment trading are examples of opportunities for making Coast FIRE work more efficiently.

How is Life on FIRE Movement?

Life under the FIRE movement is not identical to normal life. The main difference is that it isn’t as carefree. It requires careful planning at every stage of financial life. Any large expenditure has to be taken in context and seriously compared to the overall picture of your savings.

This means that FIRE isn’t for everyone. However, everyone should be doing some kind of financial planning. Those who near retirement age without planning ahead can get extremely nervous, with some of them realizing that they won’t even be able to retire as planned.

So even if FIRE can be strenuous at times, it should make you feel more secure overall. FIRE helps you decide what is and isn’t a justified expenditure, how to invest and save, and assures you that you’ll have enough to retire.

What are FIRE Movement Criticisms?

The FIRE movement isn’t always easy to maintain. There are some valid criticisms about the strategy that you should know about as well.

The first is that the FIRE movement works better the higher your salary is, so those with mid to low-income situations find it difficult to get started.

Another criticism is that FIRE requires living too frugally or minimally and isn’t worth it. However, this isn’t always required. FIRE doesn’t have to be about refusing to spend money on luxuries. Instead, it advocates planning and calculating luxuries carefully to ensure they’re worth it.

The final criticism is about the mathematics of the method itself. Some say that rising health costs and inflation will change the spending power of money so much that the FIRE strategy won’t work.

How to Retire Early with FIRE

To sum up the FIRE strategy, consider these basic principles for retiring early using the method:

1. Planning is essential. You need to question your finances early in your career to map out where you’re going, including the lifestyle you hope to have during your retirement. Include all sources of income, including pensions and investments, in your calculations.
2. Cut spending. Reducing spending is the primary tenet of the FIRE movement. To practice it successfully, you need to be saving up to 75% of your annual income, reducing your expenditures along the way.
3. Eliminate debt. Debt is the archenemy of the FIRE strategy. Loan payments and interest will make it impossible to save adequately. Save an emergency fund to handle any debt situations right away.
4. Increase your income. FIRE is easier the more you make, so invest in a side hustle if you can and try to improve your investment portfolio.
5. Save more. The most important thing you can do is save, save, save.

Summary

The FIRE movement advocates aggressive saving strategies to reduce expenditures so you can retire early, sometimes by decades. The main strategy requires planning and saving so that you can follow the 4% rule, which states that you should only be spending 4% of your investment every year during your retirement. This means you should be saving 25 times your annual expenses to prepare for your retirement.

Critics of the FIRE movement believe that it’s too stringent and may be too susceptible to inflation. However, its proponents believe they can use the strategy to retire decades early by managing expenses and creating a plan for efficient saving. Though it often requires lifestyle changes, the FIRE movement has grown in popularity due to fewer employers offering conventional retirement and may continue to surge in the coming decades.