There's Nothing New About FIRE, Here's Why
FIRE retirement sounds flashy and new, but it’s based on fundamental principles. Here’s how you can use it in your retirement strategy, no matter your timeline.
March 25, 2022
People are turning up the heat on retirement. The FIRE movement has become a hot topic of conversation in the financial planning community in recent years.
While the tenets of the FIRE method sound intimidating, most of it’s based on traditional retirement planning.
If you’re considering using the FIRE method to ignite your retirement, learn why it’s not so different from the classic approach to retirement.
What is the FIRE movement?
The FIRE acronym stands for “Financial Independence, Retire Early.” While most Americans aim to retire around 65, the FIRE retirement strategy kicks the process into a higher gear, with participants planning to quit full-time work in their 30s or 40s.
The FIRE retirement trend got its start in 1992 in the book “Your Money or Your Life” where authors Vicki Robin and Joe Dominguez wrote about the concept of saving enough money early in life that you don’t need to work to support yourself.
FIRE retirement comes in many different shapes and forms:
LeanFIRE, where you aim to have $600,000 saved in retirement accounts before leaving the workforce, then seeking to live on annual expenses of $25,000 a year. This is one of the most frugal forms of FIRE.
FatFIRE asks participants to save at least 30x their annual expenses before retiring. FatFIRE typically means working a little longer than other FIRE strategies, but living less frugally in retirement is the tradeoff.
BaristaFIRE gets its name because once you reach your retirement goal and retire from full-time work, you take a part-time job that extends benefits to all employees, meaning a lower financial burden when it comes to healthcare. It gets its name because Starbucks offers health care to part-time employees.
CoastFIRE’s goal is to invest as much as possible before you reach 30. This gives them the benefit of time in the market. CoastFIRE requires you to live very frugally and have a high-income job (or multiple jobs) before retirement.
While there are different FIREs, the gist is saving early enough in your career to retire from full-time work decades earlier than the general population.
What’s new about the FIRE movement?
The FIRE movement feels like a financial fad mainly because of two of its buzziest tenets that take traditional strategies to the extreme. Here’s what makes FIRE different from a conventional retirement approach.
You can’t have FIRE without “Retire Early.” Perhaps the most striking difference of the FIRE movement is the drive to retire nearly half as early as most, and FIRE followers typically aim to leave the traditional workforce in their 30s or 40s.
However, retirement doesn’t mean lounging by the pool. Some FIRE followers elect to take on a part-time job to cover healthcare expenses. Others need to live frugally, adhering to a strict budget to allow their investments to grow.
Aggressive saving strategy
To meet the tight deadline of FIRE, most need to put away 50% or more of their take-home income. Saving becomes your top financial priority when you’re putting that much aside. With that large of a target savings goal, it makes sense that FIRE has taken off for those in high-paying industries like technology and medicine.
But many make FIRE work, even without a six-figure salary. That may mean trying to live off one person’s paycheck for couples, and individuals FIRE-ing may resort to extreme cost-cutting and frugality to meet their savings goal.
Some common strategies for saving for FIRE followers include:
House hacking, meaning living with roommates or renting out part of a property you own
Living in a low cost of living area
Picking up a side hustle
Buying things used (e.g., cars, clothing, electronics)
Keep in mind that those who elect to live frugally to save may adopt those habits for their lifetime. While they live on a budget now, people who retire early still have to keep a strict budget to allow their investments to grow.
What’s old about FIRE?
The FIRE method may seem like the new kid on the block, but its concepts are as old as saving.
Here’s how the FIRE movement borrows from traditional retirement planning.
If you’re looking for ways to save more, it always helps to audit your budget. Where can you find ways to cut costs? That may mean doing without a few streaming services or electing to live with roommates to save on rent.
While FIRE can sometimes mean extreme frugality, traditional savers could learn something about saving from the popular trend. FIRE often forces people to live more simply and regularly check in on their spending and saving. You may not want to put 50% of your paycheck into savings, but it may be time to take a serious look at your spending and see if there’s something you can live without.
Anyone planning for retirement can take a page out of the FIRE handbook and consider cutting costs, or at least not letting them creep up.
Putting money towards retirement
The 50/30/20 budget suggests putting 20% of your after-tax income towards saving and paying down debt. That 20% could mean putting money towards:
Depending on the state of your finances, 20% of your post-tax income may go into retirement savings. But, if you have debt that needs to be paid off or you need to build an emergency fund, you may only put a portion towards retirement savings.
You may not be planning to FIRE, but can you take advantage of employer 401(k) matching or avoid lifestyle creep and increase your pre-tax contributions? The more you can automate and plan for savings, the less likely you are to miss it (or spend it).
To FIRE, retire, or somewhere in between
FIRE asks that people give up a lot in the now for freedom in the future. Conversely, traditional retirement means working nearly twice as long as the FIRE movement proposes. Whether you plan to FIRE or not, the trend has many of us rethinking on what terms they want to retire.
Just because you can’t commit to full-blown FIRE doesn’t mean to have to default to traditional retirement at 65. If you like the retire-early strategy elements, you could implement them on your terms, saving more than normal but less than the FIRE method asks. While the tenets of FIRE may not be new, they show how you can retire on your own timeline with some planning and diligent saving.
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