Who wouldn’t want to quit their job and experience complete time freedom? You can with the Financial Independence, Retire Early or the FIRE movement.
In this blog we’ll dive into:
What’s Financial Independence, Retire Early (FIRE movement)
A case study of someone who retired at 30
How much you need to save to retire early
The BIG problem with the FIRE movement
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What exactly is financial independence, retire early (FIRE)?
The origins of FIRE go back to Benjamin Franklin who retired at age 42 by earning a passive income from his printing business to pursue public service and philanthropy. This was unheard of at the time.
Financial Independence, Retire Early (FIRE) was formally described in the book, Your Money or Your Life. Instead of working a nine to five until 65, the premise is to reevaluate what’s important and reject excessive consumerism to retire early.
You forgo brand new cars or name brand clothes. The ultimate luxury with the FIRE movement is to quit your job. Opting for simple living allows you to pursue time and work freedom.
How much do you need to save to retire early?
The basic math to achieve FIRE is to save 25 times your annual living expenses. This is based on the 4% rule. It’s a financial rule of thumb where you can safely withdrawal 4% of your nest egg to live off without depleting your funds.
The true definition of financial independence is when you have assets or investments large enough to produce an income to cover your living expenses.
The mind-blowing part of FIRE is it has nothing to do with your income. To retire early, your expenses are what matter.
Why your expenses matter if you want to retire early.
Let’s say you have an annual income of $1 million, but you also have living expenses of $1 million. You’d have a baller mansion, beach house, luxury cars, and all the things. However, you wouldn’t be financially independent.
You’d need to show up to work, to earn an income to pay for your living expenses. In this case effectively you can never retire, stop working, or be financially independent.
Your work rules you and your life.
On the flip side, if you have living expense less than $25,000 a year and your investments earn $25,000, then you’re financially independent. You don’t have to work. Your money works for you.
A case study of someone who retired at 30
For example, the FIRE movement was later popularized by the blog Mr. Money Mustache who retired by age 30.
He was 100% debt-free, including his house. This left him able to comfortably live off only $25,000 a year. Using the 4% rule and saving 25 times his expenses, he retired at 30 with $600,000 ($25,000 X 25).
The 4% rule allows him to safely withdrawal $25,000 (4% of $600,000) in perpetuity. His nest egg will continually grow in the stock market allowing his withdrawal to keep up with inflation. FIRE fanatics are super savers, saving up to 70% of their income to retire early.
The BIG problem with the FIRE Movement
Who wouldn’t want to retire at 30? Imagine life without a mortgage and a perpetual flow of income to cover your expenses. However, the truth for most Americans is it’s questionable if they can EVER retire (much less retire early).
Here’s the harsh reality with retirement in America:
CNBC reports that the median retirement account in America of those near retirement between age 56-61 is only $17,000.
CNN reported 76 % of Americans are living paycheck to paycheck. Forbes found 63% of Americans don’t have $500 in savings to cover an unexpected expense.
The question isn’t can you retire early, for most people the question is can you ever retire?!
The problem with the FIRE movement is it doesn’t address issues most people are facing like paying off debt. Saving 70% of your income to retire early is not attainable for the average person who can’t even cover an unexpected expense of $500.
That’s why I created The Finance Plan.
The Finance Plan is a step-by-step plan with money to pay off debt, invest, save for a rainy day, and make a big life purchase like buy a home, car, or ultimately retire early.
Stay tuned! Next week I’ll explain how you can gain financial independence even if you have debt and haven’t started investing yet.
P.S. Have you been meaning to get your finances organized? Best Money Class Ever starts Oct. 27th. Get the details and enroll now (click here).
