The Financial Independence, Retire Early (FIRE) movement is a lifestyle movement with the goal of gaining financial independence and retiring early. The model became particularly popular among millennials in the 2010s, gaining traction through online communities.
Core Principles
The main idea behind the FIRE lifestyle is to aggressively save and invest a high percentage of your income during your working years so that you can stop working for money decades before the traditional retirement age.
- High Savings Rate: Proponents of FIRE often aim to save 50% or more of their after-tax income. This is the most critical component, as it both builds your investment portfolio and keeps your living expenses low.
- Frugality and Optimization: This doesn't necessarily mean being cheap, but rather being intentional with your spending. It involves cutting costs on major expenses like housing, transportation, and food, and avoiding lifestyle inflation as your income grows.
- Investing in Low-Cost Index Funds: The most common investment strategy is to put money into low-cost, broad-market index funds or ETFs. The goal is to achieve compound growth over time without the high fees associated with actively managed funds.
- The 4% Rule (Safe Withdrawal Rate): This is a common guideline used to determine how much you can withdraw from your investment portfolio each year in retirement. The SWR has an inverse relationship with the size of the nest egg you need: a lower rate requires a larger portfolio, while a higher rate allows for a smaller one. Your "FIRE Number" is often calculated as 25 times your estimated annual expenses, which corresponds to a 4% safe withdrawal rate (SWR), since
1 / 0.04 = 25.Crucially, the goal of the SWR is not to spend your portfolio down to zero over a fixed period. Instead, based on historical studies, it's a rate designed to be sustainable for a very long retirement (30+ years). The rule accounts for inflation by having you adjust the dollar amount you withdraw each year to maintain your purchasing power. The idea is that your portfolio's investment growth will, on average, be enough to cover these inflation-adjusted withdrawals, thus preserving your capital. In many historical scenarios, the principal even continues to grow over time.
- For example, to cover $40,000 in annual expenses, a 3% SWR requires a nest egg of $1,333,333 ($40,000 / 0.03).
- With a higher 5% SWR, the same expenses can be covered with a smaller nest egg of $800,000 ($40,000 / 0.05).
Choosing a lower SWR is more conservative and provides a larger safety margin, which is often recommended for very long retirements.
Types of FIRE
The FIRE movement isn't one-size-fits-all. Several variations have emerged, defining different kinds of the FIRE lifestyle:
- Lean FIRE: Living on a very minimalist budget in retirement (e.g., less than $40,000 per year).
- Fat FIRE: Aiming for a more traditional or even lavish retirement lifestyle, representing a high-spending FIRE lifestyle.
- Barista FIRE: Retiring from a primary career but taking on part-time work or a "passion project" to cover living expenses or health insurance, while letting investments continue to grow.
- Coast FIRE: Having enough saved in retirement accounts that, without any further contributions, it will grow to support a traditional retirement. This allows you to work just enough to cover current living expenses.
Ultimately, the FIRE lifestyle is about creating options. It's the freedom to choose whether to work, what kind of work to do, and how you spend your time, without being constrained by financial necessity.