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What Is the FIRE Movement and How Does It Work?
Strategic money moves may allow you to retire early.
When you think about retiring, when do you picture yourself leaving the workforce? Is it around the normal retirement age of 65? Or do you dream of retiring earlier to enjoy your life without the pressures of work?
If retiring early appeals to you, it’s important to think about building your savings aggressively. The average 60-year-old has just $537,5601 saved up for their retirement, but if you plan on retiring earlier, you may need significantly more to maintain your lifestyle.
Let’s take a closer look at the FIRE movement so that you can see if it’s a fit with your financial goals .
Key Takeaways
The FIRE movement encourages you to build your savings quickly to help you retire before the traditional age of 65.
This method of retirement savings may require some sacrifices, such as cutting costs or not buying nice-to-have items often, if at all.
There is more than one way to implement the FIRE movement, allowing you to choose the method that best suits your situation and needs.
What Is the FIRE Movement?
FIRE stands for “financial independence, retire early,” and it is a method that encourages aggressive retirement savings. The movement's goal is to help you retire earlier than you otherwise would, assuming you follow conventional retirement savings practices and advice.
Followers of this movement typically aim to retire sooner than 65. The exact target age each person chooses depends on their needs, goals, and preferences, but many use this method to retire in their 30s and 40s.
So, how does the FIRE movement help someone retire 25-30 years EARLIER than usual? It encourages you to build your savings and invest in moderate-to-high-yield funds.
The 4% Rule
The core of the FIRE movement revolves around effective budgeting and saving strategies, with the 4% rule being one of its key principles.
The 4% rule originated with William Bengen, a financial advisor, who reviewed 50 years of market data and concluded that a retiree could withdraw 4% of their savings each year, adjusting for inflation, and have enough savings to last 30 years.2
For example, if you manage to save $1 million by the time you retire, this rule suggests you could withdraw $40,000 annually to cover your expenses without significantly depleting your savings. It's essential to adjust for inflation annually to maintain your purchasing power over time.
The Three Types of FIRE Methods
The FIRE method isn’t a one-size-fits-all approach and could be tailored to help you reach your target retirement age in a way that works for your income level and budget.
Though you’re free to change the movement up to fit your needs, there are three main methods that people tend to use and see success with.3
The lean method: The lean method encourages you to save roughly 25 times your annual expenses by the time you retire. This method typically requires you to live a more modest lifestyle during retirement since you’re not focused on building a large nest egg.
The fat method: The fat method aims to provide you with a larger living budget when you reach retirement. People using this method often try to save at least 50% of their income or more each year until they retire. You may save even more as your income grows, boosting your wealth.
The barista method: This method encourages you to save as much as possible until you retire, with the understanding that you plan to supplement your retirement savings by working part-time. It’s ideal for those who worry about getting bored without working or those who don’t mind the idea of continuing to work at least a little once they retire.
If you’re interested in following the FIRE movement, any of these options could help. But before you choose your method, consider the type of lifestyle you want to live when you retire.
How to Start Using the FIRE Movement
If early retirement is calling you, you want to find ways now to increase your savings and build your wealth consistently.
Here are a few steps you could use to start using FIRE to help.
Pay Off Your Debt
Carrying debt reduces your opportunity to save because debt costs money (in the form of interest). Take a look at your debts and create a plan to help you pay them off. The more debt you repay in full, the more cash you may have to add to your retirement savings or allocate to your investments to boost your potential retirement income.
Not sure where to start or feel overwhelmed by your debt? Don’t panic. Consider using the following strategies to pay off what you owe:
The avalanche method: To use the avalanche debt repayment method, focus on paying off the highest-rate debt while making the minimum payments on your other debts. As you repay each debt and free up cashflow, you have an “avalanche” of funds available to tackle the next one.
The snowball method: The snowball debt repayment method has you focus on paying off your smallest debt first while making the minimum payments on your other debts. Once that first debt is repaid, you’ve freed up a little extra cashflow to help tackle the next. The funds available for repayment “snowballs” as each debt is conquered.
Both strategies have their benefits and drawbacks… the best approach is the one that works for your situation and personality.
Invest When Possible
Once you have your debt under control, you have the opportunity to increase (or start) investing each month. Investing gives you a different way to build your wealth and could help generate passive income when retired.
Start by contributing to a dedicated retirement fund like an employer-sponsored 401(k), an Individual Retirement Account (IRA) that you open yourself, or both. If your employer matches contributions to your retirement account, try to increase your contributions until you’re at least maximizing that match.
Note that these retirement accounts have minimum age requirements for withdrawing funds without a penalty. With the FIRE movement, you’re likely to retire prior to those age requirements, so you may need to find other places to keep your savings.
You may want to invest in stocks, bonds, and other investment products or savings vehicles that offer a higher return rate, such as high-yield savings accounts or certificates of deposit .
Remember that it’s always a good idea to speak with a financial professional before you start. They’re able to help you assess your risk tolerance and create a plan to help you reach your goals.
Cut Back on Daily Expenses
The key to success with FIRE lies in saving as much as possible before you retire. One of the easiest ways to increase the amount of money you save each month is to look for ways to reduce what you spend.
You may be able to save by not dining out, making coffee at home before going to work, finding a cheaper place to live, and/or eliminating impulse purchases.
Increase Your Income
Cutting back on your spending is a great place to start, but you may also want to increase your income to have more available for savings.
If you’re happy in your current position and feel comfortable talking to your supervisors, consider asking them for a raise. This could be a good idea if you’ve recently taken on more responsibilities or have proven yourself to be indispensable to the company.
If you’re unhappy with your job or aren’t being considered for raises, you may want to look for a new, higher-paying position.
You could also start a side hustle to add another income stream to your financial situation or look for passive income opportunities, such as renting out your home or creating educational courses online.
Consider how much extra time you’re willing to invest to increase your income and choose the method that works for your needs and goals.
The Pros and Cons of the FIRE Movement
Though the FIRE movement may be effective, it’s not the perfect retirement savings method for everyone. Before you start implementing this method, familiarize yourself with FIRE's pros and cons to help you make the best decision for your situation.
The Pros of Using the FIRE Movement
FIRE offers some unique benefits beyond just helping you reach retirement sooner. Some of the pros include:4
Help you live below your means: Since FIRE expects you to save as much as possible, you’re likely to live below your means to reach that goal. This experience may help you be better prepared to withstand periods of financial uncertainty, like getting laid off or being unable to work due to medical issues.
Help you experience more: By retiring early, you are allowing yourself to experience more in life (outside of work) at a younger age. If you enjoy extreme outdoor activities, for example (think mountain climbing) you may be able to do more as a younger person rather than waiting until you are in your 60’s.
May reduce financial stress: By saving as much as possible for retirement, you may reduce financial stress in the short term too. Having a large amount of savings on hand may make it easier to cover unexpected or emergency expenses when they pop up.
The Cons of Using the FIRE Movement
Though there are many benefits to FIRE, it’s not perfect. Here are some of the downsides to consider:5
May be overly restrictive: Saving as much as possible means you may forego experiences or splurges in the near term. Depending on the lifestyle you live and the types of comforts you enjoy, you may find FIRE to be too restrictive for the life you want now.
May be tough to stick to: Because FIRE restricts your spending, it may be difficult to stick to. You may “fall off the wagon” often. Some people become discouraged when they feel that they fail in their savings plans and decide to give them up.
May cause financial stress in the short-term: Extreme savings may may it difficult for you to make ends meet. You could find that your dream of a less stressful post-retirement life is making your current life MORE stressful.
Final Thoughts
Retiring early is a worthy goal. It means leaving the “40+ hour work week” behind to live your dreams… earlier. Using the FIRE movement to build your retirement savings may help you achieve that goal. That said, it’s not for everyone, and it’s certainly not the only savings strategy out there.
Check out our savings guide to learn about different types of savings funds and how you could build your savings in a way that works for you. You may prefer approaches that are less restrictive than the FIRE movement—something that could help you achieve a richer life now and in the future.