The Benefits and Drawbacks of FIRE

Most people daydream about the day they can finally clock into work for the very last time. But could that dream be much more of a reality? The FIRE movement, which stands for Financial Independence Retire Early (F.I.R.E), is a community of people who aim to live a lifestyle that allows them just that: the financial freedom to retire as early as possible.

It may sound like a far-off dream to some, an amazing life hack to others. Attempting to retire in your 30s and 40s, though, can come with its own unique set of challenges. The FIRE movement encourages people to maximize their income, maximize their savings, and live a life of frugality (in many cases) to achieve this dream. That’s why we’re going over the benefits and drawbacks to following the FIRE movement as you consider how to gain financial independence.

What is the FIRE movement?

FIRE has become a trendy word in recent years, but what does it really mean? The FIRE movement is all about helping individuals achieve financial freedom over their lives, rather than depend on a 9-to-5 income.

But this looks a little different for everyone. For many people, the ultimate goal behind FIRE is taking an early retirement and using savings and passive income from investments to fund your life.

Oftentimes, you hear of FIRE advocates living in extreme frugality, trying to save as much as possible and invest the money to retire in their 30s. The goal? Save 50% of your income, or more, to retire as early as possible.

But this isn’t the only way to interpret the FIRE movement. In fact, the definition of FIRE has expanded in recent years to become a much more expansive concept. Most proponents nowadays will focus on the “financial freedom” part instead of focusing on retiring early. The reality is that there are multiple ways to consider how to become financially independent.

FIRE involves a core shift in your financial mentality regarding both money and work. You need to think about what’s truly important to you, and how you can eliminate what may not be as important in the effort to strive towards financial freedom. It’s all about how you choose to enact these principles in your own life.

The Benefits to FIRE

One of the biggest benefits of the FIRE movement is the way it encourages people to think about their retirement and future savings goals. Many people looking into FIRE will begin to understand how much money you might need to live a certain lifestyle in retirement. As a result, you can begin to plan accordingly to achieve your target lifestyle. It’s a sharp contrast to the many people who don’t necessarily plan enough for their retirement.

The FIRE movement also gives you more freedom to make financial choices about your life. For example, if you do save enough to retire early, you can take time back for yourself and spend it how you want to spend it. That might mean traveling with loved ones or pursuing a new painting hobby.

Even if you don’t plan on retiring early, following certain FIRE pillars may be helpful to your financial lifestyle. Being financially independent – or having a significant financial cushion – can help you feel more secure while working. It gives you the option to do what you love and stop when you might want to stop.

Another benefit of FIRE? Teaching you how to save money and develop responsible financial habits. Setting up savings goals and sticking to a budget can help teach people strong money management skills and financial mindfulness, which is beneficial regardless of whether you plan to retire early.

It’s especially important later on during your retirement, when you will stick to a budget to ensure you don’t run out of money.

The Drawbacks to FIRE

The biggest disadvantage to following the FIRE movement? Having a large income (we we DO mean large). No matter how much you cut down your lifestyle and minimize your expenses, you will need a significant income – probably in the six-figure range – to save enough money to retire by your 40th birthday. If you plan to retire even earlier, you may need to take even more drastic measures (or have an even higher income).

There are other obvious barriers to following FIRE, as well. For example, student debt. Over half of young adults have student debt, according to the Federal Reserve; the typical monthly payments range from $200 to $299 per month. Those with student loans will face significant hurdles to becoming financially free.

Many critics of the FIRE movement say that the way of life needed to retire early is simply inaccessible to most Americans. In fact, many American adults simply struggle to save enough to retire – let alone retire early.

There’s also a lack of financial education that allows people to make smart investment decisions. Making aggressive and smart investment decisions is a key part of FIRE. Many Americans might not have high-performing portfolios or real estate investments to get them started.

Other drawbacks include:

• Skipping retirement contributions
• Outliving your savings if you don’t plan correctly
• Pricey health care
• Less social security income

Financial advisors can help plan for your retirement to help ensure you don’t outlive your savings, but some of these drawbacks are unique to the FIRE program.

Is FIRE realistic for you?

Even if FIRE isn’t right for you, you shouldn’t feel discouraged from building wealth. In one study, researchers found that one-third of millionaires never had a six-figure household income in a single year. The average millionaire? They worked, saved, and invested their money for an average of 28 years prior to hitting the $1 million mark.

The reality? You don’t need a high-paying job to build wealth and grow your savings for a worry-free retirement. Anyone can enjoy a luxurious retirement – it just takes a little time, and a little guidance.