Considering retiring early? How to start FIRE

To FIRE or not to FIRE… that is the question. Ever since the financial independence, retire early (FIRE) movement started, hundreds of young professionals and mid-life professionals have gotten behind this dream to retire early and live a life of financial independence.

If you’re considering retiring early, there’s a chance that the FIRE movement will align with your goals. Even if you think FIRE might be too extreme, adopting some of the general principles can help boost your retirement savings strategy. Here’s what you need to know if you want to follow FIRE and take steps towards your own financial independence.

You’ve decided FIRE is right for you… now what?

FIRE isn’t right for everyone. But if you have weighed the pros and cons and have decided to go for it…now what? Well, first things first: you need to consider which type of FIRE you will follow. Here are some of the primary types of FIRE.

LeanFIRE

LeanFIRE is all about living a minimalist lifestyle, or a “lean” lifestyle, to save as much money as possible to retire early. That means owning exactly what you need, and nothing more. In retirement, you would also lead a minimalist lifestyle.

BaristaFIRE

BaristaFIRE focuses on retiring as early as possible from your primary 9-to-5 job. However, instead of not working at all, people use their financial freedom to do part-time work, gig work, or freelance work. For many, that means pursuing their dream careers that might not pay as well.

FatFIRE

FatFIRE focuses on retiring as soon as possible. FatFIRE is about indulgence. People that abide by this method do not make as many sacrifices, and in turn, will need to save more money to fund their early retirement. FatFIRE devotees will take much longer to achieve their early retirement goals. In addition, you need a much higher income to make this work.

Not every type of FIRE will be right for you. In fact, it’s important that you pick the one that seems realistic and doable for you, based on your financial situation. That will make it much more likely that you will stick to FIRE.

How can you retire early?

Retirement can happen at any age, but most people don’t always realize it’s possible. Retiring early takes a lot of sacrifice. If you do want to go down this path, you should start by finding out your “FIRE number.” That means the total value of assets you need to accumulate in order to live off a passive investment income.

There’s a simple way to calculate it: Annual Expenses x 25 = FIRE number

Here’s how that works. If your living expenses are around $4,000 a month, and your annual expenses reach $48,000, your FIRE number would be $1.2 million.

Once you have your FIRE number, you can calculate your expected annual expenses at retirement. This part might not be so simple. For example, you should consider household expenses, healthcare, transport and more. If you’re struggling with this – even if you decide not to follow FIRE – we can help. When you have your monthly expenses set, multiply it by 12 to understand your annual expenses – and figure out how many years of retirement you expect.

To really make this a reality, FIRE recommends investing your income in tax-advantaged accounts and a taxable brokerage account.  Your assets should work for you, not the other way around.  If you do plan to retire early, keep in mind that you may not be able to access all your money prior to 59 ½ years old.  The IRS does have some special rules that allow you to take your money out before 59 ½.  But you have to be careful to follow all the rules, so talk to a good advisor to make sure you don’t get yourself in hot water.

Tips for those starting FIRE

Retiring early seems like a far-off dream for many people. But there are tangible steps you can take to make this dream a reality. Here are some tips for those starting FIRE:

Save, save, save

Most FIRE devotees will set aside 25% to 50% of their income on average each month, though some may save more.

This seems like a huge chunk of money, right? It is, but there are ways to make it easier. In order to save this much money, you need to look at your financial situation and understand where you can make lifestyle changes. Can you cut out your morning coffee? Do you want to stop eating out entirely? How can you make your living expenses more affordable? These are the important changes you need to consider, depending on the type of FIRE you want to follow.

You also need to be smart about where you put your money. That means looking at tax efficient products like stocks, IRAs, mutual funds, and more.

Invest

No matter if you follow FIRE or not, it’s not wise to leave your savings in a basic savings account. You risk losing money due to inflation. You see inflation around you as the goods and services you buy get more expensive every year.  Assuming average inflation rates in the U.S., you will need about twice as much money in twenty years to buy the same stuff you need today.  Instead, invest your savings to grow your money.

Most FIRE savers will invest in low-cost index funds, but you can opt for a method that works best for you. Check out different stocks, bonds, mutual funds, and more to boost your returns.

Try to earn more

FIRE depends on earning as much money as possible. One way to ensure an early retirement? Boosting your income as much as possible. That might include:

• Taking on a part-time job or consultancy work
• Asking for a pay raise
• Changing jobs to get a pay raise
• Working a side hustle

Spend wisely

How you spend money will determine how much you can save, and therefore, how early you can retire. Before you spend money on anything, think carefully on how you spend your money. Many FIRE devotees will avoid purchasing luxury items and high-price items and instead stick to saving the money instead. That might mean less take-out food and less dinners out. Instead, you can use that money to pay off your mortgage or invest more money.

Key Takeaways when joining FIRE

Your path to FIRE will reflect your own values, your wealth-building preferences, and your overall lifestyle choices. It’s important to remember that FIRE or no FIRE, you can retire at any age – so long as you have the savings to make it happen. At the end of the day, make sure your choices reflect your own goals and what you want out of life. If you can dream it, there’s a way to make it happen!