They’re young. They’re aggressive. And they are so hot about saving for an early retirement that you could say they are on FIRE.
FIRE stands for “financial independence, retire early” and there’s a movement of young people, aiming to retire as early as their 30s or 40s, flocking to this trendy personal finance idea. FIRE is about escaping the rat race by achieving financial independence decades before the age when people traditionally retire. Devotees of the movement fuel their aggressive saving with major lifestyle changes and extreme austerity measures.
On numerous websites, such as these blogs devoted to FIRE, FIRE devotees share their radical financial makeovers. They question every expense (yes, down to the last espresso bean) and then slash their budgets accordingly. Many FIRE followers find they can save 50% to 70% of their salaries—or even more—in order to retire just 5 or 10 years out.
What drives the FIRE crowd? They’re often Millennials who found themselves working long hours and realized they don’t want to—and don’t need to. Picture a 30-year-old couple who together earn $150,000 a year and work 50-plus hours a week, spilling into their evenings and weekends. Their answer to wanting more out of their lives is to first consume much, much less, freeing them to work fewer years and achieve financial independence very early.
Rethinking everything
Philosophically, FIRE eschews materialism. It means questioning every purchase and every fee and considering trade-offs. If consuming more means working more, is that cost worth it?
The personal challenges quickly line themselves up. How quickly could I become financially independent? What could I live without?
The easy downsizing moves could be no more dining out and choosing less expensive vacations. But big savings also are also found from slashing major monthly expenses: housing, transportation and utilities. Could I live in a house or apartment half the size of my current one? Should I move closer to work to save commuting expenses? If going car-free, getting rid of your TV and dropping your cell phone plan doesn’t sound like your idea of frugality, watch out. This is the X games of frugality.
How far would you be willing to go? Could you slash your monthly budget in half?
If such radical rethinking freed up $4,000 a month in an individual’s budget, that translates to $50,000 a year in savings, or $500,000 in a decade. This is the appeal of FIRE: By thinking about every small expense, your savings could become large over time.
Wonder how quickly you could retire? Check out this early retirement calculator.
Of course, this austerity-on-steroids approach isn’t for everyone. Changing your assumptions that you need everything that you currently have, however, could be liberating. You could also apply this philosophy to other major savings goals, such as college savings or a work sabbatical, or just apply the concept on your own terms, scaling it back to your level of comfort.
Possible drawbacks
What are the drawbacks or potential pitfalls to FIRE and an early retirement?
For one, if you retire extremely early, say by age 40, you’ll pass up a few decades of potentially peak income. A $100,000 a year salary multiplied by 20 years is $2 million in gross salary that you’ll never have. Even after taxes, that’s a lot of net income to pass up.
Secondly, the nuts and bolts of retirement income or retirement account withdrawal typically involve penalties for withdrawals before age 59½. So, you’d need other sources of living income until you reach that milestone.
Third, we understand from extensive studies that a so-called “safe withdrawal rate” of about 4% of your nest egg should pay for 30 years of retirement, but what about 50 or 60 years? How much additional risk would you take on? Or how small would your safe withdrawal rate be?
Fourth, how would you find fulfillment with all that free time? Day after day. Year after year. Some people might be too stressed out by work, but many feel a strong sense of work-related identity—and there’s the social element of a workplace. Away from a career, what would you do for personal fulfillment and growth for perhaps a half-century?
Clearly, the FIRE movement can be a path to freedom and empowerment for some. Just tread carefully, or you might get burned.
Allan Kunigis is a financial freelance writer based in Shelburne, VT. He has written about personal finance for more than two decades.
Read how Alex Tran is using extreme saving to meet her goal of retiring in her 40s.