Financial Independence Retire Early (FIRE) is a growing movement that challenges the conventional idea of retirement. While traditional retirement often happens in your 60s, FIRE poses a question: “Why not much earlier?”
Based in frugality and strategic investing, FIRE shifts the focus of work from being a lifelong necessity to a temporary means to an end. For some, this might even mean retiring completely in their 30s or 40s.
Despite its appeal, FIRE has its critics. Some view the movement as overly restrictive due to its emphasis on extreme saving, while others argue that work provides a sense of purpose that early retirement may not fulfill.
This article will explore the fundamentals of FIRE, its variations, and the lifestyle it promotes, leaving you to decide if it’s the right path for you.
What is FIRE?
FIRE simply refers to retiring earlier than what is generally considered normal, also referred to as ‘FIREing’. It is the natural next step of achieving financial independence, which refers to no longer needing to work to cover living expenses.
To retire early, you’ll need a sustainable income stream to replace your earnings from work. This usually comes from investments, usually through index-based ETFs, although property and other assets can play a role. Because FIRE advocates for retiring well before the age at which superannuation is accessible, building a personal investment portfolio is essential.
Reaching this goal requires a high savings rate during your working years. These savings are then invested to generate the growth needed to achieve your financial independence target, commonly referred to as your “FIRE number.”
FIRE Number
The first step in the FIRE journey is to calculate your FIRE number. This is the amount of savings or investments you would need to sustain your lifestyle throughout early retirement. This figure should provide a sustainable income without running out of money.
There is a myriad of ways of calculating this number. A commonly used method of estimating this number is by using the “4% rule,” which involves multiplying your annual living expenses by 25. FIRE numbers utilising the ASFA Retirement Standard would look like this:
- A comfortable lifestyle for a couple, costing $73,000 per year, requires a FIRE number of $1,825,000.
- A modest lifestyle for a couple, costing $52,000 per year, results in a FIRE number of $1,300,000.
These calculations assume you own your home outright, as ongoing housing costs like rent or mortgage interest can significantly impact your required retirement savings.
While the 4% rule is popular, it isn’t without critics. Some argue it is overly optimistic in uncertain market conditions, while others find it too conservative. Inflation also needs to be factored in when projecting future living expenses.
Reaching such a significant savings target typically requires substantial sacrifice. For most people, this includes embracing a frugal lifestyle, earning a higher than average income, and paying off their home early.
Be careful not to completely ignore your superannuation, however. No matter when you actually retire, it will still be accessible once you reach age 60.
Savings Rate
Whether or not your FIRE goal is achievable will mostly depend on your savings rate. This is calculated as the proportion of your income that is saved each year. The higher your savings rate, the faster you can grow your investments and reach your FIRE number.
For instance, consider a couple with a combined income of $240,000 per year aiming for a FIRE number of $1,825,000. If they save and invest $6,000 per month at a 7% annual return, they could achieve this goal in 15 years. This equates to a 40% savings rate after tax. This would be a challenging rate to sustain, despite their above average salaries.
With that said, it would not be impossible if FIRE was the primary goal of the household and appropriate sacrifices were made in order to achieve it.
Many people are drawn to FIRE for precisely this reason: the possibility of temporary sacrifice leading to long-term financial freedom. Committing to a high savings rate and disciplined investing can unlock the opportunity to retire early and live on your own terms.
Types of FIRE
The standard FIRE model is about achieving financial independence and retiring early, but there are variations within the movement to suit different lifestyles and goals. These alternatives can make FIRE more accessible or more ambitious, depending on personal circumstances.
Lean FIRE
Lean FIRE takes early retirement to its most minimalist form, with annual expenses often as low as $30,000 per year. This lifestyle is highly frugal, with minimal luxuries, appealing to those willing to make significant sacrifices to retire earlier.
Using the 4% rule, the FIRE number for Lean FIRE is around $750,000, a much lower threshold than standard FIRE, making it faster and easier to achieve. However, living on such a lean budget can be risky, as there’s little room for unexpected expenses. Many Lean FIRE adherents plan to supplement their income with part-time or casual work to mitigate this risk.
Fat FIRE
At the opposite end of the spectrum, Fat FIRE represents retiring early with a significantly higher standard of living and fewer sacrifices. There’s no strict definition of when FIRE becomes Fat FIRE because it depends heavily on your local cost of living.
In Australia’s major cities, a retirement income in the 90th percentile (around $150,000 per year) is often considered the baseline for Fat FIRE. Using the 4% rule, this equates to a FIRE number of $3.75 million. While desirable, Fat FIRE is going to be out of reach for most people unless they are in the top income brackets or experience exceptional investment growth.
Barista FIRE
Barista FIRE is a middle ground between working full-time and retiring entirely. It involves leaving a high-stress or demanding career in favour of a lower-stress or part-time job, hence the term barista. Investment drawings then supplement the reduced income to maintain a desired lifestyle.
This approach is attractive for those who want to escape the grind of high-paying jobs without fully stepping away from work. It’s generally easier to achieve than standard FIRE, as the FIRE number aligns more closely with Lean FIRE but without the extreme frugality.
Coast FIRE
Coast FIRE focuses on achieving financial independence for a traditional retirement age while reducing financial pressure during earlier working years. Once a portfolio grows large enough to fund retirement through compounding alone, there’s no need for additional contributions.
This option appeals to those who enjoy their careers or want to live a more balanced lifestyle pre-retirement. It provides the flexibility to reduce savings rates or work less without sacrificing long-term goals. Coast FIRE is often viewed as a set and forget strategy, relying on the power of compounding to do the heavy lifting over time.
Summary
FIRE challenges the typical notion that retirement happens in your 60s, offering a path to financial independence and early retirement through strategic saving and investing. It appeals to those who view their careers as a temporary necessity rather than a lifelong commitment, providing the opportunity to live life on their terms.
The journey to FIRE requires discipline, careful planning, and a willingness to step away from societal norms around spending and saving. For many, the allure lies in gaining control over their time and breaking free from the constraints of traditional employment. However, achieving FIRE often demands tough choices, such as embracing a frugal lifestyle, foregoing luxuries, or delaying gratification.
Whether this is worth it for you will depend on your willingness to significantly sacrifice standard of living now in favour of the future. A future, that critics would say, is never guaranteed.
