Increasingly popular among millennials, the “financial independence, retire early” movement, or FIRE, is a lifestyle that encourages people to save as much money as possible as quickly as possible to become financially independent and retire earlier than a traditional retirement plan would permit.
In theory, the FIRE mentality has benefits. With financial independence, people are free to decide where to live and what to do with their time. Instead of slaving away in an office, you can spend more time with your family and loved ones, pursue hobbies, or travel. If you want to continue working, you no longer have to pick a job based on income requirements alone.
But joining the FIRE movement has disadvantages as well. Some observers, like Miles Howard of The Outline, argue that extreme saving is only achievable for individuals with an extremely high income. For most workers, retiring at a young age demands extensive sacrifices they aren’t able to make and may not even be worth it in the end. After all, preparing for a comfortable future can require making big sacrifices in the present.
While the FIRE movement might be well intentioned, its core principles do not make sense for everybody. Rather than pursuing early retirement, it’s arguably smarter to focus on becoming financially independent. So let’s explore how you can use the FIRE mentality to achieve financial independence quickly and efficiently.
The concept of FIRE
The origins of the FIRE movement can be traced back to a 1992 book titled “Your Money or Your Life.” Written by author Vicki Robin and financial analyst Joe Dominguez, it argues that people should work to live rather than live to work, and that reducing one’s personal expenses and learning to be satisfied with less not only leads to financial success but also happiness.
“Money,” Robin and Dominguez write, “is something you trade your life energy for. You sell your time for money. It doesn’t matter that Ned over there sells his time for a hundred dollars and you sell yours for twenty dollars an hour. Ned’s money is irrelevant to you. The only real asset you have is your time. The hours of your life.”
According to the modern FIRE movement, which has taken on a life of its own outside the book, the first step toward financial independence is calculating your FIRE number. Your FIRE number is the total value of the assets you will have to accumulate to cover your annual expenses through passive income.
No two people will have the same FIRE number. To calculate your personal FIRE number, divide your annual expenses by the annual return rate of your investments. According to the 2021 Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics, the average American citizen spends around $66,928 per year, while mutual index funds yield an estimated 10.7% per year.
This means that, according to the FIRE movement, the average American would have to invest a total of $625,495.30 in order to be able to cover their annual expenses with the annual return on their investments. Once they have invested a sum equal to their FIRE number, they’ll have achieved financial independence and be able to retire. But is it really that simple?
The dangers of FIRE
Some people believe that pursuing early retirement following the principles of the FIRE movement is more trouble than it is worth, and for good reason. First and foremost, you’ve got to keep in mind that you may live a long time and you might need more money in your later years than seems obvious at first glance.
That’s partly because you cannot know what life will throw your way. Along your planned path to early retirement, you may encounter unexpected medical emergencies, home or family issues, or market crashes that will force you to completely rethink your strategies. If you have already retired and are living off a fixed monthly income, you might not have enough money to deal with such emergencies.
Due to the rapidly rising costs of raising children and private health insurance, among other reasons, many of Christopher Lyman’s millennial clients at Allied Financial Advisors in Pennsylvania don’t regard early retirement as a realistically attainable goal. Unless, of course, “you have a very, very high income and can live frugally.”
But living frugally is easier said than done. According to a recent Bankrate survey, as many as 55% of Americans feel they are behind on their savings. It’s one thing to stick to a tight budget for a couple of months, but quite another to do for years or decades. Not only does extreme saving require you to pass up on valuable experiences in the present, but it’s arguably harder to live within your means now than it has been in recent decades.
What’s more, extreme saving for prolonged periods of time can cause you to develop something called “frugal fatigue syndrome,” which happens when you start policing your spending to such a degree that it becomes mentally and physically exhausting. Some FIRE bloggers warn that extreme frugality could actually have a reverse effect, leading to bouts of extreme splurging.
From early retirement to financial independence
“The concept of retirement is too limiting,” says Brandon Welch from Newport Wealth Advisors, where he advises young high-income earners working in the tech field. “For many people, the freedom of choice for how they spend their time is far more exciting. Focusing on what they would do with that freedom is far more motivating than the idea that they could just do nothing.”
When planning your future, it is important to take a moment to ask yourself why you want to achieve a particular goal. “Sometimes the urge to retire early just means you aren’t happy in your current job,” advises Larry Luxenberg, founder of Lexington Avenue Capital Management in New York. “The financial independence needed to try a new career may be your actual goal.”
Rather than enabling you to be “work optional,” financial independence is about having the stability, security, and liberty to pursue whatever makes you feel fulfilled in life. Supported by a solid investing profile and fully stocked emergency fund, you won’t have to stick to an extremely tight budget, and you’ll have the means to deal with unexpected emergencies as they arise.
Most importantly, perhaps, financial independence allows you to pick a job based on your interests rather than the associated paycheck. You may opt to work fewer hours and take longer vacations, or you might choose to work from home instead of an office. The emphasis here is not on retirement, but on ease of mind — on well-being and happiness instead of wealth itself.