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Most people assume they’ll start a career, work until they’re 65, and then enjoy a comfortable retirement. But many have found an alternative: the FIRE movement. 

While not a new concept, it’s gained popularity in recent years. FIRE, more than anything else, is about having control over your time and energy. Many people pursuing FIRE seek to retire in their 50s, 40s, or even their 30s. Others simply want the option to pursue work they’re passionate about.

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What is the Financial Independence, Retire Early movement? 

The Financial Independence, Retire Early movement — often referred to simply as FIRE — is a lifestyle with the goal of investing enough to become financially independence and retire before the traditional retirement age.

The concept dates back to the 1992 bestseller, “Your Money Or Your Life,” by Joe Dominguez and Vicki Robin. In the book, the authors explain that as long as you can grow your investments large enough that you can live off your returns, then you don’t necessarily have to continue working.

The movement has continued to gain popularity, especially with the rise of social media and blogs. Many people started websites and social accounts documenting their own journeys toward FIRE, inspiring their readers and followers to do the same.

According to Lauren Keen Aumond, the creator of Adulting Is Easy and someone who has recently reached FIRE with her husband, FIRE means different things to different people.

“This movement is about becoming work optional,” Aumond says. “You could continue to work, as my husband and I are right now. You could travel, volunteer, work part-time, change careers, go back to school, etc. It’s all about owning your time and spending it how you want to rather than stopping work altogether.”

As Aumond notes, many people who reach FIRE don’t actually leave the workforce altogether. Yes, many do choose to retire and spend their time on other activities. But some may continue to work in their current jobs, while others might take on jobs they’re more passionate about but that pay less.

How does FIRE work? 

The basic premise of the FIRE movement is that you live on a smaller percentage of your income and invest the rest. In fact, it’s not uncommon for people in the FIRE movement to invest more than half of their income.

The purpose behind investing a large amount is to amass as large of an investment portfolio as possible. And by investing a lot of money early on, you’re giving the market time to do its job and your investments time to grow and compound.

“The importance of spending less and investing more is a Finance 101 concept called the ‘time value of money,'” says Jordan Taylor, an independent financial advisor with Core Planning. “If I give you $1 today, what will it be worth in four years? In 20 years? That depends on what you do with it. If you invest it wisely, time equals more money.”

Someone with a high income might be able to achieve FIRE with relatively little sacrifice. However, many in the FIRE movement choose to live quite frugal lifestyles with the goal of reaching financial independence as early as possible.

Suppose you have the goal of retiring early. You know that to reach financial independence, you need to earn $50,000 per year from your investments. 

How to know when you’ve reached FIRE

One of the most important steps in pursuing FIRE is knowing the amount you must have in your investment portfolio to be considered financially independent. This is often referred to as your FIRE number.

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“Many behavioral finance academics have noted that financial independence is another way of saying, ‘I have enough,'” Taylor says. “If you poke around, you’ll realize that ‘enough’ is very rarely a dollar amount you can put in an account.”

While the idea of having enough might be vague, there is a formula that many people use to determine the point at which they’ll be financially independent. The formula is known as either the 25x rule or the 4% rule. Both give you the same number.

These rules originate from the idea that you can safely withdraw up to 4% of your investment portfolio in your first year of retirement. In subsequent years, you adjust your withdrawal based on inflation.

You can determine your FIRE number by multiplying your desired income during retirement — which should be 4% of your portfolio — by 25. The resulting number is how much you should have in your portfolio when you retire. You can also find that number by dividing your desired annual retirement income by 0.04.

Suppose you want an income of $50,000 during retirement. You would either multiply $50,000 by 25 or divide it by 0.04. Either way, you end up with a result of $1,250,000. That’s your FIRE number.

Some people plan to truly retire when they reach financial independence, while others plan to work fewer hours or work on passion projects. What FIRE looks like to you will help you determine just how much money you’ll need.

“Depending on the math you use, who you listen to, and which FIRE community you frequent, you may be introduced to different ‘rules of thumb’ that people use to calculate what they need and how much income it can produce,” Taylor says.

What are the different FIRE variations? 

FIRE looks different for everyone. Some hope to live lavish lifestyles during retirement, while others simply want to save enough to pay their bills. Therefore, there are several different variations of FIRE that someone might pursue. These are some of the most common:

• Regular FIRE: According to Taylor, the most popular type of FIRE people pursue is that which allows them to maintain their current lifestyles during retirement. Someone pursuing regular FIRE might aim to have a portfolio ranging from $1 million to several million.
• Lean FIRE: Someone pursuing lean FIRE is planning for a considerably lower income during retirement. With a FIRE number generally less than $1 million, the goal is to retire early and live a more frugal, minimalist lifestyle during retirement.
• Fat FIRE: You can think of Fat FIRE as the opposite of Lean FIRE. Someone pursuing this type of FIRE plans to live at least at their current standard of living — and possibly better — during retirement. Someone seeking Fat FIRE likely aims to have at least $2.5 million in investments.
• Barista FIRE: If you don’t mind working after you reach financial independence, then Barista FIRE might be for you. Barista FIRE doesn’t usually involve saving enough to cover all of your expenses during retirement, meaning you may need to work full-time to make up the difference. This strategy often has the added benefit of employer-provided health insurance.
• Coast FIRE: Coast FIRE doesn’t necessarily involve early retirement. Instead, someone who has reached Coast FIRE has enough in their investment portfolio that they can retire at traditional retirement age without investing another dollar. Of course, Coast FIRE is the first step to any FIRE goal, and many people who reach it then go on to pursue other variations of FIRE.

“Most notably, many FIRE community members use a hybrid plan or have switched between different versions,” Taylor says.

What are the benefits and drawbacks of FIRE?

It’s easy to see the benefits of the FIRE movement. After all, who doesn’t want to leave the workforce at a younger age thanks to financial independence?

When someone reaches FIRE, they have more time and energy to focus on things they’re passionate about. And some of those things — travel is an example — you may not have as much energy for if you waited until age 65 to retire.

Even if you don’t want to retire, FIRE can give you more freedom. Suppose you’re in a high-paying job that you really dislike. If you reach financial independence, you could opt for a lower-paying or part-time job that excites you. It’s no longer about the money. Instead, it’s about doing something you genuinely enjoy.

Finally, regardless of whether you plan to retire, financial independence can give you a strong financial foundation. You know that no matter what unforeseen circumstances come your way, you’re prepared to weather the storm.

Not only could these benefits offer a clear boost to your mental and emotional health, but freedom from a demanding job and more time to relax and be outside could actually improve your physical health.

That being said, pursuing FIRE has some major downsides, as well. Among those is the extreme hustle often required to earn enough to reach your financial goal.

“A huge drawback is the delayed gratification, the hard work, and the discipline required,” Aumond says. “Some days, I wish I had a new boat and a house on the water and one job instead of house hacking with a job and all the real estate.”

And even while you work hard to increase your income, pursuing FIRE still requires major sacrifices when it comes to spending. Living on a small percentage of your income is likely to have an impact on just about every area of your life. You must ask yourself — is it worth being less satisfied with my lifestyle right now so I can retire early?

There are other risks to FIRE as well. For example, what if you spend years working toward FIRE and then discover you don’t actually enjoy retirement? And what if you leave your paying job only to have the stock market crash and take a good chunk of your portfolio with it?

Finally, you simply can’t predict what financial emergencies may come up in the future. You could run into a life-threatening illness for yourself or a member of your family that costs thousands of dollars (or tens or hundreds of thousands), and you no longer have an income.

FIRE pros and cons

Is FIRE right for you?

To determine whether FIRE is the right goal for you, you must consider your priorities. Yes, FIRE gives you total freedom over your time once you reach financial independence. But that comes at the expense of freedom over your time and money during your working years.

It’s also worth noting that FIRE simply isn’t an option for everyone. Many young people today graduate with student loan debt, meaning it can take years to achieve a positive net worth. Additionally, someone living paycheck to paycheck or on a low income is unlikely to be able to save enough of their income to achieve FIRE.

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The good news is that it’s not necessarily all or nothing. Offshoots of traditional FIRE like Barista FIRE or Coast FIRE allow you to achieve a form of financial independence without forcing you to sacrifice to get there.

If you are considering FIRE as a goal, start with the math. Run the numbers to determine what your FIRE number is and what it would take for you to achieve it.

“The math is easy” says Aumond. ” The journey is hard.”