What is the FIRE movement and how does it work?

Most people accept the fact that they’ll have to put in 4 or 5 decades of work before enjoying the rest and relaxation of retirement. But since at least the early 90s, adherents of the Financial Independence, Retire Early (FIRE) movement have sought to free themselves from the burdens of work before reaching old age.  

At its most basic, FIRE requires you to embrace a frugal lifestyle and maximize your savings so you can afford to retire sooner rather than later. But FIRE doesn’t just mean cutting down on food delivery or morning coffee runs. CNBC Select gives an overview of how FIRE works so you can decide whether you’re willing to make the sacrifice for a possible early retirement.

FIRE is a movement of people dedicated to extreme saving and investing, allowing them to quit full-time work sooner than they would with traditional retirement planning. But it comes with a cost — to achieve FIRE, you have to dedicate a huge amount of your income toward your retirement, which usually means cutting your spending down to the essentials. 

Followers of the movement typically save around 50% to 75% of their annual income until they’ve amassed enough money to let them retire early.

Knowing how much money you need to have saved before you can stop working isn’t an exact science, but the “25 rule” helps many hopeful early retirees set a goal they can work toward. Simply put, this rule states you need to have saved 25 times what you spend in a year before you can seriously consider retirement.  

Another important guideline to many FIRE followers is withdrawing 4% (or less) from your investments and savings each year during retirement. “I used the most classic definition of FIRE, which is when 4% of your net worth is equal to your annual expenses at any given time,” says Shang Saavedra, a personal finance blogger of Save My Cents who says she reached her FIRE goal by age 31. However, Saavedra says your financial needs will determine what percentage of your savings you withdraw each year during retirement. If you have a child, for example, you’ll almost certainly need to withdraw more money than if you didn’t. 

Jeff Rose, certified financial planner and blogger behind Good Financial Cents, advises people to save more money than they think they will need during retirement. This is especially true for FIRE, where your retirement might last 50 years or longer compared to a more traditional retirement. 

“Things are going to come up where you’re going to need to spend more, or the markets aren’t going to return what you hope they’re going to,” he says. “And the thing most people don’t realize is if something were to come up, like a major medical expense, in a season where the stock market is in a bad bear market… this 4% calculation all goes out the window.” 

To help you reach these ambitious savings and investment goals, you’ll need to seize any opportunity to make your savings grow. High-yield savings accounts like Marcus by Goldman Sachs High Yield Online Savings can help make the most of your emergency savings, but you’ll likely need to keep much of your money in investments where it has a chance to earn a much higher return. Betterment and Wealthfront both offer robo-advisors to help you invest in a retirement portfolio that aligns with your needs. 

Now, let’s put this FIRE strategy into perspective with an example of someone satisfied living on a small budget during their retirement.

Imagine someone is 25 and earns $50,000 a year with no prior retirement savings. Let’s say this person is saving 35% of their income (or $17,500) and spending about $32,500 each year. Using the rule of 25, this person would need to save $812,500 (25 x $32,500) in total to achieve FIRE (if they want to maintain their current level of spending during retirement). Assuming a 7% annual rate of return, it would take this person about 21 years to reach this goal.  

Based on the 4% withdrawal rule, that means this person could withdraw $32,500 each year. That means during retirement, they would have to live off $2,708 every month. 

Note that this example does not take into account different scenarios like an increase in savings contributions or expenses, or various return rates of savings and retirement accounts. 

Different types of FIRE strategies depend on other lifestyle goals. Here are some other approaches to FIRE:

• Lean FIRE: Lean FIRE refers to living a simple, minimalist lifestyle during retirement that doesn’t leave much room for any expenses beyond the essentials.
   
• Coast FIRE: Saving and investing enough that you no longer need to make any contributions and can coast into retirement by the conventional age of 65. This method is best for those who aren’t looking to rush into retirement. 
   
• Fat FIRE: Imagine the opposite of Lean FIRE, where you plan on living a lavish lifestyle in the future. Achieving FAT Fire means making room for an idealized life and costly expenses like constant travel.  

• Barista FIRE: By achieving Barista FIRE, you continue to save and invest enough money to quit your day job but still take on a side gig (like working as a barista) to supplement your income. Those who follow Barista FIRE also typically aim to retire early in life.

Reaching financial independence can be tough but it’s not impossible. However, the FIRE movement has often drawn criticism as having unrealistic requirements that aren’t achievable for many workers.   

Saavedra, for example, attributes her success to the invaluable financial support she received on her journey. Her parents paid for her college tuition, while her husband went to school on a scholarship, relieving them of any student debt burdens to worry about.   

“I want to acknowledge that and say that already gave us a footstep up,” she said. “And then both my husband and I just learned from our parents to be very mindful of our money.”  

On the other hand, without this type of support, it can require more work for others to achieve financial independence. Rose finds that reaching FIRE can be difficult without earning an income that gives you room to save and invest, while still taking care of your expenses.   

“I think the reality is that you have to have some sort of career or some sort of skill that allows you to make a decent wage when you’re saving 40%, 50%, 60% or 70% of your savings,” Rose said. “If you’re making $30,000 a year and can barely make ends meet, then it’s going to be really hard to achieve FIRE.”  

However, if you do find that you can comfortably save and invest to potentially reach FIRE at your desired time frame, there’s one thing Saavedra and Rose have emphasized that people typically neglect along the way — mental health.  

While Saavedra managed to become work-optional, the process also caused her to feel slightly insecure about her financial decisions, especially while living in New York City.   

“The pressure of ‘keeping up with the Joneses’ was definitely there,” she said. “Even though mentally I knew I had a lot of money in the bank, I felt poor compared to my friends who were living up their lives.”   

Deciding whether early retirement is right (or even possible) for you will take some considerable thought. Make sure to talk it through with a financial professional and other people you trust, and keep in mind that you’ll likely have to make some big sacrifices to achieve your goal.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Shang Saavedra, a personal finance blogger of Save My Cents, and Jeff Rose, a certified financial planner who manages the personal finance blog Good Financial Cents.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal finance article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal finance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best products.

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