For many people, retirement is synonymous with financial independence. It’s the ability to live on one’s terms.

In traditional retirement planning, a common strategy is slowly saving and building a fund over the decades. Conversely, another school of thought aims to reach that goal more quickly. It’s known as the FIRE movement.

What is FIRE?

FIRE stands for “Financial Independence, Retire Early.” According to Investopedia, it’s unknown who coined the term. Still, many of the movement’s core concepts and philosophy stem from the 1992 best-seller book Your Money or Your Life by Vicki Robin and Joe Dominguez.

FIRE is a lifestyle and financial planning strategy that encourages people to retire earlier than the traditional retirement age.

For example, many people associate traditional retirement with their mid-60s. FIRE adherents, on the other hand, try to retire in their 30s and 40s. Of course, the definition of “retirement” and all that entails can vary from person to person.

Conventional retirement involves developing a career over decades, contributing to an employer-sponsored savings plan, and incorporating Social Security benefits. FIRE adherents save and invest most of their income and rely on a healthy investment portfolio to sustain them for life.

FIRE encourages financial independence through aggressive savings, extreme frugality, and active investing. Adherents often save and invest 50-75% of their income to reach their retirement goals.

How does someone practicing FIRE know they’re ready to retire?

The goal of a FIRE follower is to save and invest actively while seeking out other sources of income. According to Nerdwallet, two concepts help define a FIRE follower’s goals:

• The 4% Rule: Withdrawing 4% of your retirement savings (investment portfolio) in the first year, and using that amount adjusted for inflation in subsequent years throughout retirement. This amount, based on the findings of financial advisor William Bengen, can be considered a “budget” to base your spending decisions.
• The Rule of 25: Calculate how much you spend over a year and multiply it by 25. The result is a rough estimate of how much you should save in order to cover living expenses throughout retirement.

The FIRE number, or the amount of money one should save to retire, is calculated from The Rule of 25. Suppose you expect to spend about $40,000 annually in retirement. Your FIRE number would be calculated as follows:

• $40,000 x 25 = $1,000,000
  

While the FIRE number is a general savings goal, it must also work with the 4% Rule. In other words, savings figured from a FIRE number should be in an investment-type portfolio that performs with an average rate of return. You would withdraw up to 4% from that portfolio annually.

All that said, everyone’s retirement goals, savings strategies, and life circumstances are different. Your savings goals and life priorities may evolve. Consequently, so will your retirement planning strategies.

Many financial advisors recommend that FIRE adherents regularly review their finances and adjust their FIRE numbers accordingly. Someone’s FIRE number might change to account for things like:

• Vacations
• Changes in living situation
• Healthcare costs
  

How FIRE Followers Might Approach Their Goals

FIRE enthusiasts incorporate a variety of strategies to reach their goals. These strategies include:

• Embracing frugality and minimalism: FIRE savers capitalize on every opportunity to minimize spending and save wherever possible. This requires adopting a “save first” lifestyle, which may involve things like downsizing living arrangements, cooking at home instead of dining out, and even using public transit instead of owning a car.
  
• Diversify income streams: Very rarely do FIRE followers have only one source of income. They may adopt other sources of income, such as investing in real estate, starting a business or freelancing, and seeking other passive income sources.
  
• Anticipate healthcare costs: Early retirees may not be able to take advantage of employer-based health plans or qualify for government programs like Medicare. They must cover their healthcare costs by researching insurance options, building a health savings account (HSA), and maintaining good health and a compatible lifestyle to reduce expenses.

Aggressive Saving: FIRE’s Cornerstone

We’ve all heard about saving for a rainy day. Now, think about saving to keep a FIRE going.

Aggressive saving is a top priority for a FIRE follower. Saving early and at every opportunity allows someone to reach their FIRE number faster. It also builds a healthy financial cushion to absorb emergencies and economic downturns. More savings also provide more opportunities to grow investments.

Additionally, debt repayment (and elimination) is also a priority. Outstanding debts accrue interest, which can quickly eat up savings. A FIRE follower will make a point to pay off debts as soon as possible so they can continue saving for retirement. This also means avoiding common debt traps like payday loans or misusing a credit card. 

Even if FIRE Isn’t for You, It Offers Valuable Lessons

As you can see, FIRE, in practice, can seem a little over-the-top to outsiders. Saving most of your income can feel restrictive. Or you might even be in a situation where such strategies may not be feasible for you and your family.

How you plan for retirement depends entirely on your goals, preferences, and what retirement means to you.

On the other hand, many of FIRE’s strategies and practices can easily be applied to many different lifestyles.

Take the “save first” strategy, for instance. Paying yourself first is a great way to build an emergency fund or save towards a down payment for a car or home loan. A frugal lifestyle can bulk up your savings while enriching your everyday experiences:

• Cooking more and eating out less saves money and promotes time with loved ones.
• Taking public transit lowers your fuel and maintenance costs.
• Being forward with your commitment to saving encourages communication between friends and family.
  

Playing with FIRE may provide keen insights into your approach to retirement and what you may do to reach your goals. Some of its practices and underlying philosophies may also enrich your own life. If you’re thinking about retirement or want to evaluate your relationship with money, the FIRE movement may spark the right conversations.

When you’re ready to map out your future, work with a team you can trust. Speak with a financial planner to discuss your options related to retirement and saving for life’s big moments.