Should You Play With F.I.R.E.?
According to the 2021 results of its annual study, Hearts & Wallets, a research and benchmarking company that analyzes consumer behaviors around saving, investing, and seeking investment advice, found that...
According to the 2021 results of its annual study, Hearts & Wallets, a research and benchmarking company that analyzes consumer behaviors around saving, investing, and seeking investment advice, found that 39% of consumers plan on retiring before the age of 65. That’s the most significant share since 2010.
The study also reported that 18% of people plan to retire before age 59. It also found that:
- Over 38% of respondents under age 54 will retire full-time by age 55.
- Only 32% of older workers, or pre-retirees, expect to stop working full-time in the next five years.
- 44% of respondents in the pre-retirement age group have already retired.
This shouldn’t be all that shocking. According to government data, approximately 2.7 million Americans age 55 and older contemplate retirement years earlier than expected because of the COVID-19 pandemic. In addition, interviews with wealth managers and federal surveys found that more significant numbers are White, a group with typically higher assets. They also stated that they were tired of COVID-19 and their retirement funds as reasons for early retirement.
What is the F.I.R.E movement?
FIRE is an acronym that stands for Financial Independence Retire Early. The concept is basically a combination of extreme saving, frugality, and investing.
“The idea is to achieve financial independence, be free from financial commitments and retire early so you don’t ever have to work again if you don’t want to,” says Elizabeth Buko, (quoted on Stylist) a financial mentor and founder of Wealth from Little. “And anyone can do it, no matter how much money they earn.”
In reality, this movement has been embraced by ambitious and middle-income earners who use the following formula;
- High savings rates (50-70% of income), frugal living (minimalism), and low-cost stock index fund investing (such as Warren Buffett’s standard investment advice).
It usually takes around ten years to achieve this goal. But, it’s no surprise that FIRE is sometimes referred to as the “ultimate life hack.”
While this might seem like a relatively modern concept, its origins can be traced back to 1992 in the best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez. Rather than working 9-5 to earn a living, they emphasized achieving financial independence.
Many are scared of retirement.
In recent years, millennials, in particular, have joined this movement. And, you can’t exactly blame us. Millennials experienced the ripple effects of both the financial crisis of 2007-2008 and the COVID-19 pandemic. They (millennials) also, lost their jobs during the Great Recession (2008). We know that (8.7 million covering all generations suffered these losses too.
Many have struggled to find a job after graduating from college. As a consequence, this generation is still behind financially from other generations at the same point in age time.
In addition, millennials continue to face staggering student loan debt and ballooning housing, healthcare, and childcare costs. Due to this, many put off buying a home, getting medical and dental care, and having children.
No wonder we’re scared of the word “retirement.”
Understanding FIRE and its different types.
FIRE’s ultimate goal traditionally is to take early retirement. To support yourself, you would use your savings and income from investments.
Sometimes you’ll hear about people who live extremely frugal lifestyles to save money.
They then invest that money to retire when they’re in their 30’s or 40’s. Thus, FIRE advocates might be able to save up to 50% of their income, or even more, to retire early. However, that’s not the only factor to consider.
Through the years, FIRE’s definition has expanded in scope and developed its application. For example, rather than retiring early, many people nowadays focus more on achieving financial independence.
Essentially, FIRE requires you to shift your perspective regarding money and work.
As a result, this encourages you to consider what’s most important to you, and how you might reach financial independence without being ruled by money demands.
As Vicki Robin explains, the real purpose of her book isn’t to present a step-by-step guide to early retirement. Instead, it’s showing people how to live well while consuming less. In turn, you’ll have a more fulfilled and rewarding life. Or, as Robin put it, “If you live for having it all, what you have is never enough.
FIRE’s principles, such as saving and being conscious of your spending, are universal. But how individuals choose to apply them in their lives and the outcome they hope to achieve will differ from person to person.
Over the years, numerous variations of FIRE have developed
To prepare for early retirement, those following this type of FIRE would prefer a minimalist and “lean” lifestyle. The minimum amount needed to live would be saved, and you would be living modestly in retirement. As a result of your extreme savings and smaller retirement income needed, you should achieve FIRE sooner than expected.
It has the same aims as LeanFIRE, but the emphasis is more on being indulgent and less frugal. This method won’t require as many sacrifices in current spending, or in retirement. So, people will have to save more money to afford the lifestyle they want. As such, it may take longer for you to accomplish your goals, and you may require a higher income.
Essentially, this will allow you to retire from your main job early by saving. However, people with financial independence may choose to work part-time or do freelance work or pursue a passion. Working for pleasure instead of working to live leads to better life satisfaction while still bringing in an income source.
The pros and cons of FIRE.
Achieving financial independence and early retirement may sound like a dream come true, but it isn’t as easy as it seems. So before implementing the F.I.R.E. strategy, you should always weigh both its benefits and drawbacks.
Benefits of the F.I.R.E. lifestyle
- You have more flexibility with your time. As opposed to retiring at 65 or 70, those who retire at 35 or 40 have more time to pursue and enjoy their hobbies and interests.
- Creating a life that is meaningful and purposeful. Earlier retirement can be immensely freeing, allowing someone to escape the shackles of a job or career. By focusing on fulfilling one’s true calling rather than earning money, one has more chances to pursue their dream.
- Being able to live below your means. A major problem facing many working-age people is lifestyle inflation, which tends to spend more as their income rises. Even if advocates don’t retire early, they can still save more money over time because they live frugally, which will help them save more overall — even if they don’t retire early.
- Less stress. Approximately two-thirds of Americans report that money is one of the significant stressors in their lives. Having enough money to live comfortably without working would eliminate an important source of stress, leading to a healthier and more enjoyable life.
However, the F.I.R.E. lifestyle also has several drawbacks.
- There is no way to predict the future. Despite thorough planning, the future can be unpredictable, even for those seeking early retirement. A budget plan can be thrown off by unexpected changes in taxes, emergencies, and social policies, which will factor into future budgeting.
- Some people find retirement boring. People who achieve financial independence and enjoy early retirement might find it challenging to fill their free time. Unless you have a specific career or non-career goal, years without work can seem a waste of time.
- There are fewer opportunities for professional development. A person achieving F.I.R.E. may find reintegration challenging if they discover that it’s not right for them. They must re-enter the workforce due to extenuating circumstances. Even in the best of circumstances, job searching may prove difficult if one does not have a history of continuous employment.
- F.I.R.E. is challenging! Even supporters acknowledge that the FIRE lifestyle can be challenging — both in terms of the extreme savings strategies and how the lifestyle changes daily life.
- Social activities such as eating out or going on vacation with friends may be difficult for extroverts to give up. Some people may have difficulty creating an identity apart from their jobs.
How to play with FIRE (safely).
To be honest, the FIRE movement isn’t for everyone. And, for lots of people, it may not be realistic. However, there are lessons that you can learn from the FIRE movement that can help you become more financially secure. As a result, you’ll be able to cover emergencies and future financial goals comfortably.
Have a master plan.
How do you envision your retirement? Would you be willing to work part-time, full-time, or not at all? Are you moving or staying put? How will your cost of living change? If you answer these questions correctly, you’ll know how much to save and when you can realistically retire.
Live within your means.
Getting by on a tight budget doesn’t mean being a “cheapskate” or sacrificing life experiences. Instead, it “simply means that you’re spending less or equal than you’re making each month,” explains Deanna Ritchie in a previous Due article. “As a result, you aren’t putting yourself into debt by living off of plastic. And more importantly, this will help you create a more stable financial future.”
Avoid debt like the plague.
Never use a credit card — unless you can pay the balance off each month. Credit card debt interferes with your ability to save and retire early. In an ideal situation, you should retire without any debt obligations.
Become a super-saver.
Try to save as much as 75% of your income. You could live off one spouse’s income while saving and investing the other spouse’s income if you both have incomes. Since this varies, adopt a structure that best fits your needs and budget.
Diversify your income.
What if you can’t save aggressively or invest? One solution would be to increase your income by getting a second job or starting a side hustle.
Invest in your future.
This doesn’t always mean literally investing in stocks and bonds. Instead, it could mean improving your financial literacy or learning new skills that make you more valuable to others.
If there’s anything you should take away from the FIRE movement, you should reduce your debt as much as possible. While some advocates may be 100% free, others only have a small amount.
For example, let’s say that you have student loans, mortgage, and car payments. If you could get rid of the car payment, which is around $300/month, you could put that money into paying off your other debt faster. But, eventually, you keep chipping away until you’re liberated from your financial obligations.