Setting Your Retirement on FIRE

Why It Matters:

  • The Millennial generation is tossing out the traditional concept of retiring at 65 in favor of retiring early, really early.
  • Cutting back your cost of living could greatly reduce how much you need for retirement and when you can retire.
  • Once you have your living expenses covered, you can work because you want to, not because you have to.

Kastle Waserman tkc.profilePicture Written by: Kastle Waserman | Transamerica
Sept. 26, 2018

3-5 Min readClock Icon

Who hasn’t dreamed of retiring early, telling the boss, “see ya!” and doing whatever you want for the rest of your life? The proponents of a movement called FIRE are aiming for just that, and it’s become an especially hot topic for the Millennial age group (ages 22-36) who set their sights on achieving a very early retirement goal to live the kind of life they want, not the kind built around an employer’s rules, schedules, or paychecks.

What is FIRE?

FIRE stands for Financial Independence, Retire Early. The goal is to accumulate sufficient wealth as quickly as possible. To arrive at your ideal wealth number, you calculate your annual spending (not your current income), then multiply that number by 25. From that amount, you’ll be pulling 4% annually to live on.

For example, if your annual spending comes to $40K each year, you would need $1,000,000 to be able to retire with FIRE. A 4% withdrawal would equal your $40K.

The FIRE approach comes with its own leaders, mentoring types who provide guidance and motivation for their growing base of followers who are up for a speedy retirement. One of the biggest is a colorful gent by the name of Mr. Money Mustache, who writes a blog with tips and encourages extreme saving over strategic investing to reach your wealth goal.

Another (unlikely) FIRE hero is 72-year-old Vicki Robin, coauthor of the 1992 bestseller, “Your Money or Your Life,” whose philosophy about money is to equate every dollar amount to hours of life energy. For example, “if you make $300 a day and want to buy a $100 pair of shoes, you ask yourself: Are those shoes really worth nearly a third of a day of your precious time on earth?”

There are also a number of other blogs written by those who achieved financial independence at an early age telling their stories of how they did it if you need further inspiration.

How to catch FIRE

So how does one accumulate roughly a million dollars in a short time frame? The answer from FIRE-starters: extreme frugalness, working like mad, and getting your cost of living down low enough so you can live on half your salary. The FIRE group then recommends stashing away the other half into low cost ETFs earning at least 7% interest — and watch the magic of compound interest go to work.

financial-independence-callout

It should be noted that many FIRE success stories come from those who landed jobs out of college in fields such as IT and engineering that earn six figures. (Sigh.) But for those who aren’t in a high-income tax bracket, it’s about building your skill set to find a better paying job, plus taking on side hustles such as driving for Uber, dog walking, retail work, selling your crafts — anything you can do to make more money to put away.

You also need to cut back your lifestyle expenses as low as you can go. In other words, stop buying stuff! It’s a far cry from the consumerism culture of previous generations. Many FIRE followers are also fans of the tiny house movement, living in 100- to 400-foot space with minimal possessions, which again, runs counter to the bigger-is-better, past generation’s ideal of homeownership. Others share housing costs with roommates or rent out their current living space to cut back the cost of housing that accounts for the majority of people’s living expenses.

The idea, as described in “Your Money or Your Life,” is not about becoming rich; “it’s about figuring out how much is enough. Once you buy less stuff, you won’t need nearly as much money to sustain your lifestyle.”

What Could Stifle the FIRE

While FIRE provides a goal and some structure to work with, there are a few caveats. The 4% withdrawal rate on 25x your expenses concept isn’t new. Financial professionals have used this strategy for years, usually as an endpoint for people to accumulate their wealth over a longer period of time than FIRE followers aim for and use it for a shorter retirement span as well.

But anything could happen in a potentially 60-year retirement when you retire young: you may meet a partner who doesn’t like to play with FIRE, children and college costs need to be factored in, inflation, taxes, and market volatility are unknowns, lifespans are getting longer, and health issues which, with the rising cost of health care, could derail even the best-laid plans.

Another issue with FIRE’s accelerated pace toward retirement is burnout. How long can you go working more than one job, saving every dollar and never splurging on anything? And the minimal lifestyle doesn’t stop once you reach retirement. If you’ve lowered your living expenses, you have to keep it at that level to keep your wealth goal the same.

Which leads us to the fact that FIRE doesn’t mean never working again. Many followers continue to work even after they’ve achieved their wealth goal. The idea is they get to do the work they like to do on a schedule they enjoy, and not be dependent on that income to cover their living expenses — think entrepreneurship, part-time, or charitable work. For example, Mr. Money Mustache runs his blog and claims it brings in six figures.

Is FIRE Realistic?

While FIRE aims to blow-up the traditional retirement model, it may be only for the exceptionally disciplined few who can achieve and sustain it. Sadly, most studies and surveys on retirement preparation in the U.S. show that much of the population isn’t even thinking about retirement readiness. In a recent survey of U.S. adults, “one in five Americans (21%) have NO retirement savings at all. One in three Baby Boomers (33%), the generation closest to retirement age, only have between $0-$25,000 in retirement savings.”

FIRE Alternatives

If you’re young, eager, and can make it work, go fourth and set your world on FIRE. For everyone else, there are at least some points you can take from these savvy savers:

  • Where in your lifestyle could you cut back to save more for retirement — eating out, subscriptions, cable TV?
  • Could you lower your housing costs by moving somewhere cheaper, getting a roommate or renting a room?
  • How can you build your skill set to land a higher-paying job?
  • What type of side hustle/part-time work could you take on to enhance your income?

By looking at some of the ways FIRE followers are building their wealth, you can build yours, too. You don’t have to be as extreme about it — you can live a little. You may not reach financial freedom as fast as the ultra-thrifty FIRE seekers, but you may get there faster than the rate you’re currently going. And if you’re one of those Americans in our statistics who hasn’t saved at all, you may actually have some sort of retirement to look forward to!

Things to Consider:

  • Figure out your wealth goal number.
  • Could you reduce your living expenses and increase your income to reach that number in a short amount of time so you could retire early?
  • If the extreme discipline of FIRE isn’t for you, look to it for ways to save a little more for retirement.

Neither Transamerica nor its agents or representatives may provide medical, tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.

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