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The idea of financial independence is appealing, right? Early retirement? Even better. The FIRE movement (Financial Independence, Retire Early) promotes the practice of saving the majority of your income during your 20s or 30s, with the goal of retiring in your 30s or 40s. However, this ambitious goal requires not just a stable income, but also intense dedication to saving.
While it’s true that the power of compound interest from early investing in your 20s can lead to substantial savings, FIRE’s enticing promise has its critics as well. The movement has faced criticism for overly optimistic savings projections, disregarding the complexities of raising children, promoting unrealistic long-term spending habits, and being largely unattainable for those who don’t already have wealth. It’s wise to approach the idea of “early retirement” with some caution.
What exactly is FIRE?
When you think about retirement, you probably imagine someone in their late 50s or 60s—and there's a reason for that—it’s the usual expectation. After all, Social Security benefits start at age 62, and you can start withdrawing from your Individual Retirement Account without penalties at age 59.5. However, FIRE followers aim to retire much sooner, in their 40s, 30s, or occasionally even in their 20s. (You might be thinking, “This sounds awesome, but what if I only earn 35K a year and am buried under student loan debt?” We'll cover that—many FIRE proponents fully recognize the privilege that comes with this movement.)
While early retirement is a common goal among those in the FIRE movement, its core philosophy is centered on financial independence. 'It’s less about retiring early and more about gaining the freedom to pursue your passions and goals,' says Deacon Hayes, author of You Can Retire Early!. Hayes explains that the essence of FIRE is 'the freedom to decide whether or not to work.'
The Rule of 25 offers a more concrete approach to financial independence: When your net worth reaches 25 times your yearly expenses, you are considered financially independent. (For example, if your annual expenses are $40,000, you are financially independent once your total net worth hits $1,000,000).
Who should pursue FIRE?
If you have a high-paying but unfulfilling job, FIRE might sound like a dream. However, Tanja Hester, author of Work Optional: Retire the Non-Penny-Pinching Way, offers a word of caution:
“Retiring early because you dislike your job is not a good reason to do it, and it can lead to boredom or a lack of direction once you get there,” she says. “Reaching FIRE is a significant achievement, and it requires a lot of focus and dedication. It’s not for those seeking a quick way to get rich or those who simply want to escape their job.”
It’s not about fleeing your career, but rather about a thoughtfully planned and holistic lifestyle enhancement. “A good reason to retire early is when you have a new vision for your life that you're excited to pursue but can’t while working full time,” says Hester. “Achieving financial independence allowed us to leave that career chapter with gratitude and appreciation, and move on to the next chapter that we now control.”
While financial independence does require reducing expenses, it also demands a solid income, as many in the FIRE movement recognize.
“There’s a significant element of privilege in being able to achieve this,” says Liz Thames, author of Meet the Frugalwoods: Achieving Financial Independence Through Simple Living. “We have a serious issue with the income gap and people who do not earn a livable wage. So I want to emphasize that the ability to separate your income from your spending is often a privilege.”
Hester adds that it’s unrealistic to assume that “everyone can save enough to retire early in a country that doesn’t value many professions or commit to a living wage. So while many people have reached financial independence without earning six figures, earning more certainly accelerates the process,” she says.
The Principles of FIRE
The basic formula behind FIRE is straightforward: spend less than you earn and invest the difference in low-fee options like index funds. Other investments, such as rental properties and passive income sources, also play a key role in achieving financial independence. Frugality is also crucial: the less money you require to live, the less you need to save to fund the rest of your life.
While the rules are simple, achieving FIRE is, of course, more challenging. Reaching FIRE involves the same principles as reaching any financial goal, and it ultimately boils down to behavior and privilege, rather than just an exercise in self-denial.
For instance, Thames leads a frugal lifestyle that many might consider overly restrictive, but for her, frugality isn’t about deprivation. “I don’t feel like I’m missing anything in my life by being frugal,” she said. “I spend money on the things that matter most to me. There’s just not much I need to buy to live a deeply fulfilling life.”
The First Steps to Achieving FIRE
If any of this seems attractive and achievable to you, experts almost universally agree on one thing: The first step is identifying your 'why.'
“If you want to retire early, you must have a clear ‘why,’” says Hayes. “Is it to leave your job and finally start that business you've always dreamed about with friends? Do you want more than just two weeks of vacation every year? Do you desire more time with your loved ones? Whatever your ‘why’ is, let it guide you in creating a plan and sticking to it during the tough times. Once you have your why, the next step is determining your path.”
The second step? Track your spending. Review your bank statements, credit card transactions, and online budgets, and identify which purchases are truly necessary or meaningful.
“Most of us are surprised to discover how much we actually spend,” says Hester. “Once you start tracking, calculate your yearly living costs, find areas where you can cut back, and focus on boosting your savings rate. These are the toughest parts of the journey, and the rest is simply waiting for the money to accumulate and compound.”
Once you’ve tackled your spending, it’s time to assess your net income and make comparisons. Thames advises subtracting your fixed expenses from your income, and then adjusting your discretionary spending as needed.
From that point, the concept of FIRE is rooted in both mathematics and mechanics. On a podcast episode, Mendonsa highlights ten key 'pillars' that are crucial for achieving financial independence. These are the principles he suggests:
Reduce your housing expenses
Opt for used cars instead of new ones
Cut out cable subscriptions
Lower your tax burden by fully utilizing tax-deferred accounts like your 401(k), 457, 403(b), IRA, HSA, and others
Switch to a more affordable cell phone plan
Use credit card rewards and sound financial practices to finance your travels
Trim down your grocery bills
Boost your income and explore opportunities for additional revenue streams
Invest in low-cost index funds
Follow the 4% rule: if you're able to withdraw 4% annually from your savings and still have enough for the future, you’ve achieved financial independence.
As with any financial objective, the mathematics are straightforward, but it demands creativity, persistence, and patience. Whether FIRE is attainable is ultimately up to you.
This article was originally published in 2017 and updated on October 19, 2020 with the latest information.
