The FIRE concept has gained massively in popularity over the last few years and here I want to summarize what it is, our thoughts about it and of course, how anyone can achieve it!
The FIRE Movement
FIRE aspirants focus on how they can reach "retirement" as fast as possible. This, as opposed to working all their lives until they are 65-70 years (or whatever age might be the "retirement age" in the future) and then having the time to do what they want.
This can be done in many different ways but a couple of key characteristics of the FIRE-movement is to: lower ones costs as much as one can and invest as much as possible to reach their financial goals using "the 4% withdrawal rule" (more on that further down). We are talking about savings rates in the region of 50-90%, which is a very significant and dedicated rate. That is how important their goal of Financial Independence is!
One of the coolest consequences of living this way is that you stop caring about other people’s opinions as you are truly focused on an early retirement. So no room for FOMO (Fear Of Missing Out) or FOPO (Fear of Other People's Opinions)!! This is not a "get rich quick scheme" though I am sure someone will try to sell ideas linked to FIRE with the message that their service or product will get you there faster… Just be aware!
We love the general idea of FIRE but we do think one has to make conscious decisions and adjust according to one's unique circumstances. As you know, I love getting the most out of my money (check out our Section for Savings Ideas) but at the same time I want to experience new things and for example eat out every now and then. Those are just part of our priorities. Many FIRE aspirants really go all in, trying to eliminate or minimize all of their costs so that they can save and invest as much as possible in order to reach Financial Independence (FI) as fast as possible.
The biggest difference between our view and many of the hardcore FIRE aspirants is that we always prioritize good quality food even it if often costs more. We want to live long, healthy, active and happy lives and we feel very strongly about the importance of our health and what we put in and on our bodies. For more info on how we eat, have a look at our post What qualitarians eat. It is hard to enjoy an early retirement if one has several health issues, a need for medication and making lots of visits to the doctors which of course will be very expensive... On top of it not being a very happy retirement, the costs can be astronomical in comparison to the initial investment in good natural and healthy food.
If you have read my story, you know that I didn't pay enough attention to my health for several years and had to pay the price… Luckily we have managed to change that and food has for sure been a very instrumental part in my recovery (which was not even possible according to many doctors...). This is why health is such an important area for us. Real, organic, non-processed, non-GMO food, no gluten or dairy and very limited sugar intake is at the core of our anti inflammatory diet. You can of course read more about it under our Health Section and in the post How and why we live an anti-inflammatory lifestyle.
Just to be clear, we love the idea of FIRE, we just don’t want you to make the same mistakes as I did. Be smart about it so that you can live an active and healthy lifestyle throughout your retirement, even if that means you will have to spend some more money on food. It will be a wise decision in the long run. On this topic, check out this post: Eat healthy stuff but be smart about it and pocket the difference!
Your savings rate and your salary
There is a relationship between your income and spending (or at least there should be) and therefore your level of savings can give you an indication of how long it will take you to reach FIRE. If you save 50% of your salary it will take you 17 years and if you save 70% it will take around ten years (given a yearly return of 4%). Different people have different expectations of how much they need to cover their expenses but most people who start out use the "4% rule" to have a clear financial goal. What many of us realize is that some of the things we used to spend money on, has no real value to us which means that what once felt like a big sacrifice, really isn’t. The other realization is that by being smart with your money and having a clear goal, you will find new ways of generating income which will take you even faster to a life on your terms which is the ultimate goal for all FIRE aspirants.
The most important things in life, really don’t cost much money and in the end, it's all about priorities.
If you want FIRE as fast as possible you will spend as little as you possibly can (lower your cost base and your expenditures) and always focus on making more money because your desire of becoming FIRE has become an obsession. When you feel like this, you won’t give a fuck about FOMO or FOPO, you know what is truly important to you and that is a life on your terms! The faster you can get there, the better. The beauty of this is that you have a clear and meaningful goal and you will be making constant progress which means that you will feel pretty awesome about the journey you are on compared to the average person, completely lost in FOMO and FOPO....
The 4% "rule"
The 4% withdrawal rule, the 4% rule or the Safety Withdrawal Rule (SWR) is a concept often used as a benchmark for how much money you need to save in order to be able to retire (become FI). There have been numerous studies done on the US stock market over very long periods of time, to determine a viable withdrawal rate. The original idea was to find out how much one can withdraw from one’s investments over a 30-year period (retirement period) without the risk of running out of money. The conclusion they came to in this study (called the Trinity study), based on historical numbers (no guarantee for the future), was 4% per year.
This means that if you need 25,000 USD per year to cover all your expenses, you would need a total investment portfolio of 625,000 USD (25,000/0.04). When you have that amount, based on history, you should be able to withdraw 4% every year and the money should last you for at least 30 years. As thirty years is a very long period, some FIRE advocates mean that 30 years or 60 years will have a small impact, so you could actually say that the money should last you forever (again, given historical numbers).
On top of this fact, most of those who have reached FI will still make money one way or another which means that the 4% rule has a "buffer in it" unless you intend to never any money ever again after you have reached FI. As long as your investments grow with 4% after any fees and ideally after inflation and you can withdraw that 4% tax-free, you would be able to withdraw and live of those 4% in eternity!
Many FIRE advocates therefore focus on this 4% rule to have a clear goal of how much money they will need to be able to retire early. They decide how much money they need per month and year and then just do the numbers. They then invest as much as they can of their income, expecting that compounding of returns will help them get there as fast as possible. Most often this is done in low cost ETFs like the VTSAX in the US.
If you have not yet read my post on: Playing with FIRE, I recommend you to do so as there I compare my monthly expenses whilst having a "normal" job versus how we live now and the difference really is significant. I would then recommend you to do the same calculation so that you know how much you would really need if you wanted to live your life on your terms.
I would ask you to think about the fact that what might look like big number if you use "the 4% rule", really doesn’t have to be all that big. When you start your journey, you will learn about money and the language of money and it will serve you for the rest of your life. You will most likely never worry about money ever again. You will train your mind to think about money and investments (ideally passive) and you will become very creative in finding new ways of both saving and making more money. The other thing many seem to realize is that they can quit their boring day job way sooner because their side hustles are making them money, meaning they can spend more time doing what they enjoy and still make money!
Pros and cons with the "4% rule"
As the "4% rule" is becoming so widely mentioned and used, I wanted to highlight some of the pros and cons:
Pros:
- It is so simple to calculate and anyone can do it and hence have a clear financial goal!
- You will have taken total control of your finances.
- You will most likely live a happier life, not one of FOMO of FOPO but rather one of JOMO.
- You will understand what is of importance in your life.
- You will become creative and hence find new ways of income via your interests and hobbies once you "retire" so I am pretty sure you will make more money even if this rule indicates you will not have to.
- The way a FIRE aspirant has created his or her life will mean that they will be much better at adapting to new situations because of their flexibility and creativity.
Cons:
- You have no way of knowing what your returns will be like, this is all based on historical US stock and bond market returns and are not a guarantee for the future.
- It was done on 30y periods but many in the FIRE community are striving to become FI fast and hence use the money for 60 years and ideally leave something behind as well.
- Current interest rates are the lowest they have ever been and its implications on this study looking forward is likely to be significant.
- You don't know the level of inflation going forward.
- You can't be certain about the tax situation when you intend to use the money.
- You can't actually know how much money you will need later on in life (unexpected circumstances like ill health etc.).
We have also written a full post on the "4% rule", where I go in to more details.
Example of a journey towards FIRE
Say the money you need per month is 3,000 USD, that would mean you would need 900,000 USD (36,000/0.04) before you could live of the the money alone, using the 4% rule. Initially, this number might feel astronomical but......
What if: You find a partner or even a friend, who has the same goal which might mean your cost base doesn't double but instead increase with 1,000 USD. You are also now two people who can split most costs and motivate each other and the total number you now need is 4,000/0.04 = 1,2 MUSD. This means your number now is 600,000 USD as there are two of you motivating and inspiring each other!
You then realize that as you are working, you are constantly adding to your pension pot (and hopefully your employer too) and even if you only work for another ten years, that pension might still pay you 500 USD per month from when you are 65 years (just an example). This means you will need 500 USD less per month from when this amount is paid out. So don't forget to take your pension savings into account too when doing your numbers!
You might have a spare room, which you can rent out for 500 USD per month (or be willing to move, to lower your housing cost significantly). We assume this can be done in eternity. Your number now is 450,000 USD (excluding the above pension payment).
You then figure that when you "retire" and have all your time at your own disposal, you will drive Uber (you love driving anyway) or whatever other useful interest you have and that will make you 500 USD per month. Basically, you realize that just because you want FIRE, it doesn’t mean you will do absolutely nothing once you retire. You will most likely find a side hustle to spend time on when you want to and you will still make money! Your number now is: 300,000 USD.
So my message for you by this example is to not get deterred by what initially seems like a large number! Break it down, tweak it and as you start your journey, you will find more ways to make sure you reach it as fast as possible. If there is a will, there is a way and you just have to break it down into small steps. It is for sure doable for everyone and it will become easier and easier as you learn The Language of Money!
The steps to get you to FIRE
There are basically only two ways of getting to FIRE fast. Either by lowering your cost and expense requirements for the future and save and invest as much as you can, if you believe the stock market will generate similar returns over time as it has historically. The alternative is to increase your income as much as you can and save/invest even more dollars whilst not spending more just because you are making more money. Just make sure you are aware of and comfortable with the risks of investing before you start your journey to FIRE using the 4% rule but I do encourage you to start your journey towards a life on your terms in one way or another!
Take the steps recommended in the below posts and start your journey today:
- The Language of Money - a language for life
- Definition of Wealth – what does it mean to you?
- Learn about the 4% "rule" to FIRE and apply it!
- The Bucket System – Automating your Finances
- How to save +1000 USD in a few hours!
- Make use of all the ideas in our Savings Section
- Are you making money whilst sleeping?
- The "easy" way of becoming a dollar millionaire
- Low costs - the effortless way to creating wealth!
- Eat healthy stuff but be smart about it and pocket the difference!
- Buying a new car - Wake the fck up!
Ideally, just totally immerse yourself in all our content along with the content of similar platforms and start incorporating as much as you possibly can. By taking massive action, you will see massive changes very fast and I will for sure be there cheering for you along the way!
More FIRE to the people!
- Jakob
