Retirement Planning & The FIRE Movement

With increasing popularity, the term FIRE is being used in personal finance. FIRE is an acronym that stands for Financial Independence Retired Early. As is the case with most money management matters, the FIRE acronym is all about math. Once you achieve Financial Independence (FI), it can equal Retiring Early (RE). FI=RE.

Behind this simplistic equation there are two primary mathematical principles that fuel the FIRE movement.

The first is one you have probably heard of: The Rule of 25.

This rule has been around for a long time when discussing retirement and financial freedom. The Rule of 25 is a simple rule that states that whatever your annual expenses are, you must have 25 times that amount saved to retire. For example, if you spend $40,000 per year, then you must have $1,000,000 saved to retire.

The personal finance blog CampFIRE Finance has some great charts that illustrate just exactly how these rules are designed to work.

As you can see in the chart above, the second rule is The 4% Rule.

This rule gets its name from the percentage of your retirement savings you can safely withdraw each year without ever running out of money. On average, the US stock market has grown at a rate of 7% each year. Obviously, it is called an average for a reason. Some years that growth rate is much higher than 7%, while other years the market loses value. However, over the course of your retirement this number should average out to about 7% per year. Therefore, withdrawing at a rate of 4% per year will leave the extra 3% leftover to keep up with the rate of inflation.

This second chart from CampFIRE Finance shows how following the 4% Rule can actually allow your retirement nest egg to continue growing from year to year.

This is what Financial Independence looks like — having enough money saved and invested so that it continues to grow as you live your life.

Whether or not you pursue early retirement is entirely up to you, but everyone should pursue financial independence. Once that independence is achieved then you have more flexibility in your life. If you find your work fulfilling and it brings you joy, then by no means should you quit. At that point you would be working for yourself rather than for a paycheck. However, if one day your boss retires and your new boss isn’t quite as friendly, your office moves and your commute triples, or any other unforeseen circumstance occurs that changes how you feel about your job, you wouldn’t be forced to continue working thanks to the financial independence you have achieved. You can retire early and enjoy your life.

How long it takes to achieve FIRE will vary wildly from case to case. The two factors that FIRE depends on are your annual expenses and your savings rate. If you have low annual expenses, then you don’t need to save such a large nest egg. If you earn more money and can save a larger percentage of your annual income, that will also accelerate your timeline for achieving FIRE.