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Peter Adeney was working as an engineer after he graduated from college, saving and investing the typical 15% of his annual income towards retirement. Adeney didn’t want to work 40 hours a week for the rest of his life — he craved the freedom to take 3-week vacations and spend time taking care of his children, among other things.
Over time, he would gradually increase his savings to 75% of his annual income, which would enable him to retire at the age of 30. Adeney, also known as Mr. Money Mustache, is considered one of the pioneers of the ‘financial independence, retire early’ (or FIRE) movement.
At first glance, FIRE may seem appealing: you cut back on lifestyle expenses, invest your savings into low-fee index funds and sit back as you watch your retirement nest egg grow. If you’re lucky, you’ll be able to retire well before your 60s (when you would normally begin collecting Social Security benefits) and get to live out most of your life not tied to a 9-to-5 office job.
What is FIRE?
FIRE is an early retirement movement where people aggressively save with the intention of retiring in their 30s or 40s. FIRE is not for the faint of heart — you’ll have to invest more than half of your annual income and cut down on all of your expenses.
In order to retire early, FIRE adherents abide by the 4% rule, first developed by financial advisor William Bengen in 1994. The 4% rule suggests that people save 25 times their annual living expenses and withdraw only 4% of their nest egg in retirement, only increasing the amount to adjust for inflation.
For example, if your annual living expenses were $40,000 a year, you would need to save $1 million before retiring. The idea is that you could live indefinitely on your investments by assuming that the annual returns of your well-diversified portfolio will range somewhere from 5% to 8% (the power of compound interest!).
There are different types of FIRE as well. Lean FIRE followers choose to live as frugally as possible in order to retire early and then choose to spend less than than the average American in retirement. Fat FIRE adherents to live more lavishly in retirement and are typically working in high-income industries like tech or medicine before retirement.
If you plan on doing FIRE, consider that you’ll have less time to invest for retirement and that you’ll be spending a longer time in retirement. This means that traditional financial advice, which suggests you save 15% of your annual income, goes out the window.
For Adeney, it meant saving 75% of …….