Financial Independence Retire Early — or FIRE — is a method of living below your means to obtain financial independence and security as early as possible.
“The mentality behind the movement is where one strives to live life on their own terms and to get off the proverbial hamster wheel where you are dependent on your employer and have the freedom and security to do so,” said Danielle R. Harrison, founder and president at Harrison Financial Planning.
That could mean having the financial freedom to change careers, work less or travel the world.
So what exactly does the FIRE movement entail? Here’s everything you need to know.
What is FIRE?
The concept of FIRE is based on the notion that retirement is determined by a financial number and not by a person’s age. It focuses on keeping expenses low and savings high. That means usually saving anywhere between 50% to 75% of your annual income to retire well before the age of 65 and usually without any debt.
“FIRE involves a shift in perspective regarding money and work, prioritizing what is most important to your work-life balance, and making decisions not dictated by the need to earn money but the ultimate goal of financial freedom,” said AnnaMarie Mock, a certified financial planner and wealth adviser for Highland Financial Advisors.
People looking to pursue FIRE typically start by picking what’s called a FIRE number, which is the amount of money you’d need to have saved to generate enough income to cover your expenses without having to work.
To determine your FIRE number, start off by figuring out your yearly expenses, excluding savings and taxes.
From there, calculate how much savings you’ll need to generate that much income without having a paycheck.
One rule of thumb, known as the 4% rule, says that retirees can safely withdraw about 4% of their savings a year without running out of money. That means saving 25 times your current annual expenses could last indefinitely with regular 4% yearly withdrawals.
For example, if your annual expenses are $50,000 per year, you would need at least $1,250,000 ($50,000 x 25) saved when you retire.
You can also take a more conservative approach by saving 28 to 33 times your current expenses, and take only 3% to 3.5% withdrawals.
From there, try an online calculator to determine how much to save and when you can reach that early nest egg number.
Starting as early as possible comes with many advantages. After all, getting a head start on your savings and investments gives your money more time to compound. But even though retiring early requires various sacrifices when it comes to saving and spending, the perks can be rewarding.
“The biggest perk of FIRE is independence,” said Kevin Chancellor, a certified Social Security claiming strategist and financial …….
Source: https://www.cnn.com/2021/08/09/business/money/early-retirement-fire-feseries/index.html
