Playing with FIRE: A Path to Financial Independence and Early Retirement

Playing with FIRE A Path to Financial Independence and Early Retirement

Ah… Retirement!  A golden time when we say bon voyage to our work life and hello to the essence of living, exchanging our focus on clocks and to-do lists for leisurely days and passion pursuits.  For many, we’re taught this glorious life transition occurs at age 65, and until then, we must work hard, save diligently, and wait patiently.  But what if you didn’t have to wait?  What if there was a way to speed up the clock and seize control of your financial future sooner?  Enter the FIRE Movement, a path to financial independence and early retirement. 

What is the FIRE (Financial Independence, Retire Early) Movement?

The FIRE movement is more than just a retirement strategy; it’s a lifestyle choice that emphasizes frugality, extreme saving, and investing with the goal of retiring far earlier than traditional budgets and retirement plans may dictate.  At its core, the FIRE movement is about maximizing savings and creating an income stream to achieve financial independence early in life.  Supporters of this philosophy often save a significant portion of their income (up to 50% or more), cut expenses dramatically, and invest wisely in order to reap the benefits of compound interest. The idea is to accumulate assets until the passive income from these assets provides enough money to cover your ideal lifestyle’s living expenses.  Once this occurs, you become “financially independent” and paid work becomes optional, allowing you to retire, regardless of your age, and live off of a withdrawal strategy, typically 3-4% per year.

Types of FIRE?

Importantly, FIRE is not a “one size fits all approach,” and there are different types based on your individual appetite for saving and desired lifestyle.

  • Lean FIRE: Not for the faint of heart!  Lean FIRE focuses on extreme frugality and an investment strategy that covers basic needs and not much else.  Supporters often value a minimalist lifestyle, requiring a smaller investment portfolio, in exchange for a quicker path to retirement.
  • Fat FIRE: For those with champagne wishes and caviar dreams, Fat FIRE is for those who desire a luxurious retirement and aren’t afraid to save a significant portion of their income to achieve it.  Supporters push savings to the max in order to build an investment portfolio that produces annual returns to support a lavish lifestyle.
  • Coast FIRE: A favorite among the movement’s younger workers, Coast FIRE front-loads saving, squirreling away as much as possible in your early working years, so that you can “coast off” of the hard work later in life.   Supporters value a “live to work” approach early on and transition to a “work to live” approach once their portfolio grows sufficiently, at which time they have the option to exchange high stress jobs for passion projects or part-time work.
  • Barista FIRE: Adored by supporters who want to partially retire before becoming financially independent, Barista FIRE focuses on saving enough money to scale back to part-time work in order to secure an income and healthcare benefits.  Supporters have the flexibility to work less as they age, while their investment portfolio continues to grow.  A shout out to Starbucks… Because the coffee mogul extended healthcare benefits to part-time employees, Barista FIRE was born!  

 

Playing with FIRE

Before diving headfirst into this movement, note that FIRE is not simply an investment strategy, it’s a lifestyle that takes years of hard work, discipline, and dedication, and it isn’t for everyone.  Think you might have what it takes to play with FIRE?  Below are five tips to consider before taking the plunge. 

  1. Maximize Savings & Invest Wisely: FIRE thrives on the magic of compound interest to grow your money. As a general rule of thumb, channel savings into retirement accounts like 401(k)s, IRAs, and other investment accounts, investing in low-cost, diversified portfolios that can yield sufficient returns to support early retirement. 
  2. Decreasing Your Expenses: Take a rigorous look at your expenses and determine what you can live without, whether that means downsizing your home, your car, or cutting back on luxury items and frivolous spending.
  1. Increase Your Income: While reducing expenses is crucial, increasing your income shouldn’t be overlooked. Consider negotiating a raise, changing jobs for higher pay, starting a side hustle, or investing in developing new skills that could increase your marketability.
  1. Create a Withdrawal Strategy: Since you might retire decades before age 65, it’s important to have a strategy for how you’ll withdraw your funds and manage your penalties and tax liabilities. Strategies like a Roth Conversion Ladder or SEPP 72(t) may help tax-minded investors withdraw funds at an earlier age.

 

While the FIRE movement represents a profound shift in how we think about work, life, and what it means to be financially free, it’s not without its challenges and risks, which is why it’s important to speak with your wealth advisor before embarking on any FIRE strategy.  Market volatility can impact investments and timelines, and unforeseen expenses can arise throughout life.  Furthermore, living a drastically frugal life isn’t for everyone, and there’s a psychological component to retiring early that many don’t consider.  Whether or not you feel this movement suits you, one thing is for certain… The FIRE movement has helped frame the way we think about savings and spending, which is beneficial at any age.  Remember, each person’s path to retirement is different based on a variety of individual factors, which is why it’s wise to speak with a wealth advisor to help you put your best foot forward.

LSIA is here for you to help address your financial questions.  CLICK HERE to contact us. 

Data Source: Wikipedia (FIRE movement), Investopedia (Financial Independence, Retire Early (FIRE) Explained: How It Works by Alexandra Kerr, 2/29/24), nerdwallet (FIRE Movement: Financial Independence, Retire Early by Elizabeth Ayoola, 7/11/23), howtomoney.com (What is F.I.R.E., the Different Types, and How to Achieve It, 5/31/23), and MADfientist (How to access retirement funds early, 2/28/22).  This blog was written with the assistance of Artificial Intelligence, specifically Chat GPT.  Photo courtesy of Adobe Stock.

LS Investment Advisors, LLC (dba LSIA) is a registered investment adviser.  The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. We believe the information in this material is reliable, but we cannot guarantee its accuracy. Opinions expressed reflect subjective judgments and will evolve as future events unfold. Views regarding the economy, securities markets, or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.