Ever dreamt of giving up the daily 9-5 grind and just kicking back? If so, you are not alone. The FIRE (Financial Independence, Retire Early) movement is growing in popularity and is challenging the mindset that we need to work until we are 65 or older.
What does FIRE stand for?
Financial Independence, Retire Early (FIRE) is the movement of those committed to allocating a very high proportion of their income into savings and investments, a method that may allow them to retire far earlier than traditional plans for retirement would indicate.
How long has FIRE been a thing?
Believe it or not, despite growing in popularity in the past decade, the approach has been around since the early 1990s. It’s a concept born out of the book “Your Money or Your Life” by Vicki Robin and Joe Dominguez, identifying the premise that people should evaluate expenses in terms of how many hours they had to work to pay for an item.
Comparing costs by hours worked
Imagine if you started evaluating every item you bought. Every pair of jeans, every item purchased on impulse. The list may prove longer than you think, and that could add up to a lot of hours worked to accumulate those items that are more wants than needs. Those following the FIRE philosophy will likely start to spend less and save and invest more.
Are millennials FIRE starters?
Some millennials have started to embrace the approach, attempting to save up to 70% of their yearly income. When their savings and investments reach the magic figure of $1 million, some choose to quit their 9-5 jobs or retire altogether. In today’s terms, $1 million depending on your age may not last long due to low interest rates and rising inflation so we don’t know why the $1 million figure was chosen, except that it’s a nice round number 🙂
FIRE can be for anyone
The beauty of this approach is that people of any salary and age can take this approach it is all about saving a large percentage of your salary. How long it takes to permanently hang up the work attire will be different for each person.
How can those using the FIRE approach afford to stop working?
Once these individuals have accumulated say $1 million or more, the FIRE approach suggests that these people continue to live within their means, withdrawing around 3-4% of their balance annually for living expenses, leaving the balance in savings and passive investments. For the $1 million example, that is $30,000 to $40,000 one would withdraw per year. But remember, you will likely still need to pay some tax.
How much you may need to withdraw will depend on the lifestyle you want once you retire. It is important to note that although the passive investments may generate some positive returns over time, there is also the possiblity that returns do not exceed the level of inflation, meaning real returns at times may actually be negative.
FIRE can mean different things to different people
Only the FIRE purists focus solely on early retirement. But for many who follow the sentiment, FIRE can represent building up a comfortable set of investments to be used at a time and purpose that suits their needs. That’s what financial independence is all about!
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