The Financial Independence, Retire Early (FIRE) Concept: A Primer
The "Financial Independence, Retire Early" concept, also known as FIRE, is a method of extreme savings designed to help you gain financial independence—and hopefully, retire—as early as possible.
It's certainly not a financial strategy that appeals to everyone, but for people motivated by the idea of accelerating their savings and enjoying a longer-than-average retirement, it could be the right fit.
Financial Independence, Retire Early: What to know
The FIRE movement took root following the publication of a book in the early 1990s called Your Money or Your Life. Authors Vicki Robin and Joe Dominguez advocated that every expense in a person's life should be evaluated according to how long you had to work to pay for it.
Born out of this philosophy, the FIRE movement created a system in which extreme savings can lead to freedom from the conventional 9 to 5 grind. Ultimately, FIRE principles aim to give you the ability to make financial decisions based on a desire rather than a need for money.
Once you’ve reached financial independence, you can then live off your savings and income from investments, withdrawing around 3% to 4% per year for expenses. You may retire earlier than the typical age of 65 or choose to continue to work.
How does FIRE work?
Although there are several different approaches to the FIRE strategy, the one thing that remains constant is an extreme commitment to savings. People following this approach save up to 70% of their income and seek to reduce spending and debt until they've reached their savings goal. A common FIRE savings goal is 30 times the total of your annual expenses. For example, if your expenses total $4,500 per month ($54,000 per year), you'd want to have $1.62 million in savings to be financially independent.
Here are a few strategies FIRE advocates use to accelerate their savings:
- Decrease spending: By minimizing spending, there's more money to save. Some people avoid any non-essential spending while others budget in some basic lifestyle comforts.
- Eliminate debt: Every penny you pay toward debt is a penny you can't save.
- Increase earnings: As earnings increase, so should your savings. Raises in FIRE typically go directly into savings.
- Max-out retirement savings: While many people using FIRE retire early, you'll still want money available when you reach the age of 59 1/2.
- Build investments: If you retire early, you'll have to wait until age 59 1/2 to draw on your retirement funds or you’ll face a stiff 10% penalty, plus taxes, on your withdrawals. Investing in non-retirement accounts that aren’t tax deferred can help you grow your savings and provide income until you reach the 59 1/2 benchmark age.
How do you know if FIRE is right for you?
These questions can help you determine if FIRE might be a fit for your financial goals.
- Are you willing to change your lifestyle? FIRE involves an extreme approach to savings. If you're not comfortable giving up some creature comforts, FIRE might not be the right approach for you.
- Have you already built an emergency fund? Without the cushion of an emergency fund, you could have to run up credit card debt or tap retirement savings—both of which have a negative impact on FIRE's accelerated savings strategy.
- Are you already maxing out your retirement plans? If you have money left over each month and you've already maxed out your employer and individual retirement plans, you can start investing in a taxable savings account.
- Do you have a complete picture of your finances? For FIRE to be effective, you have to have a complete view of your debt, income and expenses, as well as clearly defined financial goals. A financial advisor can help you assess your net worth and build a long-term financial plan.
If you meet some, but not all, of these criteria, you can still follow FIRE principles to cut spending and increase your savings. Put simply, the FIRE concept offers guiding principles that can help you reassess your spending and savings habits. From there, you can build a short- and long-term financial plan that aligns with your life and goals.
Even if you don't plan to retire early, FIRE can help you eliminate debt, prevent you from taking more debt on and provide you with a solid cushion of savings to absorb life's financial shocks along the way.
A few financial insights for your life
Account openings are subject to bank approval.
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.
Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.
First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA and SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.
Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA and SIPC. First Citizens Asset Management, Inc. provides investment advisory services.
Bank deposit products are offered by First Citizens Bank. Member FDIC and an Equal Housing Lender. icon: sys-ehl.