What is FIRE? (Financial Independence / Retire Early)

First – The Basics

FIRE. FIREd. FIREe.

FIRE stands for Financial Independence / Retire Early. It’s a concept, but it’s also a community. There is a small but varied group of people in America who have decided that working for pay isn’t for them, and they are doing something about it. Of course, there are people around the world who do the same thing. But since this blog is focused on Americans, I’ll mostly discuss the US community of FIREes.

When I say FIREd, I’m referring to the post-work period – when someone has reached financial independence and retired early. In this case, being FIREd is a good thing! FIREes are the people in the movement (like retirees…get it?).

Since FIRE is such a large part of my financial planning, we’ll go into a lot more detail in subsequent posts. This is just a primer to get you familiar with the concept in case you are new to it.

Even if you aren’t interested in retiring early because either you love your work or you want to build a large net worth, it’s still worth looking into FIRE because you never know what might happen in the future. According to a LIMRA Secure Retirement Institute analysis of US census data, 69% of Americans retire before age 66. 18% retire before age 61. Remember – sometimes it isn’t your choice to retire. You may be laid off and unable to find another job, or you may have a medical issue that prevents you from working. By following the FIRE path, you can be prepared for these events and ready to retire when the time comes, instead of struggling to make ends meet when you can’t work any longer.

Financial Independence

If you ask a parent of a teenager (or if you ask that teenager!) you might hear that financial independence is when someone is earning enough income to support themselves. That’s not the kind of financial independence we are going to talk about here on MilitaryDollar.com. I get it, the person is “financially independent” enough to not need outside support. That’s great! And it’s an important step in establishing your financial future. But when we are talking about FIRE, financial independence means something different.

Financial Independence, or FI, is the point at which your assets produce enough income for you to live off for the rest of your life without the need to work for pay.

The easiest way to discover how close you are to financial independence is to add up your annual expenses and compare it to the income you could produce without working. For instance, I have the following sources of income that I could tap if I were to stop working today:

• Thrift Saving Plan (TSP)
• Individual Retirement Arrangement (IRA)
• Taxable investments (mutual funds, ETFs, and a few individual stocks)
  • Some of these are dividend bearing, which will become important later
• Rental property, which a property manager oversees for me

Right now I could derive ~38% of my projected expenses from these sources, so I am more than 1/3 of the way to financial independence. Of course, I will continue contributing to my retirement and investment accounts and am working towards a pension, so in theory by the time I retire I will have my expenses more than covered.  At that point, I will be financially independent.

(Interested in learning how to withdraw money from retirement accounts early without paying a penalty? Check out my post on Substantially Equal Periodic Payments)

Retiring Early

People who follow the FIRE movement tend to want to quit the pay-for-work cycle a little (or a lot!) earlier than the average American. In America, retirement age is generally considered to be 65 years old, give or take a few years. FIRE devotees are those that want to stop working for pay earlier.

Some retire at 60, some retire at 30. Others retire from their main career but continue earning money through consulting, blogging, landlording, etc. Some FIREes never work another day in their lives. Occasionally a FIREe will continue working for pay long past the point when they are financially independent because they like their job, but take comfort in knowing they can leave at any time.

Some FIREes live on small amounts of less than $30,000. Others spend well over $100,000 each year. It all depends on what you want and what you can afford. One common thread among FIREes is the ability to “live below your means” (LBYM) while earning an income, because that enables the savings and investing that makes FIRE possible. The more you save, the earlier you can FIRE.

How Do I FIRE?

FIRE is a simple concept, but it’s not easy to achieve.

Careers that offer a pension that starts relatively early have a huge advantage in reaching FIRE. Military retirements are one such pathway, but there are other careers out there that still offer very nice pensions. Some of the most well known include fire and police departments, teaching, some technical industries, and a lot of government jobs.

There are a few paths to FIRE. One is to establish passive income streams. This can mean being a landlord, or writing and selling books, or investing in dividend producing funds. Often, FIREes will have multiple passive income streams. The reason is that having multiple income streams protects you in case one fails or there is a downturn in the stock market. Even pensions fail occasionally, or are temporarily frozen. Diversifying your income will protect against these problems.

As this blog grows, I’ll continue to explore this topic. There are a lot of really fantastic bloggers out there who focus on FIRE on their blogs. I’ll introduce you to some of them along the way so you can learn from them too.

Are you a follower of the FIRE movement? What is your plan for reaching financial independence?