Everyone dreams of achieving financial independence from work and the possibility of retiring early to focus on pursuits that are more personally fulfilling, but few people manage to actually retire before the usual range of 62-67. Why is that? One reason is the popular movement, financial independence retire early or otherwise known simply as FIRE.
A number of reasons exist as to why so many Americans fall short of their retirement goals, including a lack of retirement savings, narrow margins on income-to-debt/expense ratios that prevent folks from accumulating a sizeable savings, few outside income opportunities to supplement their meager Social Security check, entering retirement age with considerable debts to repay, etc.
If you’re in your 20s, 30s, 40s, or even 50s, there is still time to prepare for your golden years through the FIRE approach, which stands for “Financial Independence Retire Early.” It’s not easy by any means, but for someone with the motivation to attain financial independence beyond their bi-weekly paycheck and enjoy the benefits of retirement at an earlier age, the FIRE approach was designed to teach people how they can achieve their lifelong financial goals without having to work 40+ years to make it happen.
Financial Independence Retire Early (FIRE)
Here are a few aspects of FIRE to implement into your life for greater financial independence (and possible early retirement):
Lowering Your Monthly Expenses
While many personal finance experts recommend saving at least 10-25% of your monthly income, the FIRE approach appears much more demanding with its recommendations for 40-50% savings based on your monthly income. This might seem like an outrageous suggestion for anyone living paycheck to paycheck, but the combination of lowering your monthly expenses and developing new income streams (active or passive) can make this possible.
Obviously, this requires a great deal of self-discipline to restrain your impulsive spending habits and trim your expenses for the most efficient budget possible, as well as educating yourself on the best opportunities for side incomes and actually pursuing them, rather than pushing off your income goals with excuses like, “Someday I’ll have time to pick up a side hustle” or “Someday I’ll have more time to learn about passive income opportunities.”
As the acronym suggests, FIRE wants to jumpstart your financial goals by getting started right away. It will take considerable time and effort to analyze your current budget for areas to slash, as well as researching viable passive income options beyond your day job. However, if you are truly motivated to achieve the two goals outlined in the financial independence retire early (FIRE) methodology, then why wait for the “right” time when you can hit the ground running today?
Developing a Passive Income Stream
Having a passive income stream is one of the most important aspects of FIRE. It is especially true for anyone who believes they could never save up enough money to comfortably retire without some kind of job to back them up.
If you’re currently thrilled with your job and love what you do, then financial independence retire early can offer you the financial independence and peace of mind that comes with knowing you’re financially secure and can continue working for as long as you’re happy with your job. If you don’t enjoy your job, then the “Retiring Early” aspect of FIRE will be more of a priority for you so you can get out of your current rut and focus on tasks and activities that you really enjoy.
These goals are achievable with minimal-effort, passive income streams build on real investments such as Lending Club, Betterment, renting property (or Airbnb for your current residence), etc. Investing is one of the most popular ways to make your money work for you (instead of the other way around), and FIRE would be immensely difficult for anyone trying to save 50% of their income without some supplementary help from a passive income stream.
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Invest for Short and Long-Term Goals
Another one of the best ways to invest in a passive income stream is through dividend stocks, which pay out quarterly based on the company’s earnings. You can invest in many different dividend stocks to ensure you’re paid dividends on a monthly basis, rather than having to budget for quarterly returns when you’re in early retirement mode.
If your goal is to retire early, then it’s crucial that you not only max out your IRA (even while you’re retired) but also choose a diverse range of investments to sustain your financial independence through the ups and downs of the markets. The availability of investment options may seem overwhelming, but don’t let this deter you from diversifying your portfolio to maximize your financial security and avoid getting a job purely out of desperation if there happens to be an economic downturn in the future.
Is FIRE Right for You?
FIRE isn’t an option for everyone, but the two goals outlined by this approach – financial independence and early retirement. Both are good aspirations to strive towards. Although you might not feel comfortable quitting your job within the next few years, you can still work on developing passive income streams, slashing the non-necessities from your budget, and incorporating new investments into your portfolio to diversify it as much as possible.
Given how few Americans are saving for retirement beyond a couple contributions to their IRA or 401K funds each year, you’ll be light-years ahead of your peers if you funnel your extra funds into investments for future financial security, rather than indulging in luxuries whenever you have some extra dough laying around.
What about you? Are you could up in the financial independence retire early (FIRE) movement and mentality? What are you doing to make your FIRE dreams a reality?
My husband and I are aiming for early retirement. While we have a ways to go and we have yet to determine what exactly “early retirement” will look like for us, the goal had motivated us to live frugally, save aggressively and avoid lifestyle inflation. As a result, we have been learning to enjoy the simple things in life 🙂
As you pointed out FI is for everyone but maybe RE isn’t. I achieved FI and kept working, partly because they were throwing money at me for the first time in my life and partly because we were acquiring another Fortune 500 company through a buyout and I thought it would be fun to participate in that. However it turned out to be no fun at all and I went ahead and pulled the plug. For the years I was FI and still in my career though the stress level fell off to nearly zero compared to what it had been. It really is almost worth hanging around for a year or so after you hit your target just to see how different it feels, almost, not really!