Have you heard about the FIRE movement? It's an acronym for Financial Independence Retire Early. While many people interpret it literally, there's more to this movement than meets the eye. In this post, we'll delve into what FIRE truly means, dispel some common misconceptions, and explore the different aspects of achieving financial independence (or FI) and retiring early. So, let's get started!
Understanding what FIRE is and what it is not
Contrary to popular belief, the FIRE movement is not a cult or a race to become a millionaire overnight.
FIRE is also not about living close to the poverty line so that you can save every penny possible – in the process depriving your family of positive life experiences such as holidays. This latter interpretation is from a podcast run by one of the mainstream broadsheet newspapers!
FIRE is about gaining control over your financial life and having the freedom to choose how you spend your time without worrying about money. Many attribute the beginnings of the FIRE movement to Vicki Robin and Joe Dominguez’s 1992 book, ‘Your Money or Your Life’.
Let's break down FIRE into its key components: financial independence, retiring ‘early’, and what retirement means in this context.
FINANCIAL INDEPENDENCE (FI) - what is FI?
Financial independence is the foundation of the FIRE movement. Inevitably, you have to gain some FI before you can enjoy any of the benefits of ‘retiring early’. At its core, FI means having enough passive income from investments to cover your living expenses. However, it's important to note that there are different levels of financial independence.
Regular FI – what does ‘regular’ financial independence look like?
Regular financial independence ensures that your passive income can sustain your pre-retirement standard of living. This includes basic necessities such as utilities, transportation, food, clothing, and some travel. While many people in the UK aim to pay off their mortgages before retiring early, it's not a strict requirement.
Lean FI – what does ‘lean’ financial independence look like?
Lean financial independence focuses on covering only the essential expenses like utilities, food, transportation, and basic rental accommodation – perhaps, in a housing association or choosing to purchase the most affordable property available in an out-of-town area where property prices are much lower.
Those targeting lean FI may choose not to have children or plan to retire to low cost-of-living countries in Asia or Eastern Europe (popular destinations include Thailand, Malaysia and Turkey).
A just-getting-by type of FI, like this, is not most people’s idea of financial independence but it suits some minimalists. For instance, Jacob Lund Fisker, author of ‘Early Retirement Extreme’ needed only $7,000 a year to live and that meant he was FI at 30 and retired at 33! And if you think that wouldn't be possible in the UK, a very close friend of mine has lived on a similar amount for the 18 years since we graduated from uni...we'll cover their story in a future post.
If Lean FI is the goal then you may plan to earn some money from temporary or part-time jobs when you retire to cover luxuries such as a special holiday; this version of Lean FI is called ‘Barista FIRE’.
Fat FI – what does ‘fat’ financial independence look like?
On the other end of the spectrum is fat financial independence. It represents a comfortable retirement with all necessities and desired luxuries covered. Fat FI allows for frequent holidays, dining out, a nice house, and a generous budget for food and clothing. Downsizing is probably not on the cards for FAT FI-ers.
EARLY – what does retiring early mean?
The "Early" in FIRE refers to retiring earlier than traditional retirement ages. The timeframe for early retirement varies depending on personal goals and circumstances.
As soon as possible
For some, ‘early’ means ‘as soon as possible’. Some people join the workforce with the clear objective of achieving financial independence as quickly as possible, ideally within 10 to 15 years. To achieve this, they actively pursue high-paying careers and dedicate themselves to saving and investing.
Timing with family goals
Others discover the FIRE movement later in life or choose to align their retirement plans with family goals. For example, they might aim to retire when their last child enters university. This could be around the age of 50 or 55. In the context of a UK state retirement age currently set at 68 for millennials – and which could rise to 70 or older by the time we actually get there – 50 is ‘well’ early.
Retirement can end up being a mini-retirement
While the extremely early retirees in their 30s and 40s grab most of the headlines, some may retire in their 30s or 40s but go back to ‘traditional work’ after a few years in which case the first retirement ends up only being a mini-retirement – a fantastic opportunity to do something different for a few years.
How soon you want to retire informs the type of financial independence you go for. The ‘leaner’ your lifestyle, the quicker you can achieve FI. It also informs the type of career you go for: you might choose a career in finance or high tech over public service, for example, to maximise your saving potential.
RETIRE – what does 'retire' mean to those on FIRE?
Retiring early doesn't necessarily mean quitting work entirely. Some individuals choose to work part-time in the same career or switch to more fulfilling, passion-driven careers that may not pay as well.
Others pursue non-earning hobbies, engage in charitable work, or spend quality time with their children while they're young.
And others identify with the FIRE movement and want FI for the peace of mind and flexibility it offers, but haven’t decided what ‘ ‘retire early’ means for them yet.
In conclusion, the FIRE movement has revolutionized the way we perceive financial independence and early retirement. It's about breaking free from the constraints of a traditional career and embracing a life filled with possibilities. Whether you aim for regular, lean, or fat financial independence, the goal remains the same—to achieve a level of passive income that affords you the freedom to live life on your terms.
In my next post, we'll delve into the exciting topic of how much you need to save to embark on your ‘retirement’ journey. So, stay tuned as we uncover the secrets to financial freedom and pave the way to a future filled with endless opportunities.
Heather on Wealth
I enjoy helping people think through their personal finances and blog about that here. Join my personal finance community at The Money Spot™.