What is the FIRE Movement and How Does it Work?

The Financial Independence Retire Early (FIRE) movement is an accelerated retirement plan for those seeking to enjoy their golden years earlier in life. It calls for participants to drastically lower their expenses in order to save up more funds for retirement. Having a retirement savings calculator can also help you figure out how much you need to save so that you can retire years in advance. Let’s dive deeper into the FIRE movement and how it works so you can decide whether it’s the right strategy for you.

How Does the FIRE Movement Work?

The FIRE movement is an aggressive strategy that calls for individuals to invest 50% more of their income into retirement savings. The phrase was first coined by authors Joe Dominguez and Vicki Robin in their book “Your Money or Your Life.” The stated objective of the FIRE Movement is to provide individuals with an investment plan that will enable them to retire early. That necessitates starting as early as possible. Saving 50% of a $100,000 income for two decades can add up to $1 million in retirement savings principle. A 10% return on that can produce $100K per year.

Many followers of this movement use the rule of 25, which calls for saving 25 times their annual expenses. Some also stretch their retirement savings by withdrawing 4% or less annually. Although the FIRE movement is not an easy undertaking, using this strategy could help you gain the financial freedom to retire earlier in life or switch to part-time work.   

Setting Up Your Retirement Savings Accounts

To follow the FIRE movement, you should set up and start contributing to retirement savings accounts. However, FIRE is not a system where you can simply increase contributions to your 401(k) plan. This is because the IRS maximum contribution limit for 401(k)s in 2024 is $23,000. Investors can also have a traditional IRA or Roth IRA, but the annual IRS contribution limit is just $7,000. That’s $30,000 total, which wouldn’t be enough to follow the FIRE movement if you make over $60,000.

In order to increase your retirement contributions, consider opening an investment account. You could do this on your own through a retail investing site or contact a financial advisor if you’re new to investing. Another option is to deposit funds into an interest-bearing savings account. This option is safer than an investment account because it eliminates stock market volatility. But keep in mind that interest rates on savings accounts are low, which can limit the return on your investment. 

Suggested Strategies for Cutting Expenses

One of the core principles of FIRE is the emphasis on frugality and the reduction of unnecessary spending. People often adopt various strategies to cut expenses and fast-track their journeys to financial independence. These may include creating a detailed budget to track and analyze expenditures, minimizing discretionary spending on non-essential items, negotiating lower bills or interest rates, embracing a minimalist lifestyle, and exploring cost-effective alternatives for daily needs. For instance, you may choose to buy generic products at the supermarket or shop for clothes at thrift stores to save money.

FIRE Movement Protection for Black Swan Events

One of the toughest challenges for employees with employer-sponsored retirement plans is that they have limited control over their investment allocations. This means they can take losses during Black Swan events, or unpredictable and rare occurrences that have a profound impact. Black Swan events can include economic recessions, market crashes, and other unforeseen events that disrupt financial plans.

Luckily, people following the FIRE movement have some protection during Black Swan events because their retirement savings aren’t tied up in a single employer-sponsored plan. Stocks in managed or self-managed investment accounts can be sold, and funds in savings accounts continue to earn interest. This can help you maintain financial stability when the stock market is in turmoil.  

The Bottom Line

By advocating for strategic saving, mindful spending, and early financial independence, the FIRE movement challenges traditional notions of retirement. This method invites individuals to rethink their relationship with money, encouraging intentional choices that align with personal values. While the journey towards financial freedom may vary for each person, the underlying message of the FIRE movement is clear – take control of your financial future and redefine what it means to retire on your own terms.

Sources:

https://www.nerdwallet.com/article/investing/financial-independence-retire-early

https://www.investopedia.com/terms/f/financial-independence-retire-early-fire.asp

https://www.ramseysolutions.com/retirement/what-is-the-fire-movement

https://www.officialdata.org/us/stocks/s-p-500/2000