What Is FIRE? Financial Independence, Retire Early

Everyone wants money and everyone wants to be rich. But how do you get rich?

Well, you can gamble and hope for the best. By gamble I mean you can go to a casino and do it, or do it with the stock market and be a day trader.

Day trading is its own can of worms, and technically it doesn’t have to happen during the day. It depends on what market you want to look at.

You can also try different side hustles, I know I have. But then I came upon a new term: “financial independence” (FI).

I actually first heard it from my partner while we were in the car talking about ways to save our money. She brought up Coast FIRE (which we’ll talk about later), and I was extremely confused about how it worked and what it actually meant. So naturally, when we got home, I started researching it, watching YouTube videos, and going down a dozen different Reddit threads. I figured that research shouldn’t go to waste, so here we are with this post and what I learned.

Please note I am NOT a financial expert and I am not giving you financial advice. I’m just sharing what I learned in the process, as a beginner myself. If you’re genuinely interested in this, do a little more research on your own and talk with a financial advisor about what makes sense for you.

This post contains affiliate links. That means I may earn a small commission if you purchase through my links, at no extra cost to you, helping me share more ultimate games for couples. I only recommend fun games I truly enjoy and think you will too.

What is financial independence?

Financial independence means having enough money invested or saved to cover all your living expenses indefinitely without needing any other income. This is a financial milestone someone would, ideally, hit on their path toward retirement.

What is FIRE?

In FIRE, financial independence stays the same as above. The RE just means Retire Early. So altogether, it means financial independence retire early, and it is trying to reach your target amount as quickly as possible so you are then able to retire early. Compare that to a traditional retirement, working in the workforce for 20-40 years and retiring around age 65.

How do you do it?

Getting to FIRE means saving and investing a big portion of your paycheck toward retirement. However, to be clear, it is a lot easier to save when you are younger, for two reasons. First, you have more time for that money to grow and go through the market without much worry. Second, you have fewer expenses when you are younger, you might not have kids yet, you might still be on your parents’ insurance. As you get older it might be harder to save your paycheck when you have more expenses to deal with. Also, the sooner you start saving, the quicker you are able to hit your target amount.

So to actually do this, and what I mean by investing, is putting money into something like a 401k, IRA, etc. From there, you’re ideally putting that into index funds (like the S&P 500) or a target-date fund (something like “Retirement 2070 Fund”). That’s how you invest and let your savings grow. I highly recommend that whatever platform you use to invest, you check out their help center, most have great guides, and you can even reach out to one of their advisors to help you get your retirement set up.

Where did this even come from?

One of the first pieces of media for this saving method and the FIRE Movement goes back to a book called Your Money or Your Life by Vicki Robin and Joe Dominguez. This book was published in 1992, and they released a newer version in 2018 to talk about new ways of income (like side hustles). This book brings up financial independence, being conscious of how you are spending, passive income, and more. 

Outside of the book, there was a study in 1994 by financial adviser William Bengen called “Determining Withdrawal Rates Using Historical Data.” He looked at historical U.S. stock and bond returns going back to 1926 and found that withdrawing 4% of your portfolio every year,  kept you from running out of money for at least 30 years. A few years later, in 1998, three professors at Trinity University ran a similar analysis using the same data range and came to similar conclusions. The formula that came from this (to calculate your target amount) is:

Target Amount = Annual Expenses × 25

So if you want to take $50k out of your portfolio every year in retirement, your target amount is $1.25 million ($50k × 25).

I do want to note that for early retirement, you’ll obviously have more than 30 years left, so some individuals working toward financial independence say it might be better to use 3.5% instead of 4%, changing the formula to Annual Expenses × 29. So if you want $50k a year, your number would go from $1.25 million to $1.45 million, which means more time to reach FIRE.

When I ran my own numbers, it was really interesting to see how far away I might be from hitting a milestone like my Coast FIRE target amount. I love the idea of having six figures to my name, and it’s wild to think I could actually hit that within 5 years, and even wilder to think that in 12 years I might hit a milestone within one of the FIRE versions.

Another tip I’ve used is looking at my current annual expenses (rent, food, other essential bills for the year) and then figuring out if I’ll likely need more than that in retirement. For example, if I only need $25k a year right now, I’ll probably need more once I retire, so it’s worth realistically estimating what you’d need in your retirement years (and don’t forget to include health insurance).

What are the types of FIRE?

There are four other versions of FIRE outside the traditional FIRE target amount we talked about above.

Coast FIRE: You stop contributing to your investments once you reach your Coast FIRE target amount. At that point, your investments should just compound on their own until your retirement age.

Lean FIRE: You live a super frugal (cheap) lifestyle for your whole life, and in return have a much lower target amount.

Barista FIRE: You work a lower-stress, part-time job in retirement. You pull money from your portfolio while working part-time. Having another source of income lowers your target amount and could help with getting benefits from the part-time job.

Fat FIRE: The opposite of Lean FIRE. This is not a frugal lifestyle, you spend freely, which means you also need the highest target amount.

Here’s a link to a FIRE calculator that includes all of these versions, so you can calculate your own numbers.

Out of these, I think the most realistic options are Barista FIRE or Coast FIRE, since I don’t think it’s fully realistic to keep a frugal lifestyle for your entire life, and Fat FIRE feels a bit too extreme.

Living a frugal lifestyle is great, and honestly, I’m living one right now. But I don’t think I could keep it up forever. Later in life I know I’ll be able to live cheaply and won’t need everything brand new, but a truly frugal lifestyle for the rest of my life? I can’t see it. I already know I want to travel and maybe try the digital nomad lifestyle, and while that can have hints of frugality, it’s not quite the same thing to me. That’s why Coast FIRE feels more like my speed, it prioritizes experiences over aggressive saving, which fits the kind of life I actually want to live. Of course, as I gain more experience, my approach to saving may change too.

Pros and cons of FIRE

Before we get into the downsides, it’s worth naming the actual upside of FIRE: time. Working less, or not working at all, means getting years of your life back to spend however you want, whether that’s travel, hobbies, family, or just not being tied to a schedule someone else set for you. That’s really the whole point of FIRE, trading the traditional decades-long grind for more control over your own time, sooner.

Nothing is ever too good to be true though, so let’s look at some of the cons.

As I mentioned earlier, being able to save a big portion of your paycheck every month might not be possible for everyone due to other bills. Also, paying off debt should be your number one priority before trying to save aggressively. You should have a 3–6 month emergency fund, and then the rest of your money that isn’t going toward daily needs (not wants) should go toward debt.

Having a goal like “be married by 26 and have a kid by 30” might be unrealistic, because if you set that goal at 17, your needs, wants, and views on life will likely have changed by the time you’re 23, so you might not even want that anymore, and that’s perfectly fine. You’re supposed to grow throughout life and learn what you want and don’t want. All this to say, having a goal of hitting your target amount by 34 might be unrealistic and add stress and pressure to yourself, when you could be enjoying life while saving instead of stressing the whole time.

Let’s say you’re able to successfully FIRE at 45. Once you’re out of the workforce, it might be harder to stay social if your friends still work. You might feel more bored, since the social situations that come from going to work and interacting with others are gone. A good way to think about this: usually when you graduate high school, you either go to college or enter the workforce. The ones who go to college make new friends. The ones who enter the workforce make friends by being there. The ones who do neither often feel more alone, since they’re not getting the same human interaction as everyone else. Some early retirees report feeling this same kind of isolation once they leave the workforce for good, since that daily structure and social contact disappears all at once. This can lead to boredom, loss of identity, social isolation, depression, and more. I’m not saying none of that can happen if you’re in the workforce or in school, it just might show up differently.

A big reason people stay in debt is because of lifestyle inflation, meaning if you get a promotion at work, you upgrade your life to match: a more expensive car, a bigger house, a better phone. These upgrades eat into your new income, and you end up right back where you started. The point is, if you truly want to save, don’t spend all of your new bonus or promotion money on things you don’t actually need.

FIRE also doesn’t factor in things like social security or pensions. Those can just be an added bonus if you end up receiving them in the future.

One more thing worth noting: when you take money out during retirement, you’ll have to pay taxes or other fees if you withdraw before age 59½. So just keep that in mind.

So, is FIRE worth it?

Life is a journey, and your journey is not the same as anyone else’s, including your sibling’s or your partner’s. Whether or not you want to do FIRE, I believe there are great tips and methods within the FIRE community to help you save and budget in a way that fits you.

If you take nothing else from this: get out of debt, save your money, start a budget if you need one, and just live your life. You only get one, so make it count. Don’t stress over trying to keep up with someone you saw on Instagram, live your best version of your own life.

Throughout my whole money and saving journey toward financial independence, I’ve learned a lot, budgeting, figuring out needs versus wants, and knowing when I can let myself have some of what I want. And now, armed with everything FIRE has taught me, I’m putting it into action: I’m increasing what I take out of my paychecks and putting more toward my 401k and my Roth IRA.