FIRE stands for “Financial Independence, Retire Early.” It’s a movement that’s gaining popularity among millennials who are planning to save large portions of their income in their 20s and 30s so they can retire early. The movement encourages a humble lifestyle to maximize the amount saved for retirement.
On the surface, starting to save early and saving as much as you can sounds like a great plan for retirement. However, there has been sharp criticism of the FIRE movement. Many FIRE followers have to go back to work only a few years after their early retirement. Mostly, this is due to misinformation and poor planning.
Let’s take a deep dive into the FIRE movement and evaluate the pros and cons to see just how realistic an early retirement is for today’s youth.
Do You Really Have Enough To Retire?
How much you need to retire largely depends on the lifestyle you expect to have, where you want to live, and how much you want to spend on entertainment, travel, food, etc. To make an early retirement more attainable, the FIRE movement generally encourages a thrifty lifestyle before and in retirement. Before you decide to retire early, you need to ask yourself what kind of lifestyle you expect to have and calculate how much you will need in retirement.
How much will you spend in retirement?
While everyone is different, there is a general rule of thumb that says you should withdraw no more than 4% of your retirement savings per year. By adhering to this rule, you will be primarily withdrawing interest and dividends from your investment, thus, ensuring that you will have steady income and maintain an investment account balance that keeps your income flowing.
With this rule in mind, consider that the average 401(k) balance of investors aged 35-44 (which presumably is the early retirement age that FIRE followers are aiming for) is about $68,935. If you use the 4% rule, you would only have $2,757 per year for your retirement. While it’s obvious that this amount is not enough, the average 401(k) balance does not reflect the typical FIRE follower since the average 401(k) investor plans to retire at age 65 or older. But one thing is for certain, if you’d like to retire in between 35 and 44, you will need to greatly rev up your retirement savings in comparison to the average American.
Privilege on Fire
One of the main criticisms for the FIRE movement is that it’s only attainable to those that come from privilege. Let’s do the math – the average retiree spends $45,756 a year. If you consider the average social security benefit, which is $17,532 per year, the average retiree needs to have about $705,600 in their retirement account to follow the 4% rule. However, FIRE followers aim to retire early, which means they will not have access to social security for years. Without social security, they would need to have about $1,143,900 in their retirement account to follow the 4% rule.
The average student loan debt is $37,172 and the average college graduate salary is $48,400. Of course, under these circumstances, paying off your debt and saving over a million dollars by the time you’re 35 or 40 may be more than just a challenge.
Don’t get discouraged! There are things that you can learn from the FIRE movement whether or not an early retirement is in the cards for you.
Pay attention to your spending
The FIRE movement encourages careful spending and maximum saving. While it may not be realistic for everyone to save 70 or 80 percent of each paycheck, a smaller boost in your savings can have a great payoff. Try to increase your 401(k) or IRA contributions by 1% each year and take advantage of compound growth. This will bring your retirement goal closer as your savings will be able to grow quicker.
Retire on your own terms
Perhaps FIRE is appealing to you because you are feeling burned out or maybe you’re not in the right career path. Explore ways to retire from your existing career and start a new one. Many FIRE followers take up a side-hustle first, or freelance to get the kind of career flexibility and income stream that they need to have a more balanced life.
Part of the motivation behind the FIRE movement is centered around the idea of not leaving the best things in life for when you’re “too old” to enjoy them. You don’t need to retire to travel, to take a dream vacation or to move to a more tropical destination. At The Prosperity Consulting Group, it is our mission to help you embrace life and prepare for a comfortable future. With proper planning, you can reach your goals, take wonderful vacations and prepare for a timely retirement.
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