What is FIRE and how do we retire early?

Make life what you want it to be. Photo taken by my buddy Ian.

Imagine you are 45 years old waking up and not having to go to work. You get to wake up and pursue your passions, go to the gym, go golfing or travel and never have to worry about work, deadlines or money again. That sounds like quite the dream. Many people can do this even faster than 45; some have done it before they have even turned 30! It’s rare but this does happen.

For others, maybe not so much. Some people have a tough time imagining themselves retiring before the standard age. Maybe it’s because they didn’t save enough earlier or maybe because this is the way everyone was taught. Get a job, work for 35-50 years and then you get a few years down the road to enjoy the fruits of your labor. Though there is nothing wrong with that if that’s what you want to do.

However, there is an entire community out there of people who come from all different backgrounds, ethnicities, genders, professions and from all different walks of life that have managed to escape the rat race of the 9-5, Monday-Friday grinding slog of work and only living for the weekends. It’s scary to think that there is a way to avoid this from an early age. These people are known as the Financially Independent Retire Early community or FIRE for short. They are people who live like no one else now, so that they can live like no one else later in life.

Quite honestly, it’s not for everyone and it does take some self-commitment, short term sacrifice and living slightly different than everyone else. I’m not saying that they all eat beans and rice every meal, they just choose the things that matter to them in their life and don’t try to keep up with the Jones’s because little do people know, the Jones’s are broke. Who are the Joneses? They are the new neighbors down the street that just bought the biggest house on the block. They lease the brand new Mercedes SUV, take the $5,000 trip to Mexico every year, she buys the new Gucci handbag, and he looks like a Ralph Lauren polo model on his way to the country club, while having their house and lawn professionally taken care of. On the surface that life style probably sounds amazing! However, odds are most of it is financed with credit cards that are leveraged to the hill, a paycheck that barely stretches far enough to cover all of the bills, massively crippling car payments and one emergency from having their house look like Buckingham Palace to looking like a shack in the bayou . Doesn’t sound too great anymore does it?

For those who are looking to change up their ways a bit and don’t want to retire early, they probably fall more into the category of Financial Independence, Refocused Energy. The latter is probably a better use of the acronym because it seems that people spend so much time wanting to not be at work that when they are able to retire either early or not, they in turn focus their energy on new things. Whether that be travel, running their own small business, catch a serious golf addiction or whatever it may be, as long as it makes you happy and you are passionate about it, then pursue whatever you want.

Personally I’m looking more towards securing myself with a FI lifestyle rather than a FIRE lifestyle right now because I love my job and at this point in time there are further places I want to progress to in my career. One day, I may like to be able to pull the plug early and pursue things that interest me more. For right now though, I am content building up my career, my passions and my portfolio.

There are multiple stages of FI listed by various bloggers and financial gurus. All of them have the same end goal: being able to pursue your own passions and dreams without having to worry about money. But their difference lies in the paths that they take to get there. Some believe the best way to get there is to never have debt, pay off the house as fast as you can, don’t use credit cards and only buy investments once you have reached a position of 0 debt, regardless if it’s good or bad debt. Others believe that you can use good debt to your advantage and help build up your portfolio as long as you are doing it responsibly, while some build a six figure business on something that they are passionate about and eventually sell it down the road. As you can see there are many ways to get to where you want to go; you just have to choose the path that suits you best. No one will be able to tell you what will work for you. Everyone has their own story and philosophy on what works for them but ultimately it is up to you to design the life that you want to pursue.

You to determine what your priorities are and fine tune your plan to meet your criteria and that way you have an idea where to start. That is one of the truly amazing things about the personal finance community. It’s not the numbers that people throw out there. It’s about the stories of how people got to where they are now, the struggles they had to go through and overcome, the curveballs that were thrown their way and how they hit them out of the park. Everyone has their own perspective and story to tell.

Here’s a key take away from this that I think people need to understand. You don’t try to pursue this lifestyle because you hate your job and you want out of it. Maybe you do hate your job and you want out, you grind so hard gutting it out for years saving money and investing waiting for the day to get out of the rat race. Finally that day comes and the weight is lifted off of your shoulder from your last day at work and you are satisfied. Next day rolls around, you are just roaming around the house trying to figure out what to do. Next thing you know a month goes by and you are looking to go back to work. Why? Because you never built a life style that you wanted, you spent so long running away from your job that once you got away from it, you had no idea what to do.

Before you figure out what your FI number is going to be, you need to think of the life you are planning on living. Look around at your current lifestyle and ask yourself, would you like to be able to sustain this lifestyle in the future and in retirement? Maybe you want to have more luxuries or possibly have a different lifestyle. Here are some things you might want to consider. Where are you living? Are you living in the same house you are now or maybe you decided to do some geo-arbitrage and just travel around the world living in a few different countries for a few months at a time? What are your passions and hobbies? Do you enjoy wood working and making tables and chairs or do you have a passion project restoring an old Camaro in your garage? Or would you like to travel around the country and visit all the small villages and take in what you can? Depending on how you view your life post working career it could affect your numbers in a fairly drastic way.

Sounds nice right, but how do we find out how much we will need? First you need to determine your current expense for the year, if you aren’t sure, go back and look. If you think you will be able to survive on 40k a year with no debt and a fully paid off house in the future the number is pretty easy to get to. Your FIRE number is 25x your yearly expenses, in this case, the number is $1,000,000.

Using the 4% rule of thumb is a guideline that when you hit your FI number, you will be able to draw down a small portion of your portfolio every year that will let you live off of it and not have to work again. Some people won’t need 4%, some will need more and some will need less depending on market cycles and economies. If you go to FireCalc.com and run a few simulations on how long your money will last. Using the $1,000,000 listed above with a 4% withdraw rate, there is 95% chance you will have enough money. Not only that, the average of the portfolio that you would have is still 80% higher then what you had originally targeted.

Simulation was ran with a 30 year time frame.

Worse case, if you start drawing down on your portfolio too fast, you have a few options to fix it. You can either start to spend less, curb your spending or worse case you go back to work for a bit. Really though is it that bad? As Joel from FI180 said “your worst case scenario of going back to work, is everyone else’s normal life”. Now it really doesn’t seem that bad, does it?

Now a million seems like a long way away, and it might be for some people, but to get to a million, you need to get to $100,000. From there you had to get to $10,000, from there, $1,000 and before there, you had to start. There are multiple different levels of FI but all of them tend to start at the same place.

Every journey begins with the first step. If you aren’t sure of what maybe you would like or what you want your life to look like. Take a few minutes maybe and consider things you would want in your post retirement life. From here the journey can really start to begin.

Removal of Debt

The first step is to remove all of your high interest debt from your life. Mortgage rates are so low right now that you can leave this part out of the equation, but there will be a future post tied if it’s a good move for you to pay down your mortgage.

Debt that needs to be paid off includes but is not limited to; credit card debt, student loan, car loans and the list goes on. Anything that isn’t mortgage debt needs to be cleared because that does nothing but tie you down tied to your 9-5 as you need to have the money coming in to pay those bills. Not eliminating this debt keeps you stuck in neutral on this journey because you won’t be able to start moving forward building wealth if you are always paying down debt.

Emergency Fund

Once you have all of those paid off, then comes the tedious, but arguably most crucial, part of this entire journey. Funding your emergency reserves. You need to build a reserve fund that you can use to weather through the storms for when they come, because they do. Your furnace goes out in the middle of the night? Use the emergency fund. Car needs to go to the shop for a $1,500 bill to fix your breaks? Use the emergency fund. Want to go on that trip down to Mexico for a week for $1,200? Do not use the emergency fund for that. That is not an emergency, that’s an excuse to use this pile of cash you saved up. This is not the purpose of it. When you pull from your emergency fund, you must replace it ASAP. Watch how well you start sleeping knowing you have some emergency money socked away.

Your emergency fund should be able to sustain your basic needs for a few months. Everyone has their own rule of thumb for how big it needs to be. Some people have it at three months of expenses, while others have increased it to a year’s worth. Your situation is going to be different than others as it is based on your expenses, lifestyle and stream(s) of income.

Building and growing investments

After that the real fun starts. Use the amount that you were putting aside for your emergency fund and start sticking that money into your investment accounts and get that growing. It doesn’t matter if its $200 or $2,000 a month, get that money working for you. The earlier you start getting that money working for you in the market, the more wealth you are likely to accumulate.

At this point you have crossed the 1km mark of a 15km race. It’s not necessarily about how fast you want to finish the race. It’s the consistency of your pace that works for you. Keep the amount you are putting in there consistent and if you can increase the number, increase it but constantly be putting something into your investment accounts. You are going to get there as long as you build yourself an investment system and stick to it. If you can funnel more at the start of your journey you can ease off a little on the back end and enjoy life a little more but the point is that you need to get started as early as possible because you owe it to yourself to live the life of your dreams.