What F.I.R.E. (Financial Independence Retire Early) Means
There is a massive misconception that you must work until the age of 65. This means that if you dream of leaving your work life behind, you can do it at any age. There are examples where people took early retirement during the mid-30s, 40s, and 50s as well.
There is a new wave of interest where younger people are trying to retire early. This is a mission that has triggered a new trend or approach towards retirement known as the F.I.R.E. movement. If you have heard of F.I.R.E. or want to know what it is, here is all you need to know.
What is F.I.R.E.?
The term F.I.R.E. is an acronym for “Financial Independence, Retire Early.” The goal of this movement is an aggressive approach toward saving and investing so you can afford to retire as early as in your 30s and 40s. However, you have to save and invest between 50%-75% of your monthly/annual income. Yes, you read it right – you will have to save at least 50% of your monthly income to retire early.
How Can You Do It?
To be a part of the F.I.R.E. movement, you will have to invest up to 75% of your monthly/annual income. However, you will have to practice to strategies which are:
- Keeping your expenses extremely low
- Come up with new ways to raise your monthly income
So, a simple formula to be on F.I.R.E. is to earn a high income and keep your expenses as low as possible. You can use your savings to invest and multiply your money. The more you do it, the faster you can achieve financial independence.
However, financial independence does not mean retiring early and spending your time on a tropical beach or traveling. You can enjoy financial freedom by giving up full-time work and engaging in a part-time job or stop working altogether and spend more quality time with your family and friends.
Tips to Achieve F.I.R.E.
If you are thinking about achieving Financial Independence, Retire Early status, simply follow the rules mentioned below.
Lowering Your Expenses
You will have to make deliberate efforts to cut down on your expenses drastically. Therefore, you will have to dig deeper into your spending habits and look for every cent you can save. Define your wants and needs and get rid of any expenses that do not make sense.
You may wonder what difference would a few dollars make, but they really add up over time. All the money you save can go towards investment, where these extra dollars will multiply, creating wealth to reach your early retirement goals.
Boosting Your Income
Income is your primary tool to build wealth. Therefore, if you wish to retire early, you need to find ways to boost your income to create wealth quickly. You can either switch to a career that can bring in extra cash or create a passive income stream or side hustle that can generate money automatically.
For instance, you can work as a freelancer in your free time, run a Laundromat from home to generate extra income, etc. While it may be a little bit of a hectic lifestyle to balance more than one job right now, the perks of early retirement spread over many years to come.
Saving and Investing are Top Priority
In order to achieve Financial Independence, Retire Early (F.I.R.E.), you will have to make saving and investing your top priority. You do not have to go all and start putting 50 to 75% of your income aside. Let’s start with saving 15% of your monthly or annual income and put it away in a tax-advantaged retirement savings account such as a Roth I.R.A. and 401 (k).
Once you have developed a habit of saving and investing, gradually increase the percentage of savings to reach F.I.R.E. at your planned age. Remember, the more you save and invest now, the sooner you will be able to retire.
Staying Away from Credit Cards
If you really want to ensure that you stay on F.I.R.E. track, stay away from credit cards, or you will get burned. Do not fall for the classic trap of “well, as far as I make monthly payments on time, I will be ok.” All it takes is a single missed payment, and you may find yourself in an uncontrollable spiral of debts.
If you are not great at planning, seeking help from a financial expert at Personal Capital
can be your greatest ally. So, remember the golden rule – no credit cards, or it will be hard for you to save and invest because you may end up putting out the fire instead of achieving F.I.R.E.
5 Steps to Early Retirement
Whether you wish to retire at 35 or 65, you need to come up with a plan. However, if you wish to retire earlier than your 60s, here is a 5 step process to help you become a part of the F.I.R.E. movement.
Step #1 – Getting Rid of Debt
Debt is going to hold you back from the goal of achieving early retirement. Therefore, you must dump all your debts as soon as you can to be on your way to financial freedom. Kick credit cards and installment purchases out of your life. You can use the savings to build retirement savings and emergency savings. Having savings to last you 3 to 6 months is good and helps you survive in case of an emergency.
Step #2 – Investing 15% of Your Income into Retirement Accounts
Begin your journey to F.I.R.E. by investing a minimum of 15% of your savings into any tax-advantaged retirement accounts such as Roth I.R.A., 401 (k), etc. However, you must always ensure to invest your retirement savings in mutual funds that have an excellent track record.
Step # 3 – Paying off Your Mortgage Earlier
Paying off your mortgage early will help you invest more cash towards your goal of Financial Independence, Retire Early. The more money you are going to invest, the higher returns you will get over the years, accumulating more wealth. This fast accumulation of wealth will allow you to retire early into your 30s and 40s.
Step #4 – Increasing Your Investment into Retirement Accounts Beyond 15%
Once you have achieved the first three steps, you will have more money at your disposal to invest in your retirement savings accounts. So, max out the contributions into all your retirement savings accounts to reap maximum benefits in the end.
Step # 5 – Building a bridge Account
If you are working towards F.I.R.E., you must open a bridge account. This will help you bridge the gap between the times you want to retire and the times when you will be taking money out of your retirement savings account.
Set an age when you wish to retire and set a target for how much money you will require to survive each year after retirement. Multiply the figure for each year by the number of years you will use your bridge account. This will give you a sum of money you will require in your bridge account to survive till you can access your retirement funds without penalty.
Various factors can help you achieve F.I.R.E. successfully. These include controlling your budget, adopting a minimalist lifestyle, cutting down drastically on your spending habits, etc. The more you save, the sooner you will be able to retire early. However, if you are unsure how to start, you can always hire the help of a financial advisor. A financial advisor will not only create a plan for you but also give you helpful advice on how to stay on track to achieve Financial Independence, Retire Early goals.