Article by: Tim Marting
Are you in your 20s, 30s, 50s? Do you have a retirement plan or plan to retire? Have you ever thought about it? Are you putting off thinking about it? I’m going to take a deep dive into The FIRE retirement method. When I say deep dive, I mean I will present you with the facts, then… I’m going to throw in some reality, honesty, and turn it on its ear.
If you’re new to this blog or toarcunited.com in general, you’ll need to know that we are here to Motivate, Innovate and Elevate. My goal is to give you enough information to get you talking, thinking, and doing, so you can live your best life!
The 4% Rule
William Bengan came up with the 4% rule in 1994 it is based on a 30-year retirement, stating if you only use 4% of your retirement funds in the first year and adjust your spending to only use that 4% (and, of course, your social security) every year, your savings should last for 30 years. He considered inflation and stock market changes. Retirement investors and financial planners have all used this as a rule of thumb. This has been the aim for millions who are saving to retire between 62 - 67 years of age.
Retirement Set on FIRE
Two years earlier, Vicki Robin and Joe Dominguez released the best-selling book Your Money or Your Life. It was about retiring early, living as cheap as possible, saving most of your income, and living off your retirement savings when the time comes. People loved the book, and the FIRE Method to retiring was born.
The Fire is Financial Independence Retire Early and embraces a simple lifestyle and rejects over-consumption. The basic idea is to live off 30-40% of what you earn to save and invest the other 50 - 75%. Thus, allowing you to retire earlier than the traditional age gives you time to do as you please. Once retired, you will live off the 4% annually, which is meant to last until you die.
While seems straightforward it is broken down even more into three levels:
Fat FIRE: You are willing to save and invest more than the average Joe but need to live off more than 30% of your income. This group is in a high-income bracket or in a position to get a higher-paying job. Have a good head for investing and willing to take a little risk to meet their goals. They’re willing to take longer if needed to reach the retirement goal.
Lean FIRE –Are minimalists, extreme savers. They commit 50-75% of their income to save and investing, to retire as early as possible. They buy and use only what they need. They want to retire as early as possible, and nothing is getting in their way!
Barista FIRE: Are working, saving, and investing. As soon as they reach the retirement goal, they’re done with the 9 – 5 grinds. Some may work part-time for healthcare benefits or freelance. They will never touch those savings; as it grows into a significant nest egg.
There’s no set amount you need to save or invest. Once you have figured out your FIRE number, you will figure out the percentage you are saving and investing. This plan is 100% tailored to your needs and wants.
No matter which category you choose, you will need to live below your means. While it doesn’t sound too hard, living it will take some getting used to.
How Much Will Be Enough
First, let’s come up with a FIRE number or the savings amount you need to accumulate before you can live without a paycheck. For example, assume I have $40,000 in yearly living expenses. Using the 4% rule above, I’m going to multiply this by 25 (known as the rule of 25, this is the amount to be saved and invested); I’ll need to save 1 million dollars before I can retire early.
We can manipulate the numbers all day long; if you can live off 3 – 3.5%, you can multiply by 33 and retire even earlier.
A Look at the Positives
The FIRE method did a couple of good things when it came out, it made people take a good long look at their retirement plans, and it opened conversations with a younger generation about saving and investing. For someone who grew up in an era that saved money in a bank and scoffed at investing…this was huge!
It also stressed financial independence, the ability to have enough money to pay your living expenses without being financially dependent on others or need to work for the rest of your life. Most people dream of financial independence but very few achieve it.
Things Go Sideways
The 4% rule reflects a 30-year retirement: you can draw out that 4% to supplement your retirement as you live thirty more years. We are living longer; look at the Baby Boomers who are outliving their retirement funds. The Boomers saved their money, they lived within their means, yet they’re outliving their retirement savings.
How are you going to retire on that 4% you have saved if you retire at 40? Are you going to have enough socked away to live on for possibly 45-50 years? A lot can go on in 45 years, bad economies, inflation, ups, and downs in the stock market. I can keep going, but I think you get my point. Saving for retirement is the best guess situation; make your best guess with the proper education and set yourself up the best you can.
Realistically, there are a whole lot of people that will never be able to save for retirement; they’re going to be living below the poverty level or worse IF they get to retire. Some are not educated enough to save, most because they can’t live off and save their income. Some just aren’t worried about it enough to save for their retirement (which reinforces the point that you need to be motivated to save for your retirement). Many people are under the assumption that an employee-funded 401k is going to be enough. Sadly, that is not going to be the case.
It doesn’t take much to throw you off financially; an illness or a steep car repair can set you back. It’s not a predictable situation, yet this is the kind of thing that you need to be planning for when you start to plan for retirement. Medicare doesn’t cover everything, and the expense of medications will only be higher in 30 to 40 years.
The secondary focus of FIRE is extreme saving. I grew up believing that you had to save; you always saved something out of your check. I still think you should save as much as you can. You need to be motivated to save, and you need to have the money to save.
If I’m making minimum wage (in a good state), I’m making $11/hr. Not a lie, folks $11/hr. I’m making $880 biweekly and bringing home approximately $660 biweekly. I’m pretty sure I’m not saving anything more than change in a jar at this point. There is no way I am saving 50% of my take-home for retirement. Now, keep in mind that there are states where the minimum wage is still $7.25/hr. My point is this is doable if I make upwards of $100,000/yearly, and I’m really squeezing that penny tight, not if I earn minimum wage or entry-level pay; FIRE is out of my reach.
I recently read a Ramsey’s Solution survey of millionaires, where they stated the average millionaire who works, saves, and invests will accumulate their first million in 28 years!
I just don’t see how someone in their 20s who is motivated to save this kind of money but lives off an entry-level income can do this unless they live with six other people in a cheap apartment or with their parents. So I’m not sure it is realistic for most of us.
Now, if you have a second job or a good side hustle and don’t need that income to survive, you could save that every week and get much closer to the early retirement or at least a more comfortable retirement. But remember that the second job is extra work hours and may be contradicting the FIRE motto to work less. In FIRE, you want to have your money work for you, not work for more money.
The FIRE method focuses on living as cheaply as possible. It encourages using and maintaining a budget to live within these means. I am all for that; I have lived that way my whole life. However, I don’t know that the next two generations will be good with that. They are accustomed to living like their parents with all the comforts that come with it, most of them will want to maintain that lifestyle.
A big part of this problem is that most millennials haven’t been exposed to budget or money management. If they even learned this in school, they were lucky; if they paid attention, they were brilliant. Most of us learned saving from our parents and budgeting from years of watching our parents struggle and fight over money. This is not a great introduction to future money management!
The third focus of FIRE is investing and creating a passive income that can supplement your retirement. Retiring earlier will leave you with a smaller pension. You’re not going to be able to depend just on the money you have saved. You’ll want to create an income that you don’t have to work too hard to earn. Investments like stocks and rental properties can do that for you. The objective is to invest and earn the capital needed for earlier retirement. You are letting your money work for you as investments are intended. The more you put in, the better you will make out in the long run. Investment requires some education. Investing requires some know-how and, for most of us, an investment planner. It also goes back to income; if you barely make enough to live off, you’re probably not investing much, if at all.
It is worth noting that your success in FIRE can depend on the volatility and fluctuations in the stock market. This coupled with interest rates incurred on investments and savings could negatively impact your early retirement goals. While I’m not trying to be discouraging, I did promise to keep this real.
The core focus of FIRE involves lowering your consumption of goods and resources to save and invest. No one insinuates you have to give up the toilet paper, but you may have to embrace a cheaper brand. This can get easier to do and is key to this whole method. If you can lower your food and energy consumption, resources, and durable goods, you can save what wasn’t spent. Save enough of this, and you will have enough to invest in the things that will help create your passive income.
For some, this means giving up dinner out, a designer outfit a smaller house or apartment. Saying good-bye to daily coffee and donut or not owning a car. You are giving it up now, so you will have it all later.
Whose Stoking This FIRE
For some, this is the race to the no work at forty finish. Others see it as their way to financial stability in older age. It’s not one size fits all; it’s what you need it to be. It’s your plan for your retirement. When looked at it in this light, FIRE can be for anyone willing to work at it.
The core principle is something we are all looking for, to be financially independent sooner rather than later. The ability to live like no one else because you lived like no one else!
FIRE isn’t the retirement plan for low-income or younger breadwinners. But, it CAN be the beginning of savings to invest later, which may take another ten years for them to get started. It gives them time to learn and start using the FIRE principles and get to the next level of earnings they’ll need to achieve FIRE.
If you are in your 40s and 50s and need to catch up to retire as comfortably as possible, FIRE is precisely what you NEED to be doing to get your retirement in order. You’ve got the income; you hopefully have a home, and your needs are all met. It may require moving to a smaller home or somewhere more economical for your situation. You can tighten the belt and lower your consumption to save a larger portion of your income to increase your investments. This process is perfect for you.
FIRE is a no-brainer for anyone making over $100,00 and lives below their means, has the discipline to save, and knows investments. The FIRE method is designed with you in mind.
Even if you can’t afford to do FIRE now or in the future, you can still use your money to improve your life. Everyone can benefit from ditching those unnecessary expenses. Learning to manage your money more efficiently and increasing your earnings will go a long way to start your retirement savings.
If you can spare five dollars a week, you could sit pretty if you start in your 20s. Between online platforms where you manage investment yourself and lending institutions with investment planners, you can find a way to invest something, even small amounts. Throwing an extra percentage or two into your 401k can only help you later. You won’t miss it now, but you’ll be glad to have it later. While this may not help you retire early, it can get you closer to building that nest egg you will need!
Not being able to retire through the FIRE method doesn’t have to hinder saving and investing for retirement; you will just have to do this on a smaller scale!
If you’re looking for more Thoughts of a Random Citizen, head to the podcast section. I think you’ll find some fascinating podcasts to listen to.