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Since so much of financial planning hinges on the assumption that everyone retires at age 59.5 or later, optimizing investments to plan for early retirement can challenge those working towards FIRE (financial independence, retire early). The world of financial planning is organized around the idea of the approximately 40-year career followed by an old-age retirement or “golden years” where spending is limited due to lower energy levels and mobility.
While those working towards FIRE have different goals and plans compared to those aiming for traditional retirement age, there are two main challenges that arise with FIRE planning for Americans:
Accessing money before age 59.5
Paying for health insurance without an employer
This article addresses the first issue. While the second point is more unique to Americans, and accessing retirement funds early is also applicable to folks from other countries, the specific accounts and strategies addressed in this article relate to the current American retirement accounts. The ease of applying the logic to other countries varies.
Deviations from Our Order of Investments
The standard order of investments assumes that you have a basic emergency fund as a safety net and you have paid off any debts that you do not plan to retain going into your retirement. (You may choose not to pay off a mortgage or car loan early, if the interest rate is low enough that it makes more sense to pay it off over time. It is fine to retain these debts, but make sure your payments are included when calculating your FI Number.)
Since not all FIRE paths are the same, the sequence below may differ for you. In particular, you should formulate a unique FIRE plan either with your own research or with our help if you are in any of the following situations:
Plan to retire extremely early (for example, by 30 like Kristy Shen and Bryce Leung), because you will have nearly three decades where you need to withdraw money before you can access retirement accounts, and that takes extra planning to navigate tax and penalty implications.
Live extremely frugally because your FI number is low and can be achieved early, meaning you may not have large enough reserves accessible prior to age 59.5 unless you plan in advance.
Have a low salary for someone working towards FIRE (for example, below Scott Trench’s recommended $50k), making maximizing all accounts challenging and requiring more thoughtful prioritization of contributions.
Have a very high salary with the tax implications that high salaries bring. In particular, this may change your calculation on Roth vs traditional accounts.
The order below is also a list just for FIRE planning purposes. It does not consider outside goals, like planning to pay for a child’s college or a year-long mini-retirement to Tahiti. Incorporating those goals into your FIRE path requires your personal reflection on prioritization and timing. You can certainly still retire early, but you need to decide the order, frequency, and timing you hope to encounter certain life experiences. This is the order of operations for FIRE investments, but your personal mid-term goals should be present along your path.
The Standard Order of Investments
If you are on a more traditional FIRE path with an FI number somewhere between $750,000 and $2,500,000 in 2023 dollars, an above-median salary, and a target FIRE age in your late 30s or later, this is for you. Once your net worth is positive and you have an emergency fund, you can start investing for FIRE through the order of operations below:
1. Contribute to a Roth 401(k)* up to the employer match: Your employer match is free money. If you do not contribute enough to maximize your employer match, you are quite literally throwing away this free money. My employer will contribute about $9,000 to my 401(k) this year through the match. If I did not contribute to my 401(k), I would have $9,000 less for retirement. Since I am only 31 years old, 28 years from being able to withdraw an employer contribution, that $9,000 will be about $144,000 when I can withdraw it at age 59.5,** and I cannot think of a good reason to miss out on $144,000.
Why Roth? If you contribute to a Roth 401(k), you are able to withdraw any of your contributions without penalty even if you are younger than age 59.5. This means, if you maximize Roth 401(k) contributions for the next ten years, assuming the contribution limit will remain constant (it probably will rise), you provide yourself $225,000 you can withdraw between when you retire and age 59.5 without incurring any penalties or taxes.
This will not drain the money from your Roth 401(k). In reality, you will roll your Roth 401(k) into a Roth IRA upon leaving the workforce. At that point, your 401(k) will include the money you contributed and the growth. The growth can keep growing, experiencing the full effects of compound interest to grow into an impressive lump sum at traditional retirement age.
Again, this strategy may vary if you have an extremely high salary. If your salary is high enough that traditional contributions make sense for you, you can (a) use a Roth conversion ladder for some of the money you will need to convert in retirement and (b) contribute larger amounts to a brokerage account that you can access at any age in early retirement.
2. Maximize HSA: Since the HSA is a magical account that can provide a safety net for any health emergencies, is triple tax-advantaged, and can even become a powerful retirement account if not spent on qualified medical expenses, it is the most important account on the FIRE path. If you do not have an employer match, this account is first on the list. The only reason it is second here is because a 401(k) match is free money that disappears if you do not contribute enough for the match.
The funds in an HSA are accessible tax-free before age 59.5, assuming they are used for qualified medical expenses. In addition to providing another source of accessible funds, this account provides a safety net for the medical emergencies that worry folks when they consider early retirement (or any retirement!).
3. Maximize a Roth IRA: The Roth IRA creates another pot of money where an early retiree can access the contributions without penalty or taxation before age 59.5 while letting the growth continue growing until regular retirement age at 59.5. The established Roth IRA also serves as the location to eventually roll over an employer Roth 401(k) upon leaving employment.
4. Maximize a Roth 401(k): If receiving your full employer match requires you to contribute $9,000, this is where you contribute the additional $13,500*** to maximize your contributions. Contribute the full amount to have more money that you can withdraw tax-free down the road, and you experience more compounded growth between the time of contribution and age 59.5.
Since many folks ask, these funds (as well as those in your Roth IRA) should be invested in index funds. These can be total market index funds like VTSAX or VTI—as suggested by JL Collins in The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life—or target date index funds that accurately capture your level of risk tolerance. To determine the best target date funds for your goals, reach out for help. If you plan to diversify your investments further or want to pick individual stocks, reach out to a financial advisor.
5. Maximize another retirement account: If you are one of those individuals fortunate enough to have a 457 and a 403(b), or some other combination of retirement accounts, through your employer, maximize both! Contributing to Roth accounts for both will increase the accessible money to you for the years between early retirement and age 59.5. If you do not have this option (most of us do not!), just skip to the next step.
If you are self-employed in some fashion, there are additional options because you wear two hats: employer and employee.
6. Extend your emergency fund or contribute more to HYSA buckets and adopt the overlap method: Adding to your emergency fund or contributing more to buckets for specific safety nets or happiness spending goals adds security to your position. This also gives you the flexibility you need to explore your FIRE path options: HYSAs can provide the financial runway for jumping into full-time entrepreneurship like Patrick, the location to save for a down payment on a real estate investment, the money to save to purchase a small business, or just the place to keep FU money.
Growing your HYSAs grows your choices. This is especially important if you do not know your specific path to FIRE. You can start growing your HYSAs while reading books on real estate or entrepreneurship to see if they are right for you. If you already know that these creative, but sometimes challenging, paths are not right for you, you can also just skip to #7 and expedite the simplest path to retirement.
7. Contribute as much as possible to a brokerage account: Unless you plan to retire extremely frugally or aggressively pursue another path to receive passive income, like real estate, you need to get to this step to achieve FIRE. Yes, this means investing more money in addition to the $36,750 it takes to maximize contributions to your Roth IRA, Roth 401(k), and household HSA plan. This is a big reason why these steps vary for someone planning to retire early with a lower salary and an extremely frugal lifestyle: They will likely not want to maximize contributions to all retirement accounts before contributing some money to a brokerage account.
I reached the point of investing beyond retirement contributions when my salary hit $70,000. (I also made a jump from $49,000 to $70,000 through some strategic resume building, job hopping, and negotiations, so I admittedly never had a salary in the $50k-$70k range. That said, the contribution limits were slightly lower.) Investing more than $36,750 does not require a six-figure salary. If you are going for an aggressive FIRE plan, you are investing more than 50% of your income because you are living off of less than 50%.
Even if you choose a less aggressive FIRE path and just want to retire around age 50, investing in a brokerage account will make you feel a lot wealthier and safer in retirement. There are no fees to withdraw funds from your brokerage account, and you are taxed at a lower rate than income tax. Having a brokerage account is an extra use-whenever account to ease your worries.
8. Diversify with additional investments: Diversify your portfolio by choosing your own adventure. Invest in real estate, small businesses, yourself, certificates of deposit, bonds, or whatever interests you and makes you sleep better at night. While my large additional investments go to my brokerage account, I also contribute some money to a Fundrise account each month to diversify my investments and dabble in real estate without committing time I do not have while maintaining a full-time job, multiple side-hustles, traveling, and hobbies.
Diversification reduces your risk and protects you if any investment experiences significant losses. Whenever someone asks us if something not included in steps #1–7 is a good investment, regardless of their retirement plans, I usually say, “It can be a good strategy to diversify.” In short, that means do not do it if you have not implemented the basics to prepare for emergencies, short-term requirements, mid-term happiness, or retirement. If you have advanced through all the steps #1–7 that apply to you and another investment interests you, then diversify.
Why FIRE?
Implementing the full order of investments for FIRE takes commitment, and everyone will get to the end of the list at different stages of life and along different timelines, if at all. Take it fast, or take it slow: The path is your own. At a minimum, we do recommend aiming to hit your FI Number at least five years before you feel absolutely set on retiring, before you feel you need to retire, to account for the risk of retiring right before an economic downturn. Retiring early is less risky than retiring in your 60s because it is easier to fail at retiring in your 30s or 40s or 50s than 60s or 70s or 80s. Even if you plan to retire at age 65, try to hit steps #1–3 as early as possible to set up a wealthy retirement. Your future self will thank you.
* I subsequently use “401(k)” to discuss factors that are true for all of the accounts. In any case where there are differences, they are specified. The specific type of account available to you is based on your employer type. For example, only federal government employees can participate in the Thrift Savings Plan.
** This assumes approximately 10% growth, or doubling approximately every seven years, since the average market return rate for the S&P 500 index over the last 100 years has been approximately 10%. A more conservative perspective, assuming around 7% growth would safely account for fluctuations and any maintenance fees, would still result in that $9,000 becoming about $72,000 by age 61. In reality, the results will likely be somewhere in the middle after market fluctuations and account fees are considered.
*** These numbers are based on 2023 contribution limits.
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