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Imagine having enough money to control every hour of your day and spending each moment on the activity of your choice without fear of providing for yourself, for the rest of your life. This is FIRE. Complete freedom from the restrictions of paid employment. FIRE planning is one of the services offered by Phippen Tax & Financial Services, but folks can get hung up on the terminology.
FIRE stands for Financial Independence, Retire Early. These two concepts combine to create one event. Financial independence refers to accumulating enough money that you can survive the remainder of your life without ever working again. Retire early is what happens when you achieve financial independence because you are free from relying on a paycheck to fund your lifestyle.
Financial Independence
I introduced the math behind financial independence (FI) when explaining Why Planning to Retire Early Decreases Financial Risk. Financial independence is the point at which you have enough money invested that you will never need to work to earn another dollar in your lifetime. You reach this point by saving and investing enough money that you can live happily while withdrawing a determined safe rate each year and never touching the principal amount of money.
Safe Withdrawal Rate: The standard safe withdrawal rate is typically 4% based on the Trinity Study, but the risk averse may choose a lower withdrawal rate of 3% while the daring may work with a 5% withdrawal rate.* While we recommend choosing 4% but with the buffer that you understand you may need to go back to work if you retire right before an economic downturn, only you can assess your appetite for risk.
Principal: To save a principal so large that you never have to work again, you first need to determine your annual expenses. Enough money to cover your annual expenses, as opposed to your current salary, is the amount of money you need to achieve FI. This distinction matters immensely when planning for early retirement because a number of folks work to secure high salaries while living frugal lives. If you make $150k but live off of only $25k, you only need a principal large enough to cover $25k of annual expenses.
Calculating the principal you need to achieve FI is as simple as multiplying your annual expenses by the multiplier below, based on your preferred safe withdrawal rate:
For example, if you determine that you have $75,000 in annual expenses and use the standard safe withdrawal rate of 4%, this is your personal FI formula:
$75,000 × 25 = $1,875,000
It is that easy to determine what you need to retire early! If you need $75,000/year for your annual expenses, your FI number would be $1,875,000. Once you acquire $1,875,000 in investments, you never have to exchange your time for money again.
Inflation: How FI Numbers Change
When you reach your FI Number, it will account for inflation because the market grows more, on average, than your safe withdrawal rate. Your FI Number accounts for you withdrawing your safe withdrawal rate plus inflation that occurs once you reach your FI Number.
However, if you calculate your FI Number today and plan to achieve FIRE In ten years, you need to account for inflation. Your FI Number accounts for all inflation that occurs once you accumulate the full amount of the money. It does not account for inflation that occurs prior to you reaching your FI Number.
This means that the longer you wait to hit your FI Number, the higher your FI Number is. This is why you actually need to work to earn more money if you wait to retire later in life. If we assume a 30-year-old has that $75,000 FI Number right now, this is how their FI Number would change over time, assuming 3% annual inflation:
That means this person would need more than twice the amount of money to retire at age 60 than they would need to retire at age 30, and they would have to work for another 30 years! This happens because compound interest works against you, raising the FI Number you need to maintain your standard of living, until you hit your FI Number. Then, compound interest works for you as your money makes money and accounts for inflation. The earlier you hit your FI Number, the more your money accounts for inflation, so you do not have to trade life hours working to account for inflation yourself.
In reality, inflation may be higher or lower than 3%. Recently, it has been higher. As you achieve more wealth, it does become easier to maintain a consistent standard of living and avoid some effects of inflation, so your number may change a bit less dramatically. However, the longer you wait to hit that FI Number, the higher it will be.
How to Catch FIRE
Seeing how rapidly FI Numbers increase can be scary and make it seem unattainable, but figuring out how to get to a certain FI Number at a certain pace can also be calculated. I like to think in terms of how much time I am saving each year. For example, if I invest 50% of my income towards retirement and live off of the other 50%, I just accumulated one year! Assuming a 4% safe withdrawal rate, I need 25 years invested total, and it only took one year to bank one. (If I take taxes into account, it takes even less time to bank a “year invested” in that example!)
When you raise the percentage of money you are investing, you shorten the path to FIRE. If you raise your investment rate while your income remains the same, this action has two helpful qualities:
You are investing more money, bringing you closer to your FI Number.
You are lowering your annual expenses, making your FI Number smaller and easier to attain.
The lower your annual expenses, the lower your FI Number. The greater the percentage of your income you invest, the shorter the time before you hit your FI Number. If you still want more details to consider while calculating your FI Number and determining how to achieve FIRE at a good age for you, read Financial Freedom: A Proven Path to All the Money You Will Ever Need by Grant Sabatier.
Retire Early
Listening to recent FI-oriented podcasts and financial experts more generally, I have heard considerable pushback to the “RE” portion of FIRE. Many folks like the idea of working towards a FI Number but are not in favor of retiring early, at least as they picture it.
The thought of retiring early leads many to picture sitting on a beach and drinking a piña colada for the remainder of your days, while your brain decays way beyond its years. Life becomes meaningless because there is no purpose.
I view that as a pretty sad perspective since your purpose should not be tied to your job. The purposes that speak to me the most are decisively unpaid, and I am eager to have the scheduling flexibility to spend greater amounts of time on these purposes as I am able to decrease my work obligation. For example, I would love to spend more hours of my day working to foster inclusivity in sports, an area that is decisively underpaid and undervalued. Even if you are fortunate enough to have a job that aligns with an area in which you feel purpose and decide to keep working, I think you have still achieved FIRE.
I view it as FIRE either way because I see retiring early as exiting the stage of life where you accept pervasive workplace inconveniences or injustices. Even if I work the same job the day after I hit my FI number, I am retired from intolerable work conditions. I am retired from BS from a supervisor or coworker, retired from saying yes to a project or task I do not want to do, and retired from working a schedule I do not want. You may work the same job, but hitting your FI number means you are retired from that job exerting any control over your life that you do not intentionally decide to let it exert. If you are FI, you are also RE because your coworkers lack that same power.
Your Personal FIRE Path
While we are in the heart of tax season right now, we are developing some FIRE resources for folks interested in pursuing FIRE or exploring the possibility of doing so. In addition to another FIRE-focused article, we will release the FIRE Self Planner later this spring. If you are eager to start your own FIRE journey immediately, here are my top book recommendations to get you going. The parentheses include why each book adds value unique to other FIRE books, in my opinion:
Your Money or Your Life: 9 Steps to Changing Your Relationship with Money and Achieving Financial Independence by Vicki Robin (This book is the “why” for the remainder of them. If you need inspiration, start here. It also is a truly simple and low-tech approach to tracking your finances and getting started.)
Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required by Kristy Shen and Bryce Leung (Think it is impossible to grow up truly dirt poor and go on to retire by age 30? This book shows you FIRE is possible regardless of your roots. It is also worth reading for the emphasis on geoarbitrage and the details about how Kristy and Bryce rebalance their portfolio–something even I am not good enough about doing!)
Financial Freedom: A Proven Path to All the Money You Will Ever Need by Grant Sabatier (This book has the most compelling math. It is hard to digest the numbers and decide to do anything other than chase FIRE. If you, or someone you know, does not trust the math behind FIRE, this is a terrific deep dive that is still easy to comprehend for anyone who is not a math enthusiast.)
Set for Life: An All-Out Approach to Early Financial Freedom by Scott Trench (This is the most systematic step-by-step guide that tells you exactly how to get a job where you make enough money to start your FIRE journey. This book also digs into creative housing situations more than the others since Scott house-hacked and is now the CEO of BiggerPockets.)
Whether you are already working towards FIRE, are considering whether it is right for you, or are leaning towards retiring later in life, many of the FIRE concepts can benefit your financial journey to establish more financial freedom in your life. Your financial plan should fit your personal financial goals and plans. If FIRE fits those goals, go achieve it.
*Why Planning to Retire Early Decreases Financial Risk explains options for withdrawal rates in more depth to show the different principals required to withdraw at different rates.
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