According to a recent Gallup poll, the age when people expect to retire is creeping up — from 62 in 2002 to 66 in 2022. If the mere thought of working that long makes you shudder, don’t worry; there’s hope. And it’s spelled F-I-R-E.
Financial Independence, Retire Early (FIRE) is a philosophy that was popularized in the early 90s. It was then rediscovered by high-net-worth Millennials roughly a decade ago.
The concept of FIRE is one of extreme frugality. Instead of the 10% to 15% in annual savings recommended by most financial planners, FIRE adherents save 50% to 75% of their yearly income. Here’s how these strategies compare:
Saving 10% annually, it takes nine years to save one year of living expenses.
Saving 50% annually, it takes one year to save one year of living expenses.
Saving 75% annually, it takes four months to save one year of living expenses.
The Rule of 25
The Rule of 25, a core tenet of FIRE, says you must save 25 times your annual expenses before you can consider retiring.
Monthly expenses X 12 = annual living expense X 25 = your target FIRE number
If your monthly expenses are $5,000, you multiply that by 12 to get an annual living expense of $60,000. Multiply that by 25, and you’ll have a target FIRE number of $1.5M. This is the number you’ll need to save in order to retire early.
The 4% Rule
The 4% Rule is a recommended guideline for anyone saving for retirement. Financial experts say as part of a 30-year retirement plan, retirees can withdraw 4% of their savings in the first year and then adjust for inflation in future years as necessary.
Referencing the 75% savings formula above, it would take fewer than ten years to accumulate 25 times the average annual living expenses. So, if you’re in your 20s or early 30s, it’s entirely possible you could retire by 40.
The 3 types of FIRE
Because saving 75% of one’s salary can be too big a burden for some, there are three classifications of FIRE:
Fat FIRE is for a retirement where you won’t have to skimp. It’s for those 75% percenters who are making sacrifices today so they won’t have to make as many later in life.
Lean FIRE is more of a minimalist approach. It’s for those who are able to save roughly 50% now in exchange for a modest yet satisfying life free from work.
Barista FIRE is a bit of a hedge. It’s for someone who wants to retire from full-time work at a younger age but is OK having a part-time job with medical benefits (like those offered by Starbucks). Barista FIRE retirees can leave the workforce before they’ve banked a million dollars because they can count on roughly $30,000 in salary to help stretch their savings.
A word of caution
The reason most wait until their mid-to-late 60s to retire is entirely pragmatic: full Medicare and Social Security benefits aren’t available until ages 65 and 67, respectively. Those who retire as early as 40 will have to contend with the high cost of health care insurance and medical care.
As a safeguard against this, Jeske — who’s clearly a pragmatist — advocates for saving 30 to 40 times your annual expenses (think a Rule of 30 or 40 vs. 25). For those with $60,000 in annual expenses, that could mean needing between $1.8M and $2.4M in savings before retirement is possible.