How can I be financially independent and retire early? It is a common question many ask when thinking about their retirement or future planning.
But in recent years, “Financially Independent to Retire Early,” also referred to as FIRE, has become a popular trend and spread like wildfire. For many millennials and Gen Z, this concept is more than just a trend—it’s a life goal.
The FIRE early retirement plan to maximize your golden and middle years—like your 40s and 50s. The FIRE movement provides you with the tools to push yourself early so you can take advantage of a longer period of retirement during which you are not required to work. You can also think that you love to work but need to pay better.
In this article, we will go through everything about how this retirement plan works, what it includes, and how you can plan to be financially independent early. But before that, let’s understand the FIRE movement.
The FIRE Movement: At a Quick Glance
As mentioned above, FIRE stands for “Financially Independent to Retire Early. Many people have started working toward a single goal under the FIRE movement. With this objective, they aim to save enough money to retire many years ahead of schedule, possibly even in their 30s, 40s, or even 50s.
You get flexibility and independence when you behave responsibly and resolve at a young age. You need to save a huge amount of money and allocate a significant amount of your salary to investments if you want to join this movement.
The book Your Money or Your Life by Vicki Robin and Joe Dominguez introduced the FIRE movement and inspired thousands of people.
A Basic Understanding of How the FIRE Movement Works?
The FIRE movement focuses on keeping enough money aside so that annual expenses can be covered by passive income from investments made over an infinite period. Currently, the majority of FIRE supporters are millennials.
Data says that 58% of them plan to retire before turning 65. To gain this kind of wealth ahead of the customary retirement age, you should be ready to live an unconventional lifestyle.
Six Steps to Become Financially Independent and Retire Early
Determine your FIRE number.
Setting your goal retirement income, which must last for at least 25 years with a 4% annual withdrawal plan, is the first stage in the FIRE retirement planning process.
Your FIRE number should be $1.75 million, for example, if you need US$70,000 per year to sustain your quality of living and funds for emergencies and leisure. For example:
$25 x $70,000 = $1,750,000
Your FIRE number, or the total assets required to retire early, is $1.75 million. With the four percent rule, you might take up to $28,000 a year with this amount.
Adopt a Fire Way of Life
When you follow the approach to becoming financially independent and retiring early, it fosters a disciplined attitude and a solid financial foundation. It encourages you to put aside as much money as you can for the future, which eventually results in a happier and more wealthy life.
The amount of money you should save also depends on how you want to spend and live in retirement. There are two ways that the FIRE movement tackles this: the coast and the barista.
Decades before they retire, coast FIRE enthusiasts generally save and invest a large portion of their FIRE number. They have enough saved up to “coast” through retirement once they reach their FIRE number. However, they decide to work reduced hours to leave room to follow their passion.
Increase and safeguard your savings.
Some members of the FIRE movement boost their income by taking on part-time jobs.
Under the FIRE movement, you put emergency funds ahead of investment opportunities. Your emergency fund should be around three to six months’ worth of money, set aside for inclement weather and unexpected incidents. After creating an emergency fund, FIRE members come up with plans to safeguard and increase their assets as per their objectives.
Buy Insurance
A lot of FIRE enthusiasts buy insurance to reduce risk and give themselves more financial security for their retirement aspirations. Over 50% of respondents to Milieu’s poll in Singapore and the Philippines currently make insurance investments.
Create a side source of income.
When you follow the FIRE method and wish to become financially independent and retire early, you should create a side source of income relying on compound interest and invest in hands-off instruments such as investment funds. The interest earned on the investment then supplements their retirement savings as passive income.
Engage in side job.
Acquire a new skill or start a side business to boost your income.
Taking on a side job is a good way to boost cash flow and hasten the path to financial independence for people who need that extra push to reach their objectives. This is particularly true for people who follow the FIRE method of baristas.
After quitting their full-time jobs, these people often utilize their newfound flexibility to save money and develop an investing portfolio to cover their basic expenses.
Here are a few more ways to become financially independent and retire early:
- The majority of FIRE movement adherents keep aside at least 50% of their monthly income for savings.
- The quicker someone achieves financial freedom, the more savings they can achieve. Those who are seeking FIRE often aspire to a minimalist lifestyle since it enables them to boost their savings rate.
- When you want to become financially independent, you can look for low-cost index funds. A few might even buy rental homes to generate passive income.
- In retirement plans like a 401(k), maximize employer matching. You don’t need to work for a dollar or reduce your expenditure to save it when your company matches it.
- To lower taxes on retirement income, make use of tax-advantaged accounts such as a Roth IRA.
- Investing in inexpensive index funds will yield better long-term returns than cash.
- Invest in properties that can yield a steady income, such as rental or commercial real estate.
- Pay off high-interest school loans, credit card debt, and expensive auto loans as soon as you can.
- As long as you can control your spending and avoid carrying a load, take advantage of credit card point programs.
- Invest in an old car and try to maintain it for as long as you can, rather than leasing a new vehicle every three years.
- Use a bicycle or another inexpensive mode of transportation to reduce your trip costs even more.
- If possible reduce your regular spending on things like your phone, cable, internet, and other services.
- Take advantage of the free entertainment choices available.
Quick Check Before Your Retire
Make sure to go through this list before you announce your retirement:
- You should have an emergency fund with three to six months’ worth of spending.
- Apart from your home, you don’t owe any high- or adjustable-rate consumer debt (credit card, personal loan, etc.).
- You have enough money saved up right now to retire at age 65.
- You should already be setting aside at least 15% of your salary for retirement.
- Have more cash on hand or be prepared to reduce spending to regularly allocate more funds to savings.
If you checked the boxes next to each of the above, you’re probably in a position to become financially independent and retire early.
