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If you’ve spent much time reading financial blogs, you’re probably at least remotely aware of the FIRE Movement. “FIRE” is the abbreviation for Financial Independence, Retire Early. It’s a popular topic and even a dominant theme on financial blogs.

The FIRE movement got started roughly around 2000, and it’s been gaining ground ever since. You can and should participate in it at any stage of your life, and whatever your financial situation. Even though the emphasis is often placed on the retire early side, the more important concept may be financial independence part.

And who doesn’t want to reach that?

What is the FIRE Movement?

The FIRE movement is made up of people who are committed to the idea of reaching financial independence and/or retiring much earlier than the more traditional ages of 62 or 65. Some are working to retire by 50, and many in their 40s or even 30s.

In the podcast, Rob uses the example of Clark Howard. His life and journey perfectly exemplify the FIRE movement, even though he reached financial independence well before the movement spread.

Most people know Clark Howard to be well-known and successful. But what they don’t know is that it’s not how he started out. When he went to college, his parents couldn’t afford to pay–they had fallen on hard times. Clark went to night school and worked his way through college.

Once he started working, he decided to live on every other paycheck. What that really meant was that he was banking 50% of his income. He used the money saved to buy a foreclosure, and then to start a travel agency. After a few years, he sold the travel agency, and was able to retire and live on the beach in Florida at the age of 31.

Circumstances eventually brought him back home to Atlanta, where he started a radio program on personal finance. But now he works only because he wants to and not because he has to. Clark is in his 60s now, but he continues to live beneath his means.

The four key takeaways on the FIRE movement from the Clark Howard story are:

  • Anyone can adopt the strategy.
  • Live beneath your means.
  • Save and invest more money than you ever thought you could.
  • Create the option to retire, or to simply change direction in your life.

Those are the four basic pillars of the FIRE movement.

FIRE by the Numbers

I hope you don’t hate numbers, because in a real way, the FIRE movement is all about numbers. Or more particularly, changing your numbers to get them working in your favor.

Rob describes a popular FIRE calculation. He says you’ll reach financial independence when your savings and investments reach 25 times your annual income.

Based on that formula, if your annual income is $100,000, you’ll need $2.5 million. If your annual income is $50,000, you’ll need $1.25 million.

Why 25 times annual income?

It’s not an arbitrary number. It’s based on an annual withdrawal of 4% of your portfolio, often referred to as the safe withdrawal rate.

Various backdated surveys have confirmed that if you withdraw 4% of your portfolio each year, you’ll never outlive your money.

If you earn $100,000 per year currently, and you amass $2.5 million, 4% of $2.5 million works out to be $100,000 per year. Put another way, your portfolio will be large enough to replace your annual earned income.

Now as we all know, it’s not possible to get a completely safe 4% return on your money in today’s interest rate environment. Another important consideration is that you will actually have to earn more than 4% to make the strategy work.

It has to do with inflation. It won’t stop the day you reach financial independence or even when you retire. For that reason, your investment portfolio will have to accommodate the inflation factor.

Investing Your Way to Financial Independence, Retire Early

To do that, your investment portfolio may include a large investment in stocks. That’s because the return on your investment will need to be high enough to support withdrawing 4% per year, as well as growing your portfolio to keep pace with inflation.

Here’s how it works. According to Vanguard, a 70/30 mix of stocks and bonds has had an average annual rate of return of 9.3% since 1926.

If you withdraw 4% each year for living expenses, your portfolio will continue to grow by more than 5% per year. Since inflation has been running between 2% and 3% per year for the past couple of decades, your portfolio would actually grow at a faster rate than inflation, even when taking 4% annual withdrawals for living expenses.

It’s important to understand that this is a long-term investment strategy. There will be years when the stock market is down, and you’ll have to be prepared to hold your positions through the decline. But over time, the market always bounces back, and that’s the angle you’ll be playing.

How to Reach Financial Independence – It All Centers on Saving Money

This is the most critical component of the FIRE movement. You’ll need to be able to accumulate enough savings to enable you to live without needing to work.

But there’s also a sub-part to FIRE, and that’s getting out of debt. In fact, a common thread with FIRE participants is climbing out of debt. Some are even motivated to pursue FIRE because of debt, at least initially.

That’s hardly surprising. Debt has three negative influences on your financial situation:

  • Debt payments limit the control you have over your income.
  • They reduce the amount of money you have for savings. In extreme cases, they can make it impossible to save money.
  • It raises your financial stress level.

It’s easy to see why debt is such a powerful FIRE motivator.

If you have a substantial amount of debt, paying it off will need to be part of your FIRE strategy. It will likely mean your savings process will be slower while you’re paying off debt. But don’t let that slow you down. You’ll see as we go forward, getting out of debt eventually helps with the savings process.

The Mechanics of Saving Money

If you can save 20% of your annual income, there’s a good chance you’ll reach financial independence within 30 years. If you can save 30%, you can probably reach it within 20 to 25 years. And based on the Clark Howard example, it really is possible to live on 50% of your income and save and invest the other half. In fact, the older you are, the higher the percentage will need to be.

To save money in any significant amount, you’ll have to learn to live beneath your means. For example, if you make $100,000 per year, and you can reduce your living expenses by $10,000, you’ll achieve two very important objectives:

  1. You’ll make $10,000 available for savings and investing (or debt payment), and
  2. You’ll lower the portfolio goal you’ll need to achieve to reach financial independence.

Taking a closer look at the second point, if based on a $100,000 income you need to save $2.5 million to reach financial independence, lowering you’re living expenses by 10% will also lower the amount of money you’ll need to accumulate. You only need to accumulate $2.25 million.

That’s still a lot of money, but I hope you can see where this is going. The arrangement becomes even more pronounced if you’re able to cut your expenses by 20%, 30%, 40%, or 50%. It’s difficult, but it is doable, especially since paying off debt will be a big part of your expense reduction strategy.

Reducing living expenses also has an important intangible benefit. As you begin cutting expenses, you’ll realize you can survive on a lot less. An unexpected benefit is that as you reach FIRE, stuff becomes less important. It’s replaced by FIRE itself.

Is There a Way to Achieve FIRE Without Becoming a Multi-Millionaire?

There are, but having a large investment nest egg is the foundation of the movement. For example, you may find that you are able to live on investment earnings from a $500,000 portfolio if you have other income sources.

To be consistent with the FIRE movement, those other income sources will need to be passive or largely passive in nature.

Some examples include:

Rental Real Estate

This involves purchasing rental property that will generate sufficient rent to at least cover your operating expenses. Overtime, rents will increase, and you’ll begin to turn a profit.

Once your mortgage is paid, most of the rental income will be pure profit. It may take you 15 to 20 years for this to happen, but that’s the usual time horizon for FIRE.

Additional benefit: If you get tired of the rental real estate game, you can sell the property once the mortgage is paid. You’ll then collect a large windfall that can be added to your FIRE portfolio.

Become a Silent Business Partner

Do you know of a successful small business that may need some capital? Make an investment in the business in exchange for a share of ownership and the profits. You’ll make money without being actively involved in the business. If the business really takes off you may be able to sell your stake for a lot more than you paid for it. That’ll be more money to add to your FIRE portfolio.

Sell a Product

Entrepreneur Tim Ferris, author of The Four Hour Workweek has created a globetrotting lifestyle for himself, working only a few hours a week. He does this by starting and running product-based businesses, that are so automated they essentially run themselves.

This can be an option if you have an entrepreneurial streak. And when you’ve had enough of running the business, you may be able to sell it for a big chunk of money, similar to selling a investment real estate or a business stake.

Create an Online Course or an E-book

Is there a topic or skill you’re an expert at? You can monetize that by creating a course or an ebook. Once you have it up and running, it can generate passive income with little or no input on your part.

There’s even a service that will help you create an online course, Udemy. You can market and sell the course on Udemy, or create and promote your own dedicated website.

If you want to take this concept to a higher level, you can do this by offering an affiliate program. That’s where your course or e-book is offered for sale on other websites and blogs. The advantage of this marketing method is that it will cost you nothing up front. You’ll pay each site owner a percentage of the sale price of the course or ebook upon sale.

With affiliate participation from many websites and blogs, you’ll have income rolling in from multiple sources. And once you have it all up and running, there’ll be no additional work on your part–unless you want to create another ebook or online course.

These are just a few of the passive income strategies that can create additional income to support your FIRE portfolio.

What You Should Consider – Pros and Cons

With any venture in life that’s worth pursuing, there are both pros and cons.

On the Pro side, it’s a major advantage to reach a point in life where you’re working for the fun of it, and not to earn a living. There’s also the advantage of having fewer financial concerns. You’ll always have money worries, no matter how much you have. But when you reach the point of financial independence, the day-to-day stresses are largely gone.

There’s also the fact of being able to retire early in life, while you’re still young enough to enjoy it. Think about it–you can work when you want, and take off when you want. It may be short spells of retirement, followed by short working assignments. You can take a few months and travel the world, or search for new and stimulating experiences. And you can choose the work you want, even doing the kind of work you couldn’t do when you were tethered to your job to earn a living.

As good as this all sounds, the FIRE Movement does have a few Cons:

  • You’ll have to learn to live well below your means. That’s not impossible, but it is an adjustment.
  • You’ll have to be a committed investor, particularly when the market isn’t behaving.
  • Health insurance is a major concern. The Affordable Care Act has made health insurance more widely available, but it’s even more expensive. You’ll have to budget health insurance premiums into your FIRE strategy.
  • Long-term care insurance. This is a growing concern throughout the population, but once you reach FIRE status, you’re largely self-insured for long-term care. You can purchase a long-term care insurance policy, but they have limitations and they become progressively more expensive as you get older.

The Biggest Potential Con: The 4% Rule

Like anyone in retirement, the biggest concern is the potential to outlive your money. As Rob discussed in the podcast, to earn more than 4% on your investments will require a substantial portion of your portfolio being invested in stocks.

This opens the concern about a serious decline in the stock market. If you have 70% of your money in stocks, and the market takes a 30% drop, your total portfolio will fall by more than 20%. You’ll have to be prepared to hold on through the drop. History shows the market will bounce back, but waiting out the decline can be a nail-biting event. It’s something you have to be emotionally and financially prepared for.

One way to deal with this may be to have an emergency fund large enough to provide living expenses for at least one year. During a serious market decline, you could live out of your emergency fund so that you don’t further erode your portfolio by making withdrawals. Still another option is to have a career you can fall back on, if only temporarily.

You’ll have to decide what your backup plan will be to live at peace with a bear market. It doesn’t mean your FIRE life will come to an end. But it may require making some adjustments to deal with the fear factor. Rest assured you will experience several bear markets if you retire early, but especially if you’re in your 30s or 40s. It’s something you need to anticipate.

Who is the FIRE Movement For? Can You Still Make it Work in Your 40s and 50s?

The FIRE movement is really for anyone and everyone. Even if you never plan to retire, reaching some level of financial independence should be a goal. Eventually you’ll want to get to a point where you’ll have more options in life, including the type of work you’ll do. You’ll also want to get to where there’s less financial stress.

The target market for the FIRE movement often seems like 20-somethings, and it certainly is easier if you begin then. If you do, there’s an excellent chance you can retire by the time you’re 40, or thereabouts. If you’re in your 30s, you may not reach your goal until you’re 50.

But does that mean you’re out of luck if you’re in your 40s or 50s? In a real way, I think pursuing FIRE becomes even more important at that age range. After all, you’re going to have to come up with a way to retire by the time you’re 65 or 70. That will require getting into high gear in your 40s or 50s. If you’re already past 40, you’ll need to get started today.

Remember, FIRE isn’t just about early retirement. At a minimum, you should want to achieve financial independence no later than age 65 or 70.

Redefining Retire Early

Pete of Mr. Money Moustache may have put it best when he said, ”financial independence is the goal, early retirement is the carrot”.

But that doesn’t mean early retirement is the ultimate destination of FIRE movement participants. I suspect it isn’t for most. It seems most of the FIRE people who have reached their goal don’t actually “check out”. Instead, they do what they love, and continue earning money from it. An example is blogging about financial independence and early retirement once you’ve achieved it. After all, who is a better coach than someone who has actually done it?

Even though continuing to work in some capacity to earn money technically isn’t retirement, retirement isn’t the ultimate goal. But there’s a big difference between doing what you want, when you want, and working a 9-to-5 job. That may be more important than going the formal retirement route. In fact, it may be that people who achieve FIRE have so much energy from their success that they’re more interested in moving onto the next adventure, than retiring.

I also think that full retirement shouldn’t be the goal if you reach financial independence in your 30s or 40s. You’ll still have another 50 or 60 years to provide for yourself, so I wouldn’t plan on retiring that early and doing nothing.

That’s the model I see most in the FIRE movement. It’s more about creating work options that aren’t so income dependent, and to lean more toward what you’re passionate about.

That’s not a negative outlook either. The whole notion of retirement is changing. Today, people have the ability to work from home or anywhere there’s an Internet connection.

How to Begin Your FIRE Journey

The most important step is getting started. That means committing to lowering your living expenses. That can seem difficult at the beginning. We normally think of cutting living expenses as being a sacrifice, but it really isn’t. We have a remarkable ability to adjust to circumstances, but we build the sacrifices up in our minds. If you can get past that, you can make a serious effort.

Start with a relatively modest goal, like cutting your expenses by 10%. Use the extra savings to either pay down debt or build savings and investments. You can increase your savings each year. For example, increase it to 15% in the second year, and 20% in the third. The higher you can get the savings percentage, the more quickly you’ll reach financial independence.

Now, you’re not going to reach financial independence simply by saving money. The interest being paid on fixed income investments is just too low. That means you’ll have to have a significant investment in stocks. If you’re younger, that might mean 70% or 80% in stocks. But even if you’re in your 50s or 60s, you’ll still need to have at least 50% or even 60% in stocks.

Over the many decades, stocks have easily outperformed fixed income investments. This is important not only so that you will be able to withdraw at least 4% of your portfolio each year, but also so that you can keep pace with inflation. Inflation means you’ll have to earn more than 4%, and the only way to do that is with a large investment in stocks.

Much like cutting back your living expenses, investing heavily in stocks may also require an emotional adjustment. But if you can make it, you’ll be halfway there.

Final Thoughts on Financial Independence, Retire Early

Saving 20% to 30% will be difficult for most middle-class households, but it is doable. If you can condition yourself to focus on the benefits of FIRE, rather than the sacrifices, the need to do it may become crystal clear.

FIRE can benefit you by a combination of a simpler life, a high savings rate, and simple investing. That’s an important point as well. There’s no exotic investing formula needed to reach financial independence. It’s mostly a matter of committing, then saving and investing money in the standard investment vehicles, like index funds.

Rob likes to say, ”The best thing money can buy is financial freedom”. And that’s what the FIRE movement is all about.

Achieving FIRE is largely about changing your mindset. If you begin to change the way you think, you’ll spark the flame, lighting your way to an exciting journey towards financial freedom.


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