What is the financial freedom early retirement (FIRE) movement?

(If anybody has any questions or queries about this article or investing for financial freedom in general, please below please contact me )

FIRE stands for financial freedom and early retirement. It is becoming popular in the UK, Australia, Canada, India, China and elsewhere.  It has been written about on Reddit and the New York Times.   Young people are looking at calculators online and books on the subject.  This article will explain more about the FIRE movement.

What is FIRE? FIRE explained 

The FIRE movement is the idea that we can retire early and be financial free at a relatively young age.  It doesn’t mean the ability to get rich, although that could be the case for some people.

The main driver behind the FIRE is the ability to have more freedom, choice and time.

Most FIRE advocates aren’t calling for an extreme lifestyle of 120 hour weeks and only getting rice so we can all retire at age 32.  What most are claiming, however, is that it is possible to have more freedom by making sensible investing and spending decisions.

Why has FIRE become more popular recently?

There could be 1001 reasons.  Let me speculate about the reasons.  Firstly, it isn’t something completely new.  The hippies tried something similar decades ago, but they were often more preoccupied by unconventional living and anti-materialism.

Many people who are part of the FIRE movement are current, or ex, lawyers, investment bankers and executives.

I was watching a documentary called the Minimalist on Netflix a few weeks ago. One of the founders of the podcast is a former investment banker.  He isn’t preaching anything extreme.  He uses an Apple products, and has treats.

However, after spending decades reaching his dream of partnership at a top New York City financial institution, he cried.  He realized that he could never realistically walk away from that type of money ever again.  He started on a new journey.

The lack of meaningful jobs is just one thing driving the minimalist movement. Another thing is the Global Financial Crisis of 2008 .

Many people saw the devastation that caused.  Whilst retirement investment quickly recovered a few years later, many people lost their jobs. The desire to be in control is a basic human desire, and more and more people were realizing that we can’t depend on governments to help us throughout life.

The world is a much more complicated place than it was during the Cold War.  Before China and India opened up in the late 1970s, more than half the world’s population wasn’t competing.

We are now in a much richer, but also competitive, world. Governments can’t automatically guarantee certain things like pensions for people, especially in the light of aging populations.

The fact that universal basic income (UBI), which isn’t a new idea, has become popular again at the same time as FIRE, shouldn’t surprise anybody. They are different concepts.  One is advocating for government intervention, whilst the other is arguing for the individual to take action. Ultimately, however, they are both aiming for similar objectives.

Finally, modern parents, society and the media has probably also contributed to the spread of FIRE.

What are some of the things we are taught whilst 18? Enjoy your life because one day you will have a mortgage and kids!  I doubt you kids will even have a pension when you are 65.

These kinds of things have been told over and over again for 20-30 years, so most people under 45 reading this are probably familiar with such sayings.

People want more from life than working all the time, with few promises at the end. That doesn’t mean that all FIRE movement advocates don’t want kids and all want to retire at 30.  However, 99% of people joining the movement want to have the ability and freedom to retire or semi-retire in their 30s or 40s if they wish to.

Let’s face it, who wouldn’t want that freedom? Even if you love your job, would you want to go to work tomorrow if you became sick and incapable of doing work?  Would you want to continue working if your industry radically changed or your boss became a bully? The future is uncertain, so it is always better to plan to gave choices.

How is it possible to retire early? 

Retiring in your 30s or 40s sounds ambitious.  How can this be achieved?  There are numerous parts to the equation.  Firstly, having at least some income helps of course.  It isn’t easy to create a surplus on unemployment benefits.

The second component is good spending habits. If you have an average income or above and good spending habits, you will have a surplus every month and year.

With this surplus, you need to make the correct investment choices so that the surplus compounds.  Saving your way to early retirement isn’t feasible unless you are ultra high-income, as banks typically pay below inflation.

Markets are the best way to compound your wealth long-term, but some government bonds are also needed for diversification.

Only you have accumulated enough money to retire, you need to focus on the fourth and final component. This is proper budget planning and not withdrawing too much income.

What is the 4% rule? 

The 4% rule isn’t new.  It has been written about in countless academic papers over the years.  I will try to simplify it here.  Basically, if you have $100,000 invested now, you can withdraw $4,000 of income for life adjusted for inflation.

There are some caveats.  You do need about 25%+ in government bonds to make it safe, and the rest of the money needs to be invested in markets.

What researchers have made is that this basic rule works even during extreme times like the 1929 and 2008 crashes.

As markets have historically risen by 10% in the US and some other countries (and 6.5% above inflation), withdrawing 4% per year also allows for a conservative buffer in case markets under perform.

The history of markets has been a rising tide, but the line isn’t straight. Therefore, whilst 4.5% or even 5% is often a safe withdrawal rate, 4% has been shown to be safe even during turbulent times.

A simple examples of accumulating and the 4% rule 

Let’s imagine we have a man called Gary who is 25.  He has no savings or investments, but has a job paying him $35,000 a year after tax in Canada, the US or the UK.   He lives with his girlfriend and has no kids.  Therefore, his costs are fairly low as he splits the cost of the rent and bills.  He also lives within walking distance to work, so doesn’t need commuting costs.

Depending on the cost of living in the city he is living in, he may be able to save $15,000 or more.

For sake of simplicity, let’s say Gary saves $1,250 per month.  The markets produce 6% after inflation.  Even if Gary doesn’t get an extra pay rise or inheritance, he will have over $200,000 in ten years, $360,000 in 15 years or close to $570,000 in twenty years.

And remember these figures are adjusted to inflation.  Imagine now he gets a $20,000 inheritance when he is 26, in one year. He would now have over $630,000 in twenty years.

This example is based on some pretty conservative figures, as realistically Gary’s wages will probably increase with age.  Notwithstanding this fact, you can see how realistic it is for Gary to accumulate a large pot of money by age 35-45.

Based on the example of $630,000, Gary could withdraw $25,200 per year adjusted for inflation and not run out, or about 70% of his post-retirement salary.

There are other ways to retire early, without needing an investment.  Affiliate marketing, Google Ad-sense and writing e-books like I did have all been listed as possible revenue streams for early retirement.

However, I would offer a word of cautious. The 4% rule has been tried and tested. There is 200+ years of tried and tested academic data on how markets perform.  In comparison, these new methods of making money online aren’t tried and tested, and rules can often change.

Numerous authors and affiliates have been banned by Amazon or other firms. That doesn’t mean you shouldn’t try these methods of earning money, but just beware of the positives and the negatives of each method.

Having side incomes and reinvesting this side income towards your early retirement pot is probably safer, than relying on this money in retirement.

Imagine you are earning $30,000 a year from Google Adsense and Amazon Self Publishing and then suddenly Adsense change their policies on revenue sharing and your income drops to close to $10,000 overnight?

Retiring overseas or traveling 

Some discerning readings are probably already asking a basic question. Namely, how possible is it to retire with $25,000 a year?

If you are living in a city where rents cost $2,000 a month, then retiring on 25k clearly isn’t possible.

However, many members of the FIRE movement travel and/or emigrate overseas.  Thailand, Indonesia, Mexico, Spain and Portugal are just some of the countless places where you can live like a king on a limited budget.

Take Chiang Mai in Thailand as an example.  If you are single, you can rent a condo with a pool and gym for $500 a month.  Or $250-$350 for a couple who share a $500-$700 place.  A $1,500-$2,500 per month monthly budget, is generally speaking enough for most people in such a location.

What are the biggest misconceptions and mistakes people make with FIRE?

Too many, but here are just a few:

1.  Assuming it is a young person’s movement. It is popular amongst young people, but it isn’t exclusively for young people.
2. Assuming it is a radical movement. It isn’t radical for most people, although there are some members who may take spending habits and saving to the extreme
3. Panicking when markets are down. This is a common mistake new members of fire make.  Ultimately, to compound your surplus, you need to be invested in markets.  Markets have performed over 200 years in the US.  The Dow Jones was air 66 in 1900 and hit 26,800 this year.  That is a 10.5% gain.  The Nasdaq has produced 12.5% over the last 25 years. However, markets don’t go up or down in a straight line. 10% is just an average. Since 2009 markets have produced much better than 10% just like the 1990s, whilst 2000-2009 was a lost decade.
4. Trying to time markets. Time in the markets beats timing the markets. If somebody could time markets there would be somebody twice as wealthy as Buffett. Many have gotten lucky before, but that is gambling.  Long-term, you can’t time markets for 40-50 years.
5. Speculating.  Countless people get seduced by get rich quick schemes and speculation. Stock picking, sector picking and new fads like Bitcoin are just some of the examples.  That doesn’t mean you can’t make money this way. A very small number of stock picking (2% over a 50 year period) do beat the market, but that doesn’t make it rational for you to try as well.
6. Not staying the course.  This is self-explanatory but there may be bad and good years.  However, like anything worthwhile, it makes sense to keep on track.
7. Relationships. You don’t need to be a relationship guru to work out that somebody who wants to keep up with the Jones’ won’t be compatible dating somebody who wants to retire by age 35.
8. Being too extreme.  Ultimately, it is great when people are motivated.  However, think about something for a second.  How many people last in the gym after signing up on January 1 after Christmas and New Year binge eating and drinking?  Hardly any.  That is probably because they aren’t enjoying the gym or are trying to go everyday.  Being realistic about spending habits will still allow you to retire early, without thinking that the process is like being in a prison.  It is still possible to have loads of fun whilst spending sensibly.
9. Thinking you need a high salary to start. You don’t.  Even if you are an 18 year old student earning $100 a week living at home with your parents, it is worthwhile to start small.  Then gradually you can save and invest more and more, like a process of compounding. Remember too that every penny saved and invested at 18, is more valuable than the same money will be at 30 or 40
10. Thinking it is too late. Many people think 40, 45 or 50 is too late to start in this process.  But it isn’t always too late at all.  Sure you may need to make extra sacrifices and take the process really seriously, to meet your goals and ambitions, but what’s the alternative? Having a part-time job you hate at 75?
11. Thinking it sounds unrealistic to get wealthy.  Ultimately get rich slow or even relatively slower isn’t anywhere near as difficult as get rich quick.  Besides, as previously mentioned, you don’t have to be wealthy to retire early. You simple need to have enough money to make the 4% rule work.
12. I don’t know anything about investing or finance, so how can I start?  We all started somewhere. Even Warren Buffett wasn’t knowledgable about investing at age 5!  You can always outsource the investment process and there are plenty of good books for beginners.