The FIRE (Financial Independence Retire Early) approach can help you to set aside money for your retirement or even retire early. This guide to the FIRE movement will help you to understand the principles behind the approach and how it can help you to achieve financial independence.
Knowing when and how to start investing, and what to invest in, can be a daunting prospect. A FIRE investing approach can simplify matters because it encompasses income, expenditure, and investments. Like all investing, it doesn’t offer any guarantees, but its distinctive approach will suit many.
What Are the Different FIRE Methods?
The FIRE methodology can be broken down into four subcategories which will help those using it to pick their personal best fit approach to gaining financial independence.
There is some overlap between the different types of FIRE approach, and as lifestyles and investment aims change over time, moving between them can also be considered.
Lean FIRE
This method involves minimising living expenses to below average over the long term and has an aggressive target of saving up to 70% of your annual income. Another Lean FIRE target is having savings that are 25 times annual expenses at your designated retirement age.
Tip: Adoptees of Lean FIRE are in it for the long haul, as living frugally continues into retirement.
Fat FIRE
In contrast to the Lean FIRE variation, with Fat FIRE, you are planning on having higher-than- average expenses once you reach early retirement. It also incorporates the possibility of life events, such as starting a family resulting in there being periods of higher-than-average spending before reaching retirement age.
Barista FIRE
For those to whom extreme savings seem, well, extreme, consider this variation as “part-time FIRE”. Most notably it factors in the possibility of remaining in some form of employment once you reach retirement age.
Coast FIRE
Here, the concept is that you can retire early by saving and investing aggressively from an early age. After you’ve built up a substantial investment portfolio the compounding effect will mean that the portfolio continues to snowball in size and you can “coast” into retirement.
FIRE investing involves taking a more holistic approach to wealth management and incorporates household income and expenditure as well as out-and-out investment decisions involving stocks and other types of assets.
Tip: With the Barista FIRE and Coast FIRE versions, savings can be used to support achieving life goals other than early retirement.
How can this help you to potentially retire early?
FIRE investing allows you to calculate how your financial situation needs to be managed to achieve the aim of financial independence. It starts by deciding at what age you would like to retire and working backwards.
The main variables to consider are savings rates, income, risk appetite regarding investments, current age, health, and target retirement age. Fans of Fat FIRE, Barista FIRE, and Coast FIRE may also factor in potential life-altering events such as career breaks which may occur at intervals along the long-term plan.
FIRE planning considers all of the factors that will determine if you can retire early, and at what age. It also maps out how users can plan to prioritise different elements of their financial well-being. There are many variables in play and FIRE investing plans operate over an extended period of time which means that the FIRE investing approach is not guaranteed to help you meet your targets. But, it does offer a framework to help you set out with a clear plan.
Tip: FIRE planning might involve taking on a side-hustle to boost income.
Other ways to potentially be financially independent
If the aggressive saving of the FIRE approach isn’t for you, there are other ways to achieve the aims of early retirement and financial independence.
This means that many of the principles that are found in the FIRE method are also used in “traditional” financial planning schemes.
The main difference is that the FIRE approach offers a clearer project plan. It’s also the case that traditional retirement plans, which have a less aggressive approach to saving, require other variables to be adjusted if the goal of early retirement is to be achieved.
One option open to anyone making a life-time financial plan is to adopt a more aggressive approach to investing. This approach runs in parallel to the Coast FIRE approach and relies on compounded returns. It is a better fit for younger investors as they have more time to make compensatory adjustments to their life-plan if things go wrong.
Tip: Leading a healthier lifestyle is never a bad thing and minimising health care costs also improves your net wealth.
It’s also possible to make life changes in terms of the “income” variable. Investing in your own “human capital” and securing a pay rise means that the percentage of your total income that you need to save is lowered.
An alternative approach is to expand on the Barista FIRE idea and move into a career that gives you greater satisfaction, more work-life flexibility, or facilitates working to an older age so that adjusting retirement age upwards is more attractive.
Final thoughts
FIRE is a useful planning tool that has the potential to help people achieve financial independence or benefit from devoting some time to establishing their life goals. Saving and investing isn’t new, and no investment scheme guarantees success, but FIRE provides a useful well-structured roadmap.
It also chimes with the growing trend of cutting down on personal consumption for ethical reasons. As Vicki Robin, one of the pioneers of the FIRE movement states: “He who knows he has enough is rich”.
Learn more about different investment approaches by exploring the eToro Academy.
FAQs
There’s no getting away from the fact that FIRE is based on classic investment principles. But, the main benefit of the FIRE approach is that it breaks the topic of retirement planning down into bite-sized pieces, and supports those looking to follow a clearly laid-out plan that can be structured to suit individual needs.
Choosing a best-fit form of FIRE involves establishing your long-term investment and lifestyle goals and working through that process is a valuable experience in its own right. Once that is done, there are a range of FIRE programs to choose from, with there always being the option to switch from one to another over time as life-events pan out.
A lot of the interest in the FIRE approach stems from fans of the system using social media to share how it helped them gain financial independence. The program involves a long-term commitment to financial planning, which is harder than making a short video to share online, but there is strong anecdotal evidence that FIRE can be successful.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.