Menu #21: Cracking the code to early retirement with "FIRE"

STATS STACK 🥞

$15.7 million marked the median pay for half of the executives in a Wall Street Journal analysis, setting a new record for CEO compensation. This figure represents a significant increase from the previous year's median pay of about $14.5 million, with several CEOs earning over $50 million. Most executives saw pay raises of at least 9%, with one in four receiving boosts of 25% or more (Source: WSJ).

19 out of the 23 election years since the inception of the S&P 500 Index have shown positive performance. Historically, Elections have made no difference to long-term investment returns (Source: Morningstar)​.

61 is the average retirement age in the U.S., a number that has remained relatively steady over the past two decades, ranging from 59 to 62 since 2002. Interestingly, Americans consistently expect to retire five or six years later than they actually do. Gallup's annual survey highlights this expectation gap by comparing the ages at which retirees actually retired with the ages non-retirees expect to retire. (Source: Gallup).

DEEP DISH 🍕

Cracking the code to early retirement with FIRE

The traditional career trajectory, culminating in retirement at 65, is not a mandatory path. An increasing number of Americans are challenging this norm, aiming for early retirement to enjoy their golden years sooner. At the heart of this revolution is the FIRE (Financial Independence, Retire Early) movement, captivating those who dream of leaving the workforce in their 40s, or even their 30s.

What is FIRE?

FIRE is a lifestyle movement with the goal of achieving financial independence and the freedom to retire much earlier than traditional retirement age. Advocates of FIRE aim to save and invest aggressively—typically between 50–75% of their income—to enable early retirement, possibly as early as their 30s or 40s.

The strategy involves minimizing expenses while maximizing income to expedite the journey towards financial independence. The essence of FIRE lies in the power of choice—it’s about attaining the financial freedom to work on your own terms.

Extracting wisdom from FIRE

While opinions on the FIRE movement may vary, its principles of financial discipline offer valuable lessons:

1. Early retirement planning: FIRE prompts young people to contemplate retirement planning early. Surprisingly, a significant portion of the younger workforce lacks retirement savings. Dreaming about retirement and setting actionable goals can transform those dreams into reality.

2. Expense management: Adherents of FIRE are meticulous budgeters who distinguish between wants and needs, ensuring their spending aligns with their financial goals. This disciplined approach to budgeting can significantly accelerate progress towards financial freedom.

3. Income augmentation: To achieve early retirement, boosting income is essential. This might involve advancing in your career, nurturing a side hustle, or investing in income-generating assets. The pursuit of additional income is critical for amassing the wealth needed for early retirement.

4. Prioritizing saving and investing: Fundamental to retiring early is the commitment to save and invest a substantial portion of your income. While FIRE enthusiasts advocate for an extreme saving rate, beginning with a 10% investment of your income into retirement accounts is a more attainable starting point for many.

Challenges and considerations of FIRE

FIRE is not without its hurdles, notably the need for a substantial income to support aggressive saving and investing. Yet, building wealth is feasible at any income level with time and consistency.

Crafting your early retirement blueprint

Regardless of your stance on FIRE, achieving early retirement is an ambitious goal that requires a strategic plan:

1. Eliminate debt and build an emergency fund: Begin by paying off debt and establishing a robust emergency fund (we recommend 6 months of expenses) to lay a solid foundation for your investment journey.

2. Invest 10% of your income: Start saving for retirement by allocating at least 10% of your gross income to retirement accounts, focusing on mutual or index funds with a strong performance history.

3. Accelerate mortgage repayment: Concurrently with investing, aim to pay off your mortgage early. This significant milestone can propel you towards early retirement by freeing up more funds for investment.

4. Expand your investment horizon: With no mortgage and a habit of investing 10% of your income, consider increasing your investment rate. This could make investing 50% of your income feasible, significantly impacting your retirement timeline.

5. Establish a bridge account: For those retiring before traditional retirement age, a taxable investment account can serve as a bridge account, providing income until retirement funds become accessible without penalty. Remember, if you withdraw from your 401K or IRA before the age of 59.5, you’ll have to pay a penalty.

The FIRE movement, with its radical saving and investing strategies, may not align with everyone's financial situation or life goals. However, its core principles—financial discipline, aggressive saving, and investing—offer valuable insights for anyone aspiring to achieve financial independence and a comfortable retirement, whether early or at a traditional age.

By adopting a tailored approach to these principles, you can devise a plan that not only aligns with your financial capacity and goals but also empowers you to take control of your financial future, with or without embracing the full FIRE methodology.

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Digital bites we think you’ll like

FIRE success stories — Five years ago, VICE interviewed several people embarking on the early retirement journey. At the time, they were all thrilled about their newfound freedom. However, wild schemes and dreams don't always pan out as expected. So, VICE decided to check back in to see if their fantasies were becoming reality or if their FIRE plans had gone up in smoke.

Going car shopping — The 10% rule is your ticket to balanced car spending, suggesting you allocate no more than 10% of your annual income to automotive expenses. For example, with a $60,000 salary, keep your car costs under $6,000 a year or $500 a month. High earners with solid savings might stretch to 15%, while those on tighter budgets should aim to spend even less.

From FIRE to flameout — Former NFL wide receiver Antonio Brown, who earned over $80 million during his 12-year career, filed for bankruptcy, owing nearly $3 million to at least eight creditors. Brown's bankruptcy filing claims less than $50,000 in assets and an inability to pay several six-figure civil judgments, with additional debts including hundreds of thousands in credit card debt.