Liberty has never come from the government. Liberty has always come from the subjects of it. The history of liberty is a history of resistance.Woodrow Wilson
I started talking with my wife about this whole FIRE thing, and she tells me, “I don’t really know what you’re talking about. What is FIRE?” I took some time to explain it, and then realized that I shouldn’t assume you, my reader, knows what I’m talking about either. Here I’ll take some time to explain what FIRE is. I’ll also give a quick review of the “FIRE Movement”, and some of the criticisms about early retirement. In short, there is a lot to consider if you want to be FIRE’d.
What is FIRE?
FIRE stands for Financially Independent, Retire Early. I discovered the FIRE concept a few years ago when researching how to retire early. That’s something I’ve been wanting to do for a while now, I guess. I came across some blogs where people were well on their way and making good progress, and some other blogs where they had already achieved their goal. They’re now living the retired life! I haven’t found any where they’ve had to go back to work. However, I find that many of them still do some sort of work. Work that has meaning and a purpose to them. That’s one of the reasons I’m not in a hurry to retire from my current employer.
What is Financial Independence (FI)?
The status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others. Income you earn without having to work a job is commonly referred to as passive income.Wikipedia
That’s how Wikipedia defines financial independence in their opening paragraph. Arbitrarily, passive income is mentioned in the second sentence. I agree with the first sentence, but don’t completely understand why the second sentence is there. It seems to imply that you have to have passive income to be financially independent, which I don’t think is true. I do think that passive income is very helpful towards that goal, but not the only means.
I would define FI as not having to worry about money. That doesn’t mean not thinking about your spending and recklessly spending money, but rather not having to stress about it. It’s the opposite of living paycheck to paycheck or worrying about where your next meal is coming from. FI means you have a big, fat pile of money and/or you have enough passive income that covers your outgoing expenses.
Props to Mr Money Mustache for being the only blog mentioned on Wikipedia for Financial Independence.
What is Retired Early (RE)?
How do you define early retirement? In my head, before I started Googling it, I pictured retirement as something you do when you reach your 60’s and are eligible for Social Security. If you would have asked me, I would have said somewhere around 65.
Full retirement age (also called “normal retirement age”) had been 65 for many years. However, beginning with people born in 1938 or later, that age gradually increases until it reaches 67 for people born after 1959.Social Security Administration
Due to longer lifespans (and probably due to running out of money), the SSA is increasing “full” retirement age from 65 to 67. According to this branch of the government, that’s the official retirement age . It’s probably why I had age 65 in my head. That’s just the number that people use when talking about retirement. Many European countries have retirement ages from the late 50’s to mid 60’s, which is a few years earlier than here in the United States.
Tax on early distributions. If a distribution is made to you under the plan before you reach age 59½, you may have to pay a 10% additional tax on the distribution.Internal Revenue Service
The other standard government measure you could go by is the age at which you can withdraw money from your retirement accounts free from any penalty. At age 59 ½, you can withdraw from your retirement account without having to pay an additional tax on top of income tax. The IRS even calls taking money from these accounts before age 59 ½, “early”. So, in a round about way, they are calling anything before this age “early retirement.”
*Note: That’s a basic overview of SSA and IRS regulations. I’ll cover the ins and outs of these in future posts. It’s government. We can’t expect it to be simple.
So, to answer the question, if you go by the SSA, early retirement is anytime you retire before age 65-67, depending what year you were born. Or, it could be 59 ½, if you go by the Internal Revenue Service. Now, after gaining more knowledge, I would consider anything before the mid-50’s “early”. I plan to celebrate my financial freedom by the time I’m 45.
What is the FIRE Movement?
FIRE is a movement dedicated to a program of extreme savings and investment that allows proponents to retire far earlier than traditional budgets and retirement plans would allow.Investopedia
Typically, investment advisors recommend saving 15% of your income towards retirement. If you’re already doing more than that, good job. You are on your way towards FIRE. The extreme side saves upwards of 70% – 80% of their income. To achieve such a high savings rate, you must practice frugal living. So, it’s a simple formula of High Savings Rate + Frugal Living = FIRE. The FIRE movement is all about how to achieve this and helping others along the way.
“…high levels of risk almost always, sooner or later, crash and burn.”MarketWatch
The FIRE Movement is not without its critics. What sounds bad about saving a lot of money so you can later go on to do what you want? Some say it’s to risky. They think the risk is not properly calculated. They think that when the market takes a down turn, the FIRE plan could fall short. Others would mention the quality of life, both while saving and after retiring. And the list goes on and on, with less and less validity to the arguments.
A short rebuttal to the two points mentioned. To the first argument, those people seem to be stating a matter of opinion. Those of us with a FIRE plan have crunched the numbers over and over again. Even those that have achieved FIRE continue to look at the numbers and make adjustments if necessary. We HAVE calculated the risk! To the second point, I think it’s a matter of perspective. For most of us, even if FIRE was not the goal, we would still be living a similar life style. This IS what makes us happy, and it’s the reason we continue to work towards FIRE.
I’ve always lived a frugal life with various side jobs. Couponing, clinical trials, etc. They helped me pay my way through college and graduate with no debt (including a master’s degree and my wife’s doctorate degree). It’s the other part of the equation that I think I could do better on. I couldn’t even tell you what my saving’s rate is. My best guesstimate would be 40-50%. That’s the result of living a mostly frugal lifestyle. I just save everything that I don’t spend. I’ll get my baseline budget posted here shortly, and with that, I will have a better idea of my saving’s rate.
There you have it. A brief, really brief, description of what FIRE means and what it’s all about. I barely scratched the surface with the answer to each of those questions. There could be multiple blog posts about each topic, which I probably will cover in the future. If you have any questions that I can answer, I’m here to help. FIRE away!