Whether you are on the way to FIRE, you’ve already arrived at the destination, or you’re trying to explain what it is you do all day in your freedom to a neighbor or that great aunt or uncle who never understands, we’ve now got your back.
This post is for you.
While this piece, from Early Retirement Now, is a little longer than an elevator pitch, it’s still a great back-to-basics look at what this whole FIRE thing is, how to explain its fundamentals, and where to go from here.
Take a look.
After seven years of blogging in the personal finance and FIRE community, I realize that there’s one type of post I’ve always avoided: How to explain FIRE to a complete newbie. Until now, I’ve outsourced that task and simply referred to the Links Page. But where’s a good overview, all in a simple and comprehensive post to give a one-stop overview of what FIRE is and how one can pull it off? I’ve come across a lot of good information, but it’s all in bits and pieces and here and there. I’m not going to dump a reading/listening list of 20 different posts/shows on 18 different blogs/podcasts on someone new to the community. And my Safe Withdrawal Rate Series? Great stuff. But it’s also the deep end of the pool, and I would likely scare away any new recruits. That series is targeted at folks already retired or nearing early retirement.
So how would I explain or even pitch FIRE to someone new to the community? Let’s take a look…
Traditional vs. Early Retirement
Traditional retirement planning usually involves a 40 to 45-year accumulation phase. While not useful and applicable to all, the generic boilerplate retirement planning advice would normally involve saving around 10-15% of your net income. So, for every $100 you earn, you spend about $85-$90 and save and invest the remainder. Because the planning horizon is long enough to smooth out all the ups and downs of the economy and asset markets, those small regular contributions should be more than enough to build a sizable nest egg. The miracle of compounding! You will very likely close the gap between your expected Social Security benefits and your retirement spending needs.
So, together with Social Security and any other supplemental income from corporate pensions, you should be able to achieve a retirement income of $70 or more per $100 of pre-retirement income. Financial planners call that a 70% replacement ratio. Why only 70%? Well, first of all, in retirement, you need to no longer save for retirement, so you really only need to replace $85 of pre-retirement consumption. And the step down from $85 to $70 usually comes from lower expenditures: you no longer commute to work, no need for work lunches, etc.
FIRE requires you to step up your game and save a minimum of 30% or more of your net income. 50% would be even better. You can likely cut the accumulation phase in half and retire well before the typical retiree. You use your nest egg to bridge the time until Social Security starts and maybe even have a side gig, like a blog, or adjunct teaching job, etc., to supplement your budget for a few years.
How much do you have to sacrifice for that early retirement? It’s hard to put precise numbers into this chart because everybody’s experience is different, depending on how early you start, whether you first have to eliminate large debts, how aggressive your savings rate is, etc. But most FIRE fans should be able to retire well before the average American.
Absent a large inheritance, what all FIRE fans have in common is that we’d need to curb our consumption, which brings me to the next section…
How can a shift in your savings rate have such a radical impact on your retirement timing? Very simple, every dollar of spending you redirect into investing helps you in two ways. First, you grow your nest egg faster, and second, every dollar you can permanently eliminate from your budget also reduces the nest egg target.
To observe these mechanics at work, let’s look at the following example. Imagine you currently save $15 out of your $100 income. For simplicity, I assume you want to “replace” the entire $85 of pre-retirement consumption rather than a reduced ~$70 retirement. If you use a rule-of-thumb of 25x annual expenses – the famous “4% Rule,” more on that later – you’d need a nest egg of $2,125 (=25x$85) upon retiring. Assuming a 5% real annualized return that task will take about 42 years, so just about in line with the boilerplate retirement advice. Cutting your expenses to $50 will not just accelerate your accumulation but also lower the nest egg target to “only” $1250 (=25x$50). In other words, by “attacking” your savings target from two sides – faster accumulation and lowering your retirement budget – you can reach your retirement target after only 16 years; see the chart below. Sweet! Reducing your spending by 42% ($50 vs. $85) will chop 62% off your accumulation time (16 vs. 42 years)!
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