What is the FIRE Movement? How to Find Your FIRE Number

Embracing the FIRE movement is the answer to flush retirement with money.

According to the Natixis Global Retirement Index 2021, 36% Americans believe that they will not have enough money to retire, pointing to the main need to increase your savings early on your professional career so that you can retire easily. And that’s where FIRE comes in.

Early Retirement Financial Independence, FIRE for short, is a catch-all term origins in the personal finance book “Your Money or Your Life” by Viki Robin and Joe Dominguez. FIRE is a movement that promotes extreme financial savings and investment so that a person can retire earlier than usual. If the idea of ​​early retirement piques your interest, here’s a breakdown of the FIRE movement.

How does FIRE work?

FIRE is a movement that encourages people to walk away 50 to 75% from their earnings to savings while they have a full-time job to retire once the savings amount is reached 25 to 30 times their annual expenditure. So, suppose you make US$1000 a month (which is US$12,000 a year). If you follow FIRE, you should put at least US$500 every month into your savings until you have saved $300,000.

FIRE focus on delaying gratificationwhich requires enjoying a few lattes, expensive clothes and brand-new phones, to live comfortably after retirement.

If you follow the FIRE movement, you should live 4% of said savings in the first year and adjust for inflation in the next year when you retire. Your FIRE number (the amount you need to save before retirement) is you annual expenditure times 25 at a withdrawal rate of 4%. However, this number varies depending on the type of FIRE you do. Let’s take a closer look at the FIRE variants so you can find the one that suits you best.

Kind of fire

There are four different variations of FIRE depending on how you want to live after retirement-

Lean fire

This variant is FIRE for those who want to live more saving or post-retirement minimalist life. Participants of the FIRE lean variant focus on building a strong investment portfolio and living off the returns it gives. On average, participants of the Lean FIRE variation are those who plan to live on US$40,000 or less per year after retirement.

To know your lean FIRE number, you need to count your annual expenditure and divide it by the withdrawal limit (which is usually 4% as we discussed above). The lean FIRE variant only allows for essential expenses, such as food, transportation, housing and personal insurance to name a few.

Fat fire

This variant is for those who want to live a high class lifestyle after retirement. People who are classified in this variant tend to be in the high income bracket and intend to live in US$100,000 per year after retirement. The formula for calculating Fat FIRE will be the same as the standard FIRE number except you account for greater expenditure. People who follow fat FIRE usually hope to achieve the number of FIRE US $ 2.5 million or more.

Fire barista

Barista FIRE is for the ambitious work after retirement to enjoy the health benefits provided by the workforce. It basically means leaving your full-time job for a part-time job. This variant of FIRE has named “Barista” because the Starbucks coffee conglomerate is one of the largest American employers who provide health insurance to part-timers.

Your Barista FIRE number will be your standard FIRE number (25 x annual expenditure at a 4% withdrawal rate). You should then estimate how much you will make in your potential part-time job and reduced your annual expenses from your potential salary and then multiply the difference by 25.

Coast of fire

Coast FIRE is a variant where you make all retirement contributions 10-20 years which normally you will make over 40 years of your professional life. People who follow this variant work into their 60s but stop putting money into retirement funds in their 30s and 40s. It works on the concept of compound interest, which helps you earn interest on your interest.

The first thing you need to do to arrive at your coastal FIRE number is to find your default FIRE number then share this number by (1 + Annual Rate of Return) ^ (Time). Here, the annual rate of return is the rate at which you expect your investment to grow, and the term is the number of years in which you want to compound this interest.

Limit FIRE

When considering the FIRE movement, it is important to note that for those who live paycheck to paycheck, save a lot of money for retirement. not financially feasible. This limits the scope of people who can practically use FIRE as a retirement strategy. Then, there are others who think that life is short and the idea of ​​slogging away your youth to live modestly later in life just doesn’t make sense.

Additionally, the FIRE numbers you calculate today may not necessarily remain accurate for years to come. You never know how social programs, interest rates and taxes will change over the years. There are also other variables, like major illness and accident, that FIRE number does not necessarily account for. You can also just end up wrong calculation FIRE figure you by underestimating how much money you will need in case of an emergency. For example, when a 25-year-old calculates the FIRE number, they will think about it based on their current salary and current responsibilities and not based on how their life will look in time.

In my opinion, the FIRE number should only be a hypothetical goal you can aim for rather than a strict financial milestone. At the end of the day, we want to enjoy ourselves and spend money on things that give us happiness. Strive for financial independence, but at the same time, don’t stress about it so you forget your life.

Read also:

Header image courtesy of Unsplash

Leave a Reply

Your email address will not be published. Required fields are marked *