The FIRE movement is all over these days. It seems that half the blogs on the internet are FIRE-inspired.
I am not talking a brush or forest fire but it seems that this FIRE movement might be spreading just as fast. The FIRE movement stands for Financial Independence Retire Early.
In a nutshell, the idea is to be incredibly frugal and invest a hefty portion of your income. Once your investments provide enough income every year to cover your lifestyle, you then retire.
For example, Joe (my fictional FIRE practitioner) is an engineer and decides at age 30 that he wants to get out of the rat race of work as soon as possible and retire early. He cuts his expenses down to just $20,000 so that he can save and invest $70,000 of his $90,000 salary. Assuming a return of 8%, he’d have just over $1,000,000 in 10 years.
At this point, Joe realizes that with $1,000,000 in the bank and an average of 8% return, he could earn $80,000 per year from his investments alone. He then quits his job at age 40 and retires into the sunset.
As a whole, I think the FIRE movement is a great thing. I’ll support just about anything that encourages being more financially free and independent. That being said, I always worry that some get pulled into the movement without realistic expectations.
First of all, this movement really started to get traction in the last few years. During this time period, 2013-2019, the stock market was doing exceptionally well with an average return of close to 16% per year.
If we used 16% in our calculation, we’d only need $312,500 to provide $50,000 per year. The problem is, as we have seen with all the coronavirus craziness, 16% year over year is not sustainable.
If we average out the stock market returns for the last 100 years, the average annual return is closer to 10%. And because it makes sense for most people to have some bonds in their portfolios as well, most people see an average return closer to 7%-8%. Obviously, your personal return will depend on how you invest, when you invest, and what you invest in.
But to give the FIRE movement some credit, many of its practitioners are very smart and conservative individuals. Most of them do a great job of creating more financial independence.
When it comes down to it, many decide that they’d prefer not to retire even if they could afford to. Some quit their full-time jobs only to start something that they are more passionate about. Sometimes financial independence is not about not working, but instead about creating the option for yourself to not have to.