You Know What’s FIRE? Retiring early.

Have you heard of the FIRE movement? Proponents of the FIRE movement are taking steps to enable retiring earlier than 65.

Sound like a dream? There are definitely pros and cons involved and it’s not for everyone.  

What is FIRE?

The Financial Independence, Retire Early movement is dedicated to spending conservatively and saving liberally to gain financial independence, making it possible to retire earlier.

How does FIRE work?

The focus is on earning more and spending less.

Earning more can include asking for a raise, switching to a job with a higher wage and getting an additional job or adding a side hustle.

Spending less can include eating out less often, buying a less expensive car and maintaining a conservative budget. You can reduce your housing expenses by downsizing your home or renting out extra bedrooms to earn additional income.

Investing the additional income you’re earning and saving in stocks or stock funds is an important component of FIRE as you’ll be dependent on interest income to create wealth.

People who have had success with the FIRE movement do a lot of planning and strategizing to make sure they’re set up for early retirement. They use two tools in particular:

• The rule of 25. It’s recommended that a person has 25 times their yearly expenses saved up to be ready for early retirement. This amount should cover about thirty years of retirement living.
• The 4 percent rule. In the first year of early retirement, participants withdraw four percent of their total investment portfolio and then adjust for inflation annually. Following this guideline should make their savings last for a 30-year period.

What are the pros of FIRE?

There are several benefits to following the FIRE method:

• Financial security
• Enhanced budgeting skills and better debt management
• Getting time back to do the things you love

What are the cons of FIRE?

Here are some drawbacks to be aware of:

• If you can’t realistically see yourself living a frugal lifestyle, this is not a good fit
• Investments involve risks, as does making assumptions about your future finances
• Long-term expenses like healthcare and housing are hard to plan so far in advance
• Leaving the workforce creates a gap in employment, which will affect the amount of Social Security income you can draw later in life and can affect your employability if you decide to rejoin the workforce

Is FIRE a good option for you?

While the idea of retiring early may sound appealing, the reality is that it takes a special kind of person to successfully pull it off.

Requirements include:

• Serious discipline
• Living frugally
• Saving aggressively

And while not necessarily requirements, these contributing factors increase your success rate:

• You earn a high income
• You can afford to save a large percentage of your earnings
• You have a minimalist mindset (i.e. you can achieve happiness without material possessions)

If you’re considering the FIRE method, working with a financial planner or trusted advisor is strongly recommended. You’ll want to validate you’ve calculated the numbers accurately and truly understand what this lifestyle will look like for you. Of course, even if you don’t plan to live the full FIRE life, there are elements to the plan that can help you save more and achieve financial well-being so that you can live life on your terms.

UW Credit Union is committed to providing financial education, helping our members and communities build their financial savviness to make empowered decisions. We offer free learning seminars, confidential credit consultations and, through our partnership with Banzai, an impressive catalog of financial education resources.

Here for every you.