The Truth About FIRE - Is Early Retirement Actually Possible?

So, you might have come across videos talking about something called the "FIRE" movement, which stands for "Financial Independence, Retire Early." 

The basic idea here is that if you save a lot of money during your working years, you can reach a point where your investments generate enough income to cover your living expenses. 

This way, you can theoretically retire early and enjoy life without needing to work. 

There are many YouTube videos and resources out there sharing stories, tips, and tricks about FIRE. 

However, it's essential to approach this idea with a bit of caution. 

Most people traditionally expect to retire in their 60s, and even that can be challenging for some, if not most. 

In fact, a study from the Federal Reserve in 2019 found that only 45% of people in their 60s believed they were on track for retirement, and 13% had no retirement savings at all. 

Advocates of the FIRE movement argue that by doing some straightforward math, following specific strategies, and adhering to principles like the "4% rule" (which involves withdrawing 4% of your savings annually), you can achieve financial freedom much earlier than you might expect. 

So, early retirement is indeed possible, but there's a significant catch. 

Early retirement might be attainable for many, but there are several misconceptions about what it entails. 

Moreover, there are risks associated with early retirement that aren't always explained by FIRE enthusiasts. 

That's not to say there aren't benefits to this approach – there are many valuable lessons we can learn from the FIRE movement. 

However, early retirement might not be the constant partying on private beaches that some envision. 

So, before you decide to bid farewell to your job, let's explore how early retirement can be achieved and why it might not be as dreamy as you think.

How Much Do You Need?

When people talk about regular retirement, they mean saving up a bunch of money during your working years. 

The goal? 

So that when you get to your 60s, you can stop working and use the money you've saved to live on. 

We call this saved-up money your "nest egg." 

Now, figuring out how big this nest egg needs to be isn't too tricky. 

You just need to know when you want to retire, how long you think you'll live, and how much money you'll need each year when you're not working. 

Let me give you an example: 

Imagine you want to retire at 65, you think you'll live until you're 95, and you want $50,000 each year to cover your expenses. 

Well, with some fancy math, you can figure out that you'd need about $899,000 in your nest egg by the time you're 65. 

But remember, the numbers can change based on different stuff like how well your investments do and how prices go up over time (we call that inflation). 

And another thing to remember is that this way of planning doesn't really cover all the complicated stuff about taxes. 

But at least it gives you a basic idea of how much money you need to save over time if you want to keep living the way you do when you stop working. 

But remember, these numbers we're talking about are just for our example. 

They might not be right for you. 

Now, I have no idea whether $50,000 dollars is too much or too little for you. 

So, if you need help figuring out your own money plan, it's a good idea to talk to a money expert.

The FIRE Movement

Now, let's talk about the fire movement, which is kind of like regular retirement, but with a twist. 

The goal here is to save up a big pile of money that you can use to live on. 

To do this, you need to get rid of any money you owe to others, save some money from your paycheck, and invest it typically in passive index funds that help your money grow. 

But the folks who follow the fire movement want to do it a lot sooner, usually in their 30s. 

That means they have less time to save up all the money they need, and they need even more money because they'll be living on it for a long, long time. 

Now, here's where it gets tricky. 

Real financial independence in the fire movement means you live off the money your investments make, and you don't have to spend the money you've saved up. 

It's like having a money tree that gives you fruit, but you don't want to cut down the tree. 

Remember our earlier calculation? 

We said you'd spend all your savings by the time you're 95.

The Four Percent Rule (4% Rule)

But in the fire movement, they follow something called the 4% rule. 

This rule came from a research paper known as the trinity study, and it says that if you only spend 4% of the money you've invested each year, you probably won't run out for at least 30 years. 

In other words, if you can live on just 4% of your invested money, you should be good for the next 30 years. 

When you retire early, you need your money to last much longer because you'll be retired for a really, really, really long time. 

Some folks try to spend even less money from their savings, like just three percent each year. 

This can make your money last forever theoretically, which is great if you want to be retired for most of your life. 

To figure out how much you need to save with this three percent rule, you simply divide the amount of money you want each year in retirement by three percent. 

But here's the tricky part. 

To have an annual retirement income of $50,000 using this rule, you'd need to save around $1.7 million dollars by the time you're in your mid-30s. 

That's a huge amount of money! 

Unless you've been super lucky, like starting a successful business early or becoming a big YouTube star because your viewers really, really like your videos, most people just don't make enough money to do this. 

Even if you could somehow make your investments grow by six percent after taxes and inflation, which is pretty amazing, you'd have to save $59,000 dollars every year or about $5,000 dollars each month starting when you're 18 years old. 

I’m gonna guess that's really tough for most folks to do.

Shifting From Earning To Saving (Frugality)

So instead of trying to become really rich quickly and earn more money, many folks who follow the fire movement focus on spending less. 

They do this both when they're working and after they've retired. 

By planning to spend less money during retirement, like going from $50,000 a year to $25,000 a year, they can lower the amount they need to save. 

So instead of needing $1.7 million, they might only need $833,000. 

They also try to save a lot of their income when they're working. I mean, they save a big chunk of their money, like maybe 80% of what they earn. 

This makes sense because even with a smaller nest egg, you'd still need to save around $30,000 dollars a year or $2,500 dollars a month, based on our earlier example. 

This super careful spending and saving is what makes the fire movement special. 

Reaching these savings goals is really tough, so people have come together to make forums, blogs, and websites where they share tips and tricks with others who want to retire early too. 

There's sort of a culture around this movement. 

Many, though not all, folks who follow it don't really like buying lots of stuff and going into debt. 

They prefer to live with less and not spend too much on things. 

Honestly, there's a lot we can learn from this way of thinking. I'm a fan of capitalism, but most of us could do better with our spending habits. 

The fire strategies, like paying yourself first and eating out less, are super good at helping people save money, and they can help anyone who wants to retire early. 

But there are some folks who don't really tell the truth about what early retirement is like. 

You see, being really careful with money is a big part of it, and that continues even after you’re retired. 

So, you might not get to drive a fancy new car or take super luxurious vacations like you see some people doing online.

The Risks Nobody Talks About

There’s also a lot of risks about early retirement that people don't always talk about. 

You see, even if you use the 4% rule to figure out how much money you need to retire, it doesn't guarantee that your money will last your whole life. 

Even if you follow the 3% rule, which is even safer, things like how the stock market is doing and inflation can still affect your nest egg. 

And if your money loses a lot of value when you first start retirement, it can make it really hard to make it last. 

Then there are personal things that can mess up your plans, like losing your job, getting sick or hurt in ways that stop you from working, or having an unexpected expense that makes you spend more money than you thought. 

Now, living on $25,000 dollars a year might sound good on paper, but it can be tough to do in real life. 

And that's why many early retirees keep working in some way. 

It might not be a full-time job like they had before, but they still do some work, maybe part-time or working on things they love that can make them some money. 

The idea is they have more freedom to work when they want and do things they enjoy without relying too much on their regular job for money. 

For some people, that's really worth it. 

Like, if you don't like your regular job, you might be okay with living a simpler life if it means you get to do something you like and still pay your bills on time.

“Your Mindset Matters”

But the point I’m trying to make is that early retirement isn't always as fancy as some people make it sound, and that's perfectly okay. 

I'm not saying this to stop anyone who dreams of retiring early. 

If you think you can save up enough money sooner in life, that's amazing. 

But sometimes, I see folks talking about early retirement like it's all about having the right attitude and not really about your situation. 

Like they say anyone can do it. 

I don't quite agree with that. 

Sure, your mindset matters, and there are folks who can make their lives better by making some changes in how they spend money. 

I've seen that happen. But the truth is, early retirement isn't something that's possible for everyone. 

Where you're born, how you grow up, and what opportunities you have all make a big difference in whether you can retire early. 

So, while it's awesome for those who can do it, be careful of people who retired on a yacht trying to tell you that you can do the same thing, especially if they're selling a course or product to help you get there.

Should You Pursue FIRE?

So, it's all up to you if you want to go after early retirement, but think about these things before you decide. 

Early retirement often means changing how you live and spending less money than you might if you retire at the usual age. 

When you wait longer to retire, you have more time to save and let your salary grow. 

Also, there are some risks with relying on your savings and investments to pay for your life. Sometimes, you might have to go back to work to pay your bills. 

And remember, there's no surefire way to reach early retirement. 

Sure, your attitude is important, but you can only do so much based on your situation. 

There's no magic way to get rich quick, so be careful of anyone who says there is. 

Whether it's worth taking these risks and dealing with the downsides depends on what you think is most important. 

I'm pretty lucky because I enjoy my job, so I'm not in a hurry to leave it and retire early. 

But if someone really doesn't like their job and would trade some spending money for a less stressful job, that's their choice. 

Just be sure to plan carefully and check on how things are going regularly. 

Either way, being careful with your money is a good idea.

Even if you don't plan to retire early, it's smart to act like you might.

Some people call it living like a student.

You can use free tools to help you keep track of your savings and how you're doing with your money goals.

- Ivan