What is Financial Independence, Retire Early (FIRE), Or FI?

FIRE is an acronym for Financial Independence, Retire Early. FI is Financial Independence, without the emphasis on early retirement.

FI or financial independence is when your portfolio’s income (or withdrawals) can pay for all your living expenses. Your portfolio supports you, so you don’t have to work for money.

If that sounds like traditional retirement to you, that’s because it is. Kind of.

FIRE adds the twist of being able to retire early.

Achieving FIRE typically requires a frugal lifestyle. You save 50% or more of your income and channel those savings into investments.

FIRE is often misunderstood as “deprive yourself now so you can be bored out of your mind later.” No, FIRE is about giving yourself the option to quit working full-time and do something you enjoy instead.

I prefer using FI vs. FIRE. After all, if you’re older, your goal is probably not early retirement, but to be able to retire at all!

The concept of financial independence is widely attributed to the 1992 book Your Money Or Your Life, and that’s where I first learned about it. However, the idea of attaining financial independence and having the option of not working goes way back in history.

FI means that you gain control over your life and your time.

It means creating the financial breathing room to pivot from working only for money to finding work you enjoy, the kind of work that feels like play.

Like I mentioned earlier, pursuing FI is linked with frugality. Frugality is about discovering how to enjoy life with less stuff. It helps both you and the planet by lowering your consumption. It focuses on the quality of your life versus the quantity of crap you buy.

Seeking FI is a continual balancing act between the present and the future. Without conscious thought, the present always wins. It’s your job to plan for the future while also remembering that life can be cut short.

Three Levels Of FI(RE)

Here are the three levels of FI based on your expense level:

leanFIRE is when you retire with expenses of $40k a year or less, according to the leanFIRE Reddit group. When you read about people “retiring” incredibly early – like less than 35 years old, they are typically leanFIRE.

fatFIRE is where you accumulate enough to spend $100k or more each year. Here you need a high-paying career, an early start in life, or probably both.

FIRE or Regular FIRE is somewhere in between the above, around $60k a year.

3 Objections And A Solution

Here are three common objections and why I still think FI is a goal worth pursuing.

It’s Intimidating. Attaining FI Involves Massive Numbers

The rule of thumb for the amount you need to be considered FI is around 25x your annual expenses, or around a 4% withdrawal rate. So, if you want to spend about $60,000 a year, you’ll need to accumulate a portfolio of $1.5 million. And there are arguments that with the current low-interest rates, a 4% withdrawal rate is too high.

Still reading?

Thinking in terms of those numbers is like trying to produce museum-quality art without first understanding how to use a paintbrush.

Yes, it’s a lofty goal, but don’t let the end state intimidate you.

We Don’t Have Time Machines, and FI Can Take Decades

FI is a super-long-term goal, potentially involving decades of investing to allow compound interest to work its miracles. It also requires the cooperation of a robust stock market, which is not guaranteed, especially in the short term.

It’s true. The earlier you start, the easier it is.

If you start reading FIRE blogs, you’ll notice the pattern. Most FIRE bloggers start young, make tremendous sacrifices by living on tiny amounts of money, and have high-paying jobs. Oh, and this is changing, but they are also predominately male. That eliminates most of us.

But even if you are older or can’t save as much, the sooner you start investing, the better off you’ll be.

Side note: This is a big reason I’m working on a personal finance book for teens. If a teenager were to start putting money aside, they’d be almost guaranteed to attain financial independence early. Money compounded over multiple decades could lead to millionaire status! But the problem is, who thinks of this as a teenager?

Right Now, Interest Rates Are a Big Problem if You Crave Safety

In Your Money Or Your Life (the 1992 version), the goal was to invest your money in stocks while working full-time. Then when you were ready to stop working, you could move your entire portfolio to safe assets, specifically Treasury bonds, and live off the interest. As it states on the yellowed pages of my book, “Even at 5 or 6 percent, this program will work.”

Sigh. 5% interest rates? In 2020, you’d be lucky to find interest rates approaching a minuscule 1%.

$1,000,000 is a lot of money, right?

But even $1,000,000 at 1% interest only earns $10,000 a year. Ouch. To live off your money risk-free, without touching the principal, you’d need to take a vow of poverty!

The Dimmer Switch Solution

The solution? FI isn’t an on/off switch. It’s a dimmer switch.

“Pure” FI requires massive savings and takes lots of time. And we have no control over current interest rates. But what about variations of FI? As you build up savings, you get more choices. Let’s focus on some more accessible versions of FI and on what you CAN do.

Coast FI is a stage where you’re finished funding your retirement accounts. You have enough saved that you can let compound interest do the heavy lifting to get you to your final number at 65 years old.

You know that your future self will be set, because who knows if you’ll want to work at all when you’re 65 years or older. Knowing that you have the option to retire because you’ve funded your traditional retirement provides peace of mind.

You could hit your Coast FI number and continue to fund it to build in a safety buffer, but the pressure is off. Knowing that you no longer need to save for retirement opens up a significant amount of options.

Yes, you still have to work to fund your living expenses, but once you drop the need for savings, this could be a much lower number.

For example, my husband and I lived on 50% of our income for over 10 years. This funded our retirement savings to the point where we hit Coast FI (didn’t know it had a name back then). The moment the numbers looked good enough, I quit my full-time finance job.

My writing career and this blog is a result of that freedom!

Very closely related to Coast FI is Barista FIRE. This is where you have enough saved that you can live off a mix of passive income from your portfolio and some part-time “active” work. You are at a point where you could drop full-time work to work-part time instead and have more free time.

Both options require you to work. But based on my personal experiment with a mini-retirement, I believe that work is essential to a happy life. (more on this to come)

Think of this as a kinder, gentler form of FI. You still aim for a frugal lifestyle, but not an extreme one.

You take the pressure off of the enormous number and the decades of saving by finding work that you enjoy while working towards your FI goal.

By working at least part-time, you stay engaged and build resilience into your plan.

In this blog, I want to help you promote financial calm and confidence in your life by taking control. You do that by pursuing FI in the context of intentional living.

Through a combination of knowledge and action, you can reduce stress, anxiety, and worry around money. Learn all that you can.