The FIRE (Financial Independence, Retire Early) movement emphasizes saving and investing to achieve financial independence, often through aggressive saving and frugality. At its core, the movement is based on the 4% rule (withdraw 4% of your portfolio per year, indexed to inflation) and the 25x rule (save 25 times your annual expenses).
History of the FIRE Movement
The FIRE movement has its roots in the 1990s with the publication of Your Money or Your Life by Vicki Robin and Joe Dominguez. The movement gained momentum with the launch of the Mad Fientist blog in 2012 and the Mr. Money Mustache blog in 2011.
Core Math of the FIRE Movement
To illustrate the core math, consider an individual with annual expenses of $40,000. Using the 25x rule, they would aim to save $1,000,000 (25 x $40,000). With a portfolio of $1,000,000, they could safely withdraw $40,000 per year, based on the 4% rule ($1,000,000 x 0.04). Here is a 5-year breakdown of their portfolio balance, assuming a 7% annual return and 3% inflation:
- Year 1: $1,000,000 - $40,000 (withdrawal) + $70,000 (return) - $30,000 (inflation) = $1,000,000
- Year 2: $1,000,000 - $40,000 (withdrawal) + $70,000 (return) - $30,000 (inflation) = $1,000,000
- Year 3: $1,000,000 - $40,000 (withdrawal) + $70,000 (return) - $30,000 (inflation) = $1,000,000
- Year 4: $1,000,000 - $40,000 (withdrawal) + $70,000 (return) - $30,000 (inflation) = $1,000,000
- Year 5: $1,000,000 - $40,000 (withdrawal) + $70,000 (return) - $30,000 (inflation) = $1,000,000
Using the Freedom Calculator, individuals can determine their retirement number and create a personalized plan to achieve financial independence.
Criticisms of the FIRE Movement
One criticism of the FIRE movement is that it may not be suitable for everyone, particularly those with lower incomes. For example, an individual earning $50,000 per year would need to save $1,250,000 to achieve financial independence (25 x $50,000). To achieve this in 10 years, they would need to save $125,000 per year, or 250% of their income, which is not realistic.
Persistence of the FIRE Movement
Despite criticisms, the FIRE movement persists because it offers a clear framework for achieving financial independence. By understanding the core math and principles behind the movement, individuals can make informed decisions about their financial future. For more information on the different paths to financial independence, such as Lean FIRE (living frugally to achieve financial independence) vs Fat FIRE (saving aggressively to achieve financial independence and maintaining a high standard of living) vs Barista FIRE (working part-time in retirement to supplement income), see our post on Lean FIRE vs Fat FIRE vs Barista FIRE: A Numbers-Driven Comparison.
Ultimately, the FIRE movement is a framework, not a one-size-fits-all solution. By understanding the math and principles, individuals can create a personalized plan to achieve their financial goals.
New to FIRE? See our primer at https://freedomcalc.app/what-is-fire.
Tools worth looking at
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- Empower — Free net worth tracking, portfolio analysis, and retirement planner. The dashboard serious FIRE chasers actually use.
- Acorns — Round-ups that invest your spare change automatically. The lowest-friction way to start investing if you have been putting it off.
- Wealthfront — Tax-loss harvesting, a 5% cash account, and direct indexing once you cross $100k. Solid robo for the set-and-forget crowd.