F.I.R.E. stands for financial independence, retire early, and it's a lifestyle movement dedicated to achieving freedom over your time by mastering your money. The FIRE movement is especially popular among millennials and gen Xers and is often characterized by high savings rates, intentional spending, and frugality.

The general idea is that by saving and investing aggressively, you can reach financial independence early and begin living off passive income, no longer needing your 9-5 job. While the FIRE movement is not for everyone and is often typified by extreme frugality, the core components and underlying math can be eye-opening for anyone working towards retirement.

The Shockingly Simple Math Behind Early Retirement

Mr. Money Mustache (MMM) is one of the most popular FIRE bloggers of all time, and in 2012 he wrote The Shockingly Simple Math Behind Early Retirement. The post is a staple of the FIRE community and outlines the premise for early retirement—your time to reach retirement boils down to one factor: “your savings rate, as a percentage of your take-home pay.”

MMM writes that

“If you are spending 100% (or more) of your income, you will never be prepared to retire, unless someone else is doing the saving for you (wealthy parents, social security, pension fund, etc.). So your work career will be Infinite.

If you are spending 0% of your income (you live for free somehow) and can maintain this after retirement, you can retire right now. So your working career can be Zero.”

In the post, MMM shows the direct correlation between your savings rate as a percentage of your income and your working years until retirement:

*Assuming 5% investment returns after inflation and a 4% safe withdrawal rate.

In the FIRE community, it’s not uncommon for people to push for a 50 to 70% savings rate, aiming to achieve financial independence within one or two decades. And while that level of savings may seem out of reach for many, proponents of the FIRE movement are willing to do what it takes, often house hacking, going car-free, meal-planning, and curbing lifestyle inflation to find additional savings in their budget.

But, despite the appeal of being able to walk away from work at a young age after reaching financial independence, the FIRE movement is not for everyone. That said, the FIRE movement offers some key takeaways for anyone working towards retirement.

What does this mean for your retirement?

1. Retirement is not an age—it's a number.

While many believe the ability to retire is tied to your age, those in the FIRE community believe it’s tied to your net worth. For FIRE proponents, if you have enough money saved to provide passive income to cover your living expenses, it doesn’t matter if you are 30, 40, 50, or 60—you can retire if you want.

This can be a liberating realization for those saving for retirement while working in a career or job that no longer excites them. Rather than working till age 65 just because, you can begin to view retirement and work optionality as something that’s tied to your net worth instead of your age.

So, what’s your financial independence number?

The FIRE movement is largely built around the 4% rule, which states that by limiting your withdrawals to 4% of your nest egg per year, your money should safely last throughout your retirement, even early retirement. And while the safe withdrawal rate may need to be modified for your situation, it is sufficient for many.

You can calculate your retirement number using the 4% rule by multiplying your annual spending by 25. The result is your financial independence number—the amount of money you need to retire early.

Annual Spending x 25 = Your financial independence number

In the FIRE movement, once you’ve reached your financial independence number, you no longer need to work as you can safely withdraw enough each year to cover your annual expenses.

2. The lower your savings rate, the longer your working career.

Using MMM’s shockingly simple math behind early retirement, savers can begin to understand the relationship between their savings rate and the length of their working careers. So, assuming an average savings rate of roughly 10% per year, you can expect a working career of around 51 years. Alternatively, if you want to reach financial independence in nearly half that time, you can increase your savings rate to 40%, shortening your working career to just 22 years.

This realization can empower savers as they understand their ability to reach financial independence is directly tied to their savings rate rather than external factors outside their control, such as market returns or economic forces.

3. Your ability to manage money can provide you freedom over your time.

Financial writer and best-selling author Morgan Housel writes:

“Controlling your time is the highest dividend that money pays. The ability to do what you want, when you want, with whom you want is priceless.”

At its core, that’s what the FIRE movement is all about: controlling your time by managing your money. This can be valuable knowledge for anyone on the path to retirement or financial independence as they begin to realize what’s at stake—the ability to wake up every day and do what you want, with who you want, for as long as you want.

And the great thing about the FIRE movement is that it’s not all or nothing. By implementing even a few of the core aspects of financial independence, reducing your lifestyle expenses while increasing your savings rate, you can begin to realize incremental freedoms over your time. Having a handle on your finances can give you options—the option to take lower-paying but more meaningful work, the option to take a mini-retirement or extended sabbatical, or the option to shift to part-time work and free up some of your time for other pursuits.

Whatever the case, understanding the tenets of FIRE can provide early or traditional retirees the knowledge and tools they need to have more freedom over their time—the highest dividend that money pays.

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