Hi, everyone! I know I’ve been a little MIA, but my goal is to start posting here more often. A lot has happened since my last post (it’s been four months 😬) and I hope to share more about it soon.
The short version: I soaked up some summer, went back to my home country, my beloved Brazil, and traveled around a few times to see so many wonderful people and discover more incredible places (my country really is amazing). I also worked, because my main financial goal requires money, and right now that money comes from my job.
But today’s topic isn’t really my life. It’s one of my life goals: the big FIRE. It’s a term I use all the time but have never actually explained: what it is, how you calculate it, and where it came from. So that’s what I’m doing in this post.
Let’s start with the term itself. FIRE is an acronym for Financial Independence, Retire Early. And when I say early, I mean it: we’re talking about retiring in your 30s, 40s or 50s, without depending entirely on Social Security, though you might tap into it later on to supplement your income.
Now, a little history of the movement, which, by the way, is pretty recent. The FIRE philosophy took off in 1992 with the book Your Money or Your Life, by Vicki Robin and Joe Dominguez. It gained even more momentum when Peter Adeney, better known as Mr. Money Mustache, decided to share his FIRE journey in 2011, and it was a very successful one. Since then, a lot of people have started learning more about it and joining the movement, which is built on saving and investing aggressively and cutting your cost of living. If you think about it, we spend less, invest more, and in the process buy something many people forget is finite: our time!
Now that we understand what the acronym means, how the movement became popular, and which tactics we use to adopt this lifestyle, let’s get to something very (VERY) important... the numbers.
You’re probably wondering: how much do I need invested to retire safely?
And the answer is pretty simple: 25 times your annual spending.
The number is simple, but the strategy, not so much. It’s not enough to have that big pile of money under the mattress or sitting in a savings account at the bank. We’re talking about that money being invested, with a little help from compound interest: your money earns returns, and those returns start earning returns too.
Once we get there, it’s time for a mindset shift. We go from the accumulation phase to the long-awaited (or dreaded by our fellow accumulators) withdrawal phase, where we start living off the wealth we’ve built. That’s where another very important number comes in: the number four. Every year, we withdraw 4% of our portfolio to live on that year. For example, if we have $1,000,000 invested, we can withdraw $40,000 to live on for the year. Notice that the two rules are the same math seen from opposite sides: 4% of a portfolio is 1/25 of it, which is why the magic number is 25 times your annual spending.
This withdrawal method is based on the 4% rule, which comes from extensive research suggesting that if we withdraw 4% of our portfolio each year, we have a good chance of not running out of money.
So, let’s recap the FIRE movement, which I decided to follow two years ago:
FIRE: Financial Independence, Retire Early. To reach financial independence, you need to have 25 times your annual expenses invested, so you can live on 4% of that portfolio each year and always have the amount you need available.
The recap is simple, but the goal takes a lot of discipline and creativity to live a happy life on less, since most people committed to this goal save and invest 30% of their income or more every month.
Even though I’m a fan and talk about the movement all the time, I know it’s not for everyone. Many people don’t want to retire early, or simply don’t have the resources to do it, and we can talk more about that in another post. But if you take one thing away from this post, let it be this: money really can buy time. The more you invest and the less you spend, the more time you have for what truly matters to you.
I hope this helped you understand FIRE a little better. Tell me in the comments if you’ve ever thought about financial independence for your own life!
And of course, questions are always very welcome.
Big hug,
- Deb