What is FIRE?
Photo by Cullan Smith on Unsplash
The basic tenet of FIRE (Financially Independent, Retire Early) is that is if you save 25 times your yearly expenses, then you can ‘safely’ retire and begin to draw money from your investments.
Here is a Mr. Money Mustache primer on FIRE.
This leads to a few realizations and questions to answer:
- Can I reduce any spending and not really miss it?
Every $1 I save instead of spend each year means that is $25 less dollars I need to save!
- Hmm, how much do I actually really spend and where does it go?
Is that where I still want it to go?
Does that match my ‘values’?
- What do I want my future FIRE life to look like?
How much money does that imply I need?
- How do I need to structure my savings/investments so as to actually make the most sense for long term growth but also the possibility to access some of it prior to traditional retirement age?
- What are the milestones to FI and where am I relative to those?
- Do I believe all this?
Does the math and history really back this up?
- Oh, and insurance and taxes and blah.
Most of those questions each have their own rabbit hole of information and can get very detailed. I’m no expert on any of them at this point, but I’m sprinkling in some links in this post so you can jump into your own FIRE rabbit hole should you so choose. And I recommend that you so choose! It may change your life for the better…
What I want to focus on for a moment are the FI milestones.
What are the big “Ah Ha, I did it!” moments along the way? Thanks to FI 180, there is already a good framework for the basics of FI milestones. I’ve taken their concept from their post, modified with what they discussed on the Choose FI podcast, and then added my own tidbits. These are mostly based on an assumption that you know how much money you want to spend each year and that it is a constant number. Obviously this is an oversimplification, but it is a good enough measuring stick to measure progress as the details settle.
Stage 1: Positive Net Worth
Seems simple enough, no longer have debt. Other than maybe a mortgage. Ok, actually in the FIRE world, there is great debate on the mortgage topic.
In essence, some say don’t buy a place so that you leave yourself open to move to cheaper locations (this is called geo-arbitrage). Others say, buy smartly and once you’ve paid off the mortgage then it means you no longer have to have a constant monthly outflow of money for a place to live.
At the moment, I am in the ‘buy smart, pay off the mortgage, and therefore eventually have a “free” place to live’ camp.
Stage 2: Emergency Fund
This is generally considered to be 3-6 months of basic living expenses saved. By expenses, they mean that you can cover your basic life costs but you may not be going out to eat or going on vacations. You and anyone you are responsible for will have food, shelter, and transportation.
Stage 3: FU Money
Yep, that would be F$*%& You Money! Aka, if things are bad at your job you can say ‘Buh Bye. I’m out.’ You’ll have a year or two of regular (not just basic) expenses saved. You now have 1-2 years of runway before you HAVE to have a new job or income of some sort.
Stage 4: ½ FI
Numerically halfway to the 25 times annual expenses so 12.5 years of expenses saved. Believe it or not, but you’re more than half done in time required to save at this point thanks to the power of compounding interest! It also means that if you’re splitting your life expenses with a life partner, one of you is completely FI…
Stage 5: Lean FI
Basic living expenses are covered at 4% withdrawal of your investments. Remember basic expenses means the things you need like food, shelter, and transportation.
Essentially, you now have a Perpetual Emergency Fund. You can live forever but maybe without bells and whistles. From this point on, you’re working for bells and whistles.
Depending on how much you spend, or want to spend, on extras you can figure out how far away you are from Full FI. For instance, if your discretionary spending is 30% of your total spending and 70% is basic expenses, you would be 70% of Full FI.
Somewhere around this time, your investment portfolio gains will begin to make more money for you than your day job.
Stage 6: Flex FI
20 years of anticipated expenses saved. If you can be flexible by spending less when the markets are down, you’re FI. Or if you have a side hustle or something bringing in a bit of spending money, this may be sufficient.
Stage 7: Full FI
25 years of anticipated expenses saved. You can essentially keep withdrawing 4% of your portfolio in perpetuity.
Stage 8: Fat FI
30 years of expenses saved. Means you have extra leeway and are pretty much guaranteed success and have money for quite a few extra bells and whistles!
Wow right? Mind blown.
I have much more to say about this whole concept including how to actually believe these numbers. Hold tight, more coming soon!
Until then, what FI Stage are you in? Or if you don’t know yet as you don’t even know what your annual spending is, are you intrigued and going to go start figuring it out?