Want To Retire Early? Maybe The FIRE Movement Is For You

Money, (it) get away! Get a good job with more pay and you’re OK!

– “Money,” Pink Floyd (1973).

Would you rather not work under the fluorescent lights of Corporate America until you’re 65? Would you rather travel the world, perfect your golf game, or spend more time with your loved ones? You’re not alone. Time is finite, and it’s natural to want to spend your life doing what makes you happy. Millions of people around the world have successfully done so decades before the traditional retirement age. But to do so yourself, you need to know how to pull it off. Enter FIRE, a lifestyle movement with a cult following.

What Is The FIRE Movement?

FIRE stands for “financial independence, retire early.” The main Reddit group for FIRE has 1.3 million subscribers. The idea of FIRE is pretty simple– retire decades before your peers and live life on your own terms. The key ideas of FIRE are a high savings rate and generating passive income to allow you to retire. FIRE overlaps with other lifestyle movements such as the digital nomad movement. Working for myself for 95% of my life, I’m personally part of the FIRE movement, but my lifestyle is more of a cross between the digital nomad movement and FIRE.

FIRE breaks down into a few different subsets. There’s LeanFIRE (financial independence but also frugality/minimalism), BaristaFIRE (where the endgame is working a low-stress job, often to get access to cheap health insurance), normal FIRE, and FatFIRE (retiring early with a hefty stash of money, generally enough to provide $200,000 or more per year in annual passive income). FIRE built an early following among millennial tech workers. Early adherents figured out that if you earned a six-figure salary + stock options but continued to live like a college student for a few years in your twenties, then you could get wealthy quite quickly if you worked for the right company. After that, work becomes optional.

FIRE might seem like crazy talk if you haven’t been introduced to the concepts, but I think it’s quite sensible in the grand scheme of things. A couple of years out of college, acquaintances of mine have already managed to get married and racked themselves up enormous amounts of debt between mortgages, cars, and student loans. The mainstream approach to building wealth is extremely speculative when you think about it. Many of these young professional-type folks have piled up debt 7x their pretax income with DTI ratios pushing the hard limit of 50%. The 2007-2011 housing bust showed that under these circumstances, macro decisions like when to buy a home will completely swamp your W-2 income. To this point, needing both spouses’ income to service debt is precarious at best, as the probability of at least one of you being unemployed at some point is higher than that of a single person.

Bought a house in 2006? In many markets, it took 10+ years to break even, if you weren’t foreclosed on. Bought one in 2010? There’s a good chance your house has made more for you than savings from your job/business! The history of housing (and stocks) is a history of boom and bust asset bubbles, and with 5x leverage and 6% mortgage rates, a lot of smart people are looking hard at alternatives to the mainstream societal script. On average, housing is a solid source of wealth creation and stability. But like with stocks, getting the timing wrong can wreck your results for 10 years or more. Time will tell whether the investors beat the speculators, but I’d bet on the former at this point in the cycle.

How Do You Retire Early/FIRE?

The principles of early retirement and FIRE are pretty simple. To live without working, you need passive income. People escape the “rat race” with online businesses, rental properties, and such, but most of the FIRE people I’ve seen put their money to work in the markets. The key to getting to FIRE is a relatively high income, a high savings rate, and investing money for passive income.

Many FIRE followers use the classic 4% rule, which states that every $100,000 in assets you have is good for $4,000 in annual income. I’d argue that a modified 4% rule is reasonable if you take a variable 4% from your account balance, but you might be asking for trouble if you take a fixed 4% and increase it without regard to what the market is doing. A lot of people saw swelling account balances in 2000 and decided to quit working – only to see a terrible decade of investment returns, with a grand finale of them running out of money in 2009 if their withdrawal rates were too high. Backtests show if you started FIRE in January 2000, you’d be in some trouble with the 4% rule, with your funds down about 20% and your withdrawals now pushing 8% of your annual portfolio balance. If we get a deep bear market now, your money is likely to come close to running out. If you were willing to do a 4% variable withdrawal, you’re getting the same income but have twice as much money in the bank. And of course, as always, better timing makes life better–choosing to FIRE in 2003 when the market bottomed would have seen your standard of living grow nicely.

You might not need as much money as you think, as some expenses drop off if you dump your job. Commuting, for example, is a hugely overlooked expense that’s not tax deductible. I built a relocation spreadsheet that shows a couple living 20 miles away from work and commuting daily could spend $15,000-$20,000 of their pretax income just on their commute. This is extremely overlooked, and if you understand this, you will understand why houses 30-plus miles from where you work look cheap in price but are very expensive in actual costs. My spreadsheet is here (Relocation_Spreadsheet.xlsx), and you’re welcome to play with the assumptions.

And the other assumption with FIRE is generally that you go into it owning a home as well (with or without a mortgage). Renting puts more pressure on your investments to outpace inflation. Also, note that freeing up your time can help you reduce other expenses as well, for example, learning to cook healthy food more often rather than relying on takeout. FIRE’d people fight traffic far less, they don’t have to take vacations when everyone else is taking them, and they get to meet more wealthy and/or self-employed people in their daily life, which can bring business opportunities.

In general, you have the best chance of retiring early if you use all of these asset classes:

• Stocks, including small caps (IJR), mid-caps (IWM), and international (VEA). Well-chosen dividend stocks or funds (VYM), (VYMI) also are a key building block.
• Bonds, for income, diversification, and to preserve purchasing power. Many higher-income people favor munis. Bonds can be pretty boring, but I built a model that trades interest rate futures in a pretty interesting way and gets tax advantages. For a public alternative, check out Simplify’s Treasury Risk Parity Fund (TYA).
• Preferred stocks, (PFFD), for tax-advantaged income.
• Cash, 3-6 months income is generally recommended and can be kept in a high yield savings account or money market fund (VMFXX).
• Commodities. Putting 5% or so of your portfolio commodities helps your portfolio in times of inflation. My favorite fund is Vanguard’s commodity fund (VCMDX), which owns TIPS and commodity futures at the same time for a 20 bps management fee. Commodities extend to your life as well, from owning everything you need for your lifestyle (i.e. owning an electric car and solar panels) to having enough to cover you for any emergency that could reasonably happen (i.e. 2 weeks of bottled water and food). You can probably throw some Bitcoin (BTC-USD) in there as well.
• Real estate. Owning your primary residence (and a second residence for FATFire) is a smart long-term investment, but buying into a bubble is not. If already own your home and have a low mortgage on it, that’s great. If not, make it part of your 5-10 year plan. Some friends have extended this further into landlording – but opportunities now seem few for rentals at the present moment in the cycle.
• Insurance. The purpose of insurance is to reduce variance, and insurance should be used strategically to protect your property where needed. This extends to Taleb-style options strategies like buying puts that insure against a market crash or buying puts on junky stocks. 1% of your portfolio value per year is a reasonable benchmark, 1.5% if you’re really bearish.

What Are The Top Challenges of Early Retirement?

The biggest (and most overlooked) challenge of retiring early in the United States is the unsubsidized cost of health insurance, which costs an average of roughly $22,000 per year for the typical family. By the time most people will have accumulated enough wealth to think about living on, they’re in age brackets where they have little to no shelter from skyrocketing healthcare costs. Deductibles and other gotchas can push your total outlays to $30,000-plus each and every year. Until there’s some sort of political fix to bring the US healthcare system in line with the rest of the first world, this is a considerable hurdle to retiring. This is just something that you have to have in your budget if you’re going to live in the US. Fortunately, if this is a deal breaker for you, there’s a good network of tax treaties and Social Security totalization agreements that allow Americans to live abroad with generally favorable implications for taxes, healthcare costs, and cost of living. Health insurance isn’t too bad for me because I’m a single guy, but if I had a family it would be a considerable expense. I still had to go through the process of finding good doctors and dentists who take cash though, which brought my healthcare costs down further.

The second biggest challenge, in my opinion, is the combined influence of inflation and taxes. Inflation is poorly understood but ever present. Combining taxes and inflation with the cost of living can make it very hard to stay ahead of expenses over time. Stocks are likely to continue to fall, but I now expect stocks to return 9% in the long run and bonds to return 3% (note that you might not see your return at this level for 15-plus years though). In the long run, I think you’re good for a 6.6% return from a 60 stock/40 bond portfolio. But subtracting ~25% for federal, state, and local taxes gets you roughly 5% after tax, and 2.5% long-run annual inflation will take you down to a 2.5% real return (assuming the Fed is able to get inflation down). That’s all you can spend without your standard of living slowly decreasing over time! To do better than this, you either have to earn a higher return on investment or get your tax rate down. That’s why it’s so important to use every asset class and every advantage you can find to make more money and keep it in your pocket.

For somebody with, say, $2.5 million in the bank, the magnitude of this challenge should stress you out a bit! Under these assumptions about stocks, bonds, and inflation, you’re not supposed to spend more than $77,500 annually, knowing that paying for health insurance could take your disposable income down to $55,000 or so. It’s not quite this dire – you can help yourself by spreading your money across asset classes and investing in stuff like tax-free municipal bonds, dividend-paying stocks, and preferreds. Also, there’s a 0% tax bracket you can use on dividends and long-term capital gains if you have low enough income. But my point here is that a variable 4% rule used for retirees is in the ballpark of what is reasonable – and is probably even a little too optimistic for investors living in high-tax states and looking to retire based on bull market gains. If your investments are successful, reinvesting the money above 4% will increase your standard of living.

Historically this would have been a lot easier, but you’re being squeezed from every angle here, with the biggest issue being that it’s very difficult to get a safe return after a 14-year QE binge by global central banks.

It’s effectively pretty difficult to retire early unless one or more of the following apply:

• You’re willing to relocate to a lower cost of living and/or lower tax area.
• You have the skills to increase long-run investment returns (I gave the broad strokes of my best long-term ideas above and wrote more on it here).
• We get a massive market and you can buy stocks and real estate low to set up FIRE.
• You have passive income outside of the markets, like author royalties or an online business.
• You own your home outright.

FIRE Abroad?

It’s not impossible to retire early in the United States, but many early retirees find that they have an easier time achieving their goals abroad, where they can take advantage of a lower cost of living, lower healthcare costs, and lower taxes in many cases. As of my writing this in 2022, the dollar is very strong, while many other major currencies are quite weak.

A classic move for 20th-Century American writers and artists was to live in France. Writers like Ernest Hemingway and F. Scott Fitzgerald moved to Paris in the 1920s, taking advantage of the strong dollar and living impressively well in the process. Today, the most common country for Americans to live in is actually Mexico. When I was a kid, schools in the US had just started to fully switch over from teaching French to Spanish, so I have very rudimentary French but a good knowledge of Spanish (EU CEFR B2). I definitely wouldn’t try to live anywhere with a low level of English knowledge if you don’t know the native language!

Good candidates for FIRE abroad are first-world commonwealth countries where English is spoken, European countries with high standards of living, and developing countries with large communities of Americans. At a minimum, living abroad can get you out of state income tax and paying inflated US health insurance, and property taxes are generally lower abroad as well. Every country is different, but there are some unique incentives for Americans who are willing to live abroad, from favorable tax treaties (France), to helpful territorial tax systems (UK, Ireland), to special deals that exempt income for retirees and digital nomads (Italy, Portugal, and soon Spain). Tax planning with trusts can help press your advantage further in many cases. For those of you who haven’t traveled abroad much, you’re likely underestimating the differences in the cost of living. You’ll still be liable for federal US tax on your investments in most cases, but you can reduce your overall tax burden and cost of living by considering moving abroad.

I spent a bit less than a month of this spring abroad and plan on spending the autumn abroad as well to further test out these ideas. I’ll report back my full experience to readers.

Bottom Line

FIRE is an amazing movement, and I believe each and every one of my readers should spend some time getting acquainted with it. Early retirement is often thought of as an impossible dream, but if you’re smart, flexible with where you live, and/or have a substantial amount of money saved up, it’s much more achievable than you might think. If you have the ability to freelance in addition, you might find that you don’t need much money at all to live a lifestyle that you thought only existed in Hollywood movies.