The FIRE Movement- How You Can Retire Early Too

FIRE is an acronym that stands for “financial independence retire early.” People who join this movement aim to retire as early as their thirties or forties. These people go to the next level in saving as much as they can and increasing their income as much as they can in a short period of time. Aggressively saving and being frugal, however, does not come without costs. Most people tend to prefer a balance between spending and enjoying the present while also saving for the future and retirement. Other people like what they do and can’t imagine not working. The movement has gained traction though, as there are many people who would rather work hard now and enjoy life later. 

The different types:

LeanFIRE: This aims at a minimalist way of living in order to save and retire early. One lives on the bare minimum, and even in retirement, one lives very modestly. Because of extreme saving, these people tend to retire earlier. 

FatFIRE: This is less frugal than LeanFIRE as this approach doesn’t have one sacrificing as much currently or in retirement. One will have to save more because of this, and retirement might take a little longer. 

BaristaFIRE: This approach has the same goals in mind, but lets people work part-time or do freelance or do something they love that doesn’t pay as much. By saving for this type of lifestyle, one is able to work for pleasure for most of their life rather than just working to live. 

Knowing how much to save:

Before retiring, one must be certain that one’s money won’t run out. The majority of retired people can use about 4% of their portfolio per year. This 4% ensures that retired people have enough money to live on and have enough money left to last them through their retirement. However, this is only the case if one has about ¾ of one’s money invested. To figure the numbers out, you should roughly calculate your expenses per year and divide it by 0.04. You can also then use the number you calculated as your expenses per year and multiply it by 25 in order to roughly estimate how much you need to save overall in order to retire. 

Important things to remember:

You most likely can’t take money out of your retirement account until you are at least 55 years old. In this period of time from when you retire early until this age, make sure you have an account set aside to support you through these “bridge years” between these ages. 

How to get started:

1) Look for ways to cut your costs

- Move somewhere with a lower cost of living

- Live in a smaller space of with roommates

- Forgo memberships and subscriptions

- Don’t take vacations

- Sell your car if you have one

- Buy used clothing/items

- Don’t drink alcohol

- Don’t own pets

- Don’t buy gifts

Overall, try to save around 50-57 percent of what you make and invest in funds or stocks with high yields, and take advantage of cashback. 

2) Get a side job or another way to earn money than your main paycheckRent out additional rooms 

- Rent your car

- Sell your stuff

- Tutor

- Resell things

- Start a small business

3) Invest

- Invest in stocks and real estate

- Buy bonds

4) Pay your debt

Make sure to pay any loans or credit card debt as soon as you can. Debt increases your monthly overhead and the interest rate just accumulates as more time goes on.

Why You Should Start Saving for Retirement Now

Whether you’re a student, postgraduate, or entry-level employee, it’s never too early to start saving for retirement. Even if retirement is thirty years down the road, saving now could help alleviate stress and anxiety in the long-run. Here’s why you should start saving now for retirement and how to do it.

How Do Retirement Plans Work?

Before we get down to the perks of investing in retirement early, it’s important to understand what a retirement plan is and what options are available. A retirement plan typically incorporates an account you can invest money in annually that will grow over time with compound interest.

Some retirement accounts are referred to as pension plans. This is a fund where an amount of money is added over your working years and oftentimes only accessible once you reach a certain age or threshold. Many government organizations and large companies typically offer this to employees.

The most commonly used retirement accounts are Individual Retirement Accounts typically referred to as IRAs and a 401(k). The best part is that you can invest in both depending on your circumstances!

What is an IRA?

An IRA is a type of retirement account that allows you to input pre-taxed income into bonds, stocks, cash, ETFs, and even mutual funds. These investments grow without tax until you withdraw them when you retire. The account can be opened with any financial institution that’s been approved to do so by the IRS. You’ll typically need to wait until a certain age to actually use funds from this account or you could be charged an early-penalty withdrawal fee. You might also be subject to income tax if you withdraw early.

There are a few types of IRAs available including a SEP, ROTH or SIMPLE in addition to the traditional IRA. SEP and SIMPLE IRA accounts are usually used by business owners or someone who is self-employed. A Roth IRA incorporates after-tax contributions and oftentimes will allow tax-free withdrawal in retirement. There is typically a cap on how much you can put into a retirement account yearly.

Ultimately, one of the main perks of investing in an IRA is tax-deferred or tax-free growth. It’s also a way to supplement any savings or even Social Security.

What is a 401(k)?

Like an IRA a 401(k) is another retirement account that allows you to save. These accounts, however, are offered through your employer and allow you to make automatic contributions typically through automatic payroll systems. Like an IRA, your contributions won’t be taxed until you withdraw in retirement, although a Roth 401(k) allows tax-free withdrawal by investing taxed income. Many companies even offer to match your contributions to your 401(k), which essentially gives you free money.

Why Should I Start Saving Now?

Now that you understand your options, here are several reasons why you should start investing now, even if it’s difficult to think about the future.

The Compounding Effect and Compound Interest:

The compounding effect is the idea that if you reinvest your money, you can earn even more money in the long-run. Every year, your investment collects annual interest which can range depending on the account. This is added on top of the initial amount you put in and builds up year after year.

For example, if you invest $10,000 into a retirement account at age 20 with an annual interest rate of 7%, by the time you’re 60, that investment could equal nearly $150,000. If you invest that for a twenty-year period with the same interest rate, you may only get about $39,000 for retirement. So the earlier you start, the more money you can save in the long-run.

Don’t Miss Out on Free Money

If you work for a company that offers to match the amount you put into your 401(k), every year you postpone investing in a 401(k) is money lost. Additionally, the IRS caps the amount you can put into retirement accounts every year. For example, in 2019 and 2020 individuals can put up to $6,000 annually into retirement accounts while those older than 50 can add an additional $1,000. Even if you try to make up for lost time, you lose those past opportunities to invest, you lose the extended compound interest, and you’ll decrease the end value you get in retirement.

Social Security isn’t Enough

Social Security is typically taken out of every U.S. worker’s paycheck. It offers benefits to retirees as well as those with disabilities. Typically, you can’t start receiving Social Security until you’re 62, and while receiving the money is definitely a relief, it’s not enough. According to the Social Security Administration, benefits cover only about 40% of your pre-retirement income. Therefore, if you want to live a comfortable life after retirement, you’ll need an account to supplement it.

It’s often hard to start planning ahead for the end of your career, especially when you’ve just started your first job. But taking the time to prepare now for the future will help you live a more comfortable life in the long-run.