There’s a lot of talk about the Financial Independence, Retire Early (F.I.R.E) movement these days. On one hand, it’s generating awareness around financial freedom which every investor should know more about. But is it actually true that you can retire in your 30s or 40s?
Understanding the F.I.R.E movement may help answer this question. In this blog, we’ll tell you everything you need to know about the F.I.R.E movement.
What Is The F.I.R.E Movement?
Financial Independence, Retire Early (F.I.R.E) means to save and invest aggressively in your 20s and 30s to retire early. The F.I.R.E movement aims to debunk the conventional notion that you can’t retire before 60.
How Does F.I.R.E Work: Definition Of Financial Independence, Retire Early
The core principle of F.I.R.E is viewed as a way of life rather than an investment strategy where you save and invest up to 50-70% of your income in assets that can generate high returns and passive income.
The other important aspect of the F.I.R.E movement is to live below your means. When you keep your expenses low, you can save or invest more. This can help you achieve financial independence in the long run.
The motivation behind F.I.R.E is to willingly choose not to work full time by making your money work for you compared to retiring early and partying forever.
The origins of F.I.R.E can be traced back to the concepts laid out in two books:
1. “Your Money or Your Life” by Vicki Robin and Joe Dominguez
2. “Early Retirement Extreme” by Jacob Lund Fisker
The groundwork for F.I.R.E was established by these books by combining the principles of “Simple living” and investing aggressively. Simply put, the higher the savings/investment rate, the faster you can retire.
Ever since then, millennials have embraced the concept and made it their own. But there are criticisms that the F.I.R.E movement is only for those in the high-income group.
But the F.I.R.E movement has received significant coverage over the years and believe it or not, there are even dating sites dedicated to bringing people who share the F.I.R.E vision together.
4 Types & Variations Of Financial Independence Early Retirement (F.I.R.E)
1. Lean F.I.R.E
Lean F.I.R.E enthusiasts tend to live a minimalist lifestyle so they spend less than the average person. They save up to 25x their annual expenses and adhere to a strict budget.
Benefits Of Lean F.I.R.E May Include
It is the most practical sub-set of F.I.R.E because the methodology requires you to generate just enough passive income to fulfil basic needs.
Living a frugal lifestyle in the present may help you live a frugal lifestyle post-retirement - this is the simple underlying principle of Lean F.I.R.E and perhaps the biggest advantage.
Lean F.I.R.E can be a stepping stone to prepare yourself for more comprehensive F.I.R.E lifestyles like Fat F.I.R.E.
2. Fat F.I.R.E
Fat F.I.R.E is a direct contrast to Lean F.I.R.E. Someone who wants to lead a Fat F.I.R.E lifestyle will have a large post-retirement budget with investments that can produce aggressive returns and passive income.
Benefits Of Fat F.I.R.E May Include
Prepares you for a very extravagant post-retirement lifestyle (eg. living in a 4 BHK in Lutyens Delhi or South Bombay).
Helps you secure the financial future of your dependents along with yourself.
Bigger budget to dip into for emergency expenses.
3. Barista F.I.R.E
Barista F.I.R.E is a combination of both Lean and Fat F.I.R.E. The Barista F.I.R.E lifestyle will involve getting a part-time job after retiring early to fund post-retirement expenses.
But Barista F.I.R.E enthusiasts will have sufficient savings and investments that can generate aggressive returns and passive income.
Benefits Of Barista F.I.R.E May Include
Low but convenient part-time income along with a large corpus of F.I.R.E and comparatively lower stress.
Does not require you to sacrifice your lifestyle as much.
Healthcare costs may be covered due to part time employment.
4. Coast F.I.R.E
Coast F.I.R.E enthusiasts will get a part-time job after retirement just like Barista F.I.R.E. But they don’t have enough money saved up for post-retirement.
Benefits Of Barista F.I.R.E May Include
Live life on your own terms but with an eye on the future.
May not require you to actively sacrifice the most important aspects of your lifestyle.
Presents the opportunity to go back to full-time employment in case you exhaust your F.I.R.E budget due to unforeseen circumstances.
What Are The Steps To Achieve F.I.R.E?
It’s important to note that there’s no easy way to achieve financial freedom at any age. You’ll have to stick to a budget, make sacrifices and consult a wealth coach periodically. That said, here are widely accepted steps to achieve F.I.R.E:
1. Understand F.I.R.E
While the basic tenets of F.I.R.E are straightforward, it’s important to know about the various types of F.I.R.E (listed above) to understand what lifestyle would suit you.
2. Start Planning For Retirement
Once you understand what type of F.I.R.E enthusiast you are, consult a financial advisor and create a budget. Ideally, you would have to make 2 budgets:
Pre-retirement: This is crucial. You’ll create a plan which will allow you to save and invest aggressively while handling your present-day expenses with an eye on the future.
Post-retirement: The end goal. Based on the lifestyle you want, you’ll evaluate and invest in options that can fund your post-retirement expenses that you will create (roughly).
Note that no budget is set in stone. Every budget must have room for both good and bad instances of life. Focus on having liquid assets too. Speak to a wealth coach to know more about investing in assets that can help you plan for future wealth creation.
3. Live below your means
Cutting your expenses can help you live a less extravagant life today and post-retirement all the while saving more money. This is crucial to achieving financial freedom of any kind.
Saving even ₹1,000 more than usual each month can help you add more to your F.I.R.E vision. Let’s see what happens to this money over time when you invest in mutual funds SIP or keep the money in a savings bank a/c.
Invest (@ 12%)
Save (@ 3%)
This does not, however, mean that you should not leave room for joy. Stick to a budget. But ensure that the budget factors in expenses for recreation and/or group activities.
Explore avenues that can add to your existing income. This may involve getting a side gig, freelancing, or starting a small business of your own. The math is simple:
More money today = more investments/savings today = more money tomorrow.
5. Invest, invest, invest
Saving your money is important. Once you do that, you should think about making your money work for you for F.I.R.E. How do you do that? By investing!
Remember, F.I.R.E involves investing at least 50-70% of your income. Choosing the right aggressive investments for the long term can bring you closer to achieving F.I.R.E due to the risk-returns principle.
Assume you earn ₹1,00,000. You save 10% and invest 60%. You start a monthly SIP (₹15,000 each) in aggressive investment options for the long term.
Equity Funds (@ 12%)
International Funds (@ 18%)
Indian Stocks (@16%)
US Stocks (10%) in $
US Stock Returns in ₹
Note: Historical returns don’t guarantee future success. This is just an example. All facts & figures as of 23-12-2020.
The “shut it and forget it” principle applies here. Speak to a wealth coach or download a reliable app like Cube to invest your money in assets that can generate returns over the long term.
Watch this video to learn how you can start investing in mutual funds
3 Benefits (Pros) Of F.I.R.E
1. Reduced stress
The rigours of a 9-5 can be taxing. Retiring early can save you the hassle of working every day.
2. More free time & flexibility
Retiring early ensures that you have time and ability on your side. You can pursue your dreams, hobbies and spend more time with family and friends. F.I.R.E helps you live a life that you choose on your timeline.
3. Healthy investment habits
Since F.I.R.E requires you to save and invest aggressively, you’ll develop a lifelong habit of spending less and saving/investing more.
3 Risks (Cons) Of F.I.R.E
1. Impact on mental health
More free time to do nothing or close to nothing may have negative effects on your mental health.
2. Side effects of frugality
Living below your means may require you to cut back on several things. This may affect morale and happiness.
The future may hold unexpected and unforeseen emergencies that you might not be prepared for with your F.I.R.E budget.
Financial Independence, Retire Early (F.I.R.E) has been gaining a lot of traction for obvious reasons. But the promise of retiring early does come with its own share of benefits and risks.
While you won’t have to worry about long work hours, not having to work or be productive may impact your health. At the same time, you may or may not be prepared for every future scenario.
Retirement is hard. F.I.R.E can be harder since it would require you to invest 2-3x more than you spend on essentials and wants. Thus, it is crucial to know more about your idea of early retirement and whether F.I.R.E may be right for you.
You can read these blogs to know more about retirement finances:
Watch this video to know how busy professionals can grow rich
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.
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