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financial independence retire early

Financial Independence / Retire Early, aka FIRE, has come to connote the idea of saving and growing enough money so that you can stop working for a living at a younger age than your folks did. Followers call it a movement. Critics call it a fad. Millennials are typically identified with it, though any generation can take up its main tenets of living more frugally and investing their savings smartly. Read on to learn more about FIRE – and for common strategies that will help you gain financial independence. Of course, a financial advisor can provide hands-on, professional guidance, too.

What is FIRE?

You’ve probably heard at least some of the many stories about people retiring rich before they even turned 45. They’ve written books on the topic, and their names grace the chyrons of morning business news shows.

On any given day, thousands of would-be early retirees visit online blogs and forums, reading and sharing their tips on how to ignite FIRE. How much they need to save depends on their salary, goals and timeline, but generally speaking, they are aiming to save at least 50% of their paychecks.

Where they invest their money is also up to the saver. Typically, though, passively managed index funds and exchange-traded funds are favored over actively managed investments. The idea, after all, is to free your days so you can do what you love – not so you can manage your portfolio (unless that is what you love).

A lot of the advice offered by FIRE bloggers and podcasters dovetails with what many financial planners would recommend. Here are some of the strategies that anyone – and everyone – would be wise to follow.

Keep Six Months of Expenses Liquid

FIRE devotees like to discuss investments a lot. But they do follow the traditional recommendation of keeping six months’ worth of living expenses in a liquid emergency fund. For many people that just means in a savings account connected to their checking account. But a FIRE adherent probably wouldn’t settle for the dismal interest rates banks are paying these days.

Instead, they would likely look to optimize the return even on their emergency fund. Perhaps they would park it in a high-yield savings account or money market account, which functions similarly to a savings account but tends to offer a better rate. Or maybe they would take the chance they won’t really need their emergency fund and put it in a certificate of deposit (CD), which typically pays a higher interest rate than savings and money market accounts but also locks down your money for a period of time.

For more info about your savings options, check out our rankings below for best:

Savings accounts
Money market accounts
CD rates

Set the Right Asset Allocation

In a world full of investing apps and online platforms, it’s becoming increasingly easy for DIYers to give investing a try. But all too often, newbie investors fall for the hype. They dump their money into the next (insert tech-of-the-month) initial public offering and watch their investment sink as news about falling revenue (forget profit) comes out. Or they stick to one sector that suffers a major downturn.

As any FIRE follower can tell you, diversification is the key to withstanding market volatility while enhancing return. The idea is basically to invest across sectors and within sectors so that one stock’s or sector’s fall won’t take your whole portfolio down. Mutual funds and ETFs make diversifying your portfolio easy. Use our asset-allocation calculator to get a glimpse of what a portfolio that’s right for you may look like.

Minimize Investment Fees

financial independence retire early

Of course, market volatility is only one thing that may hurt your returns. Another thing, which you may not be aware of, are fees. So while mutual funds are great boons to individual investors, many also come with hidden fees and shouldn’t be bought blindly. Always take a magnifying glass to every fund you invest in.

Generally, the lower the expense ratio, the better. Also, ideally, you want to buy no-load mutual funds, which have no sales commissions either when you buy (at the front end) or when you sell (at the back end). Investment companies sell these funds directly. So there’s no need to buy it from a third party who collects a sales commission.

“You want to make sure that you are using low-cost and extremely diversified investment options within your portfolio,” says Michael Mezheritskiy, president of Milestone Asset Management Group. “Internal expenses of funds, sales loads, commissions– all of that eats away at your bottom line.”

Open a Retirement Account

If you’re focused on early retirement, you probably aren’t considering an individual retirement account (IRA) or a 401(k). After all, the IRS places strict rules on when you can withdraw money from tax-advantaged retirement plans without penalty.

But you’re going to need money after you reach retirement age, too. So you should be socking away some of your savings in a retirement vehicle. They can help you reach your savings goal, since both IRAs and 401(k)s offer tax savings. What’s more, many companies offer to match a portion of employee 401(k) contributions, padding your balance even more.

If you’re lucky enough to work for a company that offers a 401(k), you should go for it, if only for the match, which is free money. If not, an IRA is still a great option. To help you find the right one for you, we rated the best IRAs out there.

Better yet, you could open a Roth IRA. It won’t reduce your taxes, but it has more flexibility than other plans when it comes to making penalty-free withdrawals.

Take a Semi-Retirement

If you don’t accumulate enough wealth by your target age to live on for the rest of your life, you can always work part-time or freelance in your field. Or maybe you have enough except for health insurance. Within the FIRE movement, this is called Barista FIRE.

The Takeaway

financial independence retire early

FIRE or achieving financial independence and retiring early can sound like a luxurious concept for many. After all, you can’t really save 50% of your pay when you’re living paycheck to paycheck. Indeed, one common critique is that FIRE doesn’t really work for people in low-paying jobs – or who have kids. But the growing-your-savings part of the program can work for everyone who is willing to learn about investing.

Tips on Retiring Early

Photo credit: ©, ©, © Jorruang

Javier Simon, CEPF® Javier Simon is a banking, investing and retirement expert for SmartAsset. The personal finance writer's work has been featured in Investopedia, PLANADVISER and iGrad. Javier is a member of the Society for Advancing Business Editing and Writing. He has a degree in journalism from SUNY Plattsburgh. Javier is passionate about helping others beyond their personal finances. He has volunteered and raised funds for charities including Fight Cancer Together, Children's Miracle Network Hospitals and the National Center for Missing and Exploited Children.
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