Financial Independence / Retire Early (FIRE)

Financial Independence, Retire Early (FIRE) encourages you to save and grow your money so you can stop working at a younger age than your parents did. It involves saving aggressively and being much more frugal than the average person. These FIRE strategies can help you gain early financial independence.

To map out a path to early retirement, consider working with a financial advisor who can provide hands-on guidance.

What Is FIRE?

You’ve probably heard stories about people retiring rich at 45. The FIRE method can help because it centers around saving enough money to give people the financial independence to retire early, or FIRE.

For many, this means retiring before age 50, but everyone’s FIRE number is different. The goal is to take control of your financial life so you don’t have to rely on a 9-to-5 job.

Most people end up spending more time punching the clock than enjoying the things and people they love the most. The movement is really about being financially free to live the way that you want to.

How the FIRE Method Works

By using this approach to saving and investing for early retirement, you commit to saving most of your money for several years.

Saving up to 70% of your income and investing it aggressively can help you accumulate enough to sustain your lifestyle over the long term. When your savings total 30 times your yearly expenses, then you are ready to retire.

To cover living expenses after retirement, you make small annual withdrawals of around 3% of your total savings. This requires a lot of effort to ensure expenses are tracked so you don’t overspend, as your money can run out much earlier than anticipated.

Variations of the FIRE Method

There isn’t just a one-size-fits-all approach to achieving financial independence.

There are a few FIRE variations to suit different retirement lifestyles.

Lean FIRE

This adheres to a very minimalist lifestyle once retirement begins. Many people in this category live on less than $25,000 per year. Several even end up living in a different country with a more affordable cost of living once they have quit their day job.

Barista FIRE

This is for people who don’t want to quit working entirely but don’t want a full-time job that consumes all their time. With this method, you save enough money to quit your 9-to-5 job. However, you still work part-time to supplement your savings a little bit.

Fat FIRE

This is the traditional FIRE method for people who want to maintain a similar lifestyle while retiring early.

This requires a very aggressive saving and investment strategy. You also usually need a high income for several years to fund this method.

How to Start Down the FIRE Path

An investor meets with their financial advisor.

There is no single way to start down the FIRE path other than by saving a lot of your income. Most will want to invest as much as they can while they still have a full-time job to increase their total funds.

These tips can help you begin saving with FIRE.

1. Keep Six Months of Expenses Liquid

While FIRE devotees like to discuss different investments, they do follow the traditional recommendation of keeping six months’ worth of living expenses in a liquid emergency fund. For many people, this just means a savings account connected to their checking account.

However, as a FIRE adherent, you probably won’t want to settle for the dismal interest rates banks are paying these days. Instead, you will likely look to optimize the return even on your emergency fund.

There are a few ways to do this.

High-yield savings account. You can park it in a high-yield savings account for higher interest rates than a traditional savings account.
Money market account. Another option is a money market account, which functions similarly to a savings account but typically offers a better rate.
Certificate of deposit. You may also take the chance that you won’t really need your emergency fund and put it in a certificate of deposit (CD). This typically pays a higher interest rate than savings and money market accounts, but it also locks down your money for a period of time.

2. 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, beginner investors fall for the hype. They dump their money into the next big thing through an initial public offering (IPO) and watch their investment sink as news of falling revenue emerges. They may also make the mistake of sticking to one sector that ultimately 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 to invest across and within sectors so that a single stock’s or sector’s decline won’t take your whole portfolio down.

Mutual funds and ETFs make it easy to diversify your portfolio. Use our asset-allocation calculator to determine the right type of asset allocation for your portfolio.

3. Minimize Investment Fees

Of course, market volatility is just one thing that may hurt your returns. Another important factor to consider is cost.

While mutual funds are great boons to individual investors, they often come with hidden fees, so they shouldn’t be bought blindly. Always take the time for an in-depth review of every fund before investing.

Generally, the lower the expense ratio, the better. No-load mutual funds may be ideal because they have no sales commissions when you buy at the front end or sell at the back end. Investment companies sell these funds directly, so there’s no need to buy from a third party that would charge 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.”

4. 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.

However, you’re going to need money after retirement age, too. Therefore, it’s important to put some of your savings into some type of retirement account. These accounts 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, opening an IRA is still a great option. Better yet, you could open a Roth IRA. This won’t reduce your taxes, but it offers more flexibility than other plans for making penalty-free withdrawals.

How a Financial Advisor Can Help You Create a FIRE Plan

Pursuing FIRE involves aggressive saving, precise withdrawal math and long-term tax planning.

All of this can benefit from the professional input of a retirement financial advisor. It is particularly important for the FIRE plan because one mistake made decades before traditional retirement age has much longer to compound than one made closer to retirement.

Stress-Testing Your FIRE Number

The rule of saving 30 times annual expenses and withdrawing 3% annually is a helpful starting point. However, it doesn’t account for market downturns early in retirement, unplanned expenses or a retirement horizon that can stretch well past what most retirement models assume.

An advisor can:

Run specific numbers against past market cycles to see how your savings would have held up during historical downturns.
Test whether your withdrawal rate will last for 40 or 50 years, rather than the 25 to 30 years most planning tools default to.

Example

Someone planning to retire at 45 with a target based on 3% annual withdrawals might learn, once tested over a longer time horizon, that their plan carries a higher risk of running out of money than expected.

This may lead them to either save more or build greater flexibility into their spending.

Getting Money Out of Retirement Accounts Early

IRAs and 401(k)s restrict withdrawals before a certain age. However, investors may not know the actual paths that FIRE savers use to circumvent that restriction without penalty.

An advisor can review retirement strategies such as:

Building a Roth conversion ladder over several years.
Setting up substantially equal periodic payments under IRS Rule 72(t).
Simply withdrawing original Roth contributions.

Example

Someone retiring in their early 40s, with most of their money locked in a traditional 401(k), might work with an advisor to roll over a portion of that account into a Roth IRA each year for several years before retirement. They can time things so the converted funds become accessible without penalty right when they’re needed.

Splitting Savings Between Retirement and Taxable Accounts

Someone retiring decades early needs money well before penalty-free withdrawals from retirement accounts kick in. Deciding how much to put into tax-advantaged accounts can be far more complicated than with a regular brokerage account.

An advisor can:

Help map out exactly how much income you’ll need to bridge the years before your retirement accounts open up.
Figure out how much should go into taxable accounts now to cover that gap.

Example

A couple aiming to retire at 40 might discover that fully maxing out their 401(k)s and IRAs would leave them without enough accessible cash for their first decade-plus of retirement. This prompts an advisor to help them shift more new savings into a taxable account instead.

Covering Healthcare Costs Before Medicare

Leaving the workforce decades before turning 65 means paying for health coverage entirely on your own for years.

An advisor can:

Help estimate what health coverage will realistically cost during the gap years before Medicare.
Look at how ACA marketplace subsidies interact with your projected retirement income.
Check whether your savings target already accounts for this.

Example

Someone planning to retire at 48 might find that health insurance costs for the years until Medicare eligibility add up to far more than they’d budgeted for.

This prompts a higher savings target or a plan to keep taxable income low enough to qualify for subsidized coverage.

Bottom Line

Achieving Financial Independence and Retiring Early, or FIRE, 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. However, growing your savings can work for anyone willing to learn about investing.

Tips on Retiring Early

If you’re not sure where to start, you may want to consider working with a financial advisor. An advisor can help create your financial plan to help you achieve your FIRE goals. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re really committed to starting the FIRE, we developed a guide on everything you need to know about retiring early.
Location can have a big impact on how quickly you achieve FIRE. To help out, we compiled a study on the most affordable cities for an early retirement.