Financial Independence, Early Retirement, and the 4% Rule

Financial Independence Retire Early

  • September 7, 2020
  • 7 min read
  • 181 reads

Financial Independence, Retire Early

Retiring doesn’t have to be done at 65. With some hard work, dedication, and smart investments, a lot of self-control, retiring early can be an option.

If you listen to any personal finance podcasts or have read any of the latest financial books. In that case, you will have heard about the fire movement that is taking smart, hardworking millennials by storm. 

The FIRE movement “Financial Independence, Retire Early” is about gaining financial independence through frugality, saving, and investing for the purpose of retiring early. The fire method has become a popular goal amid an overall rise in anti-consumerism and an unusually long bull market cycle for stocks. 

But what is the fire movement exactly? How does it work, and let’s define early retirement? 

What is the F.I.R.E Movement?

The fire movement is how you retire early. It’s not about getting rich enough to spend the rest of your life on your yacht in the Mediterranean.

The concept is about gaining enough financial freedom to be able to afford to live without having to work. It doesn’t mean that you won’t work. It simply means that you don’t have to. 

>> Find out how much money is enough money here.

The idea is to get you out of the fire of having to work for money until your 65 and have no energy to do the things that you love.

It’s about choosing to create space and time for yourself and your family to pursue purpose and the ability to live out of your values. 

How The Fire Movement Works

The F.I.R.E movement method is to insistently save and invest as much of your income as you can. Until you have enough of a portfolio to retire. The saving target to retire in your 30s or 40s is to save at least 50% of your current income to place in high-interest investments and savings plans. 

You are probably thinking the fire movement is not for me at this point, right? How is it even possible to save half your annual income? Well, it is not for everyone, and a high income is essential when wanting to follow the F.I.R.E principals. 

When you can retire from using the Fire movement method will differ for everyone

    F.I.R.E Movement Method

  1. Save at least 50% of your income

    You will generally need to earn at least six figures. If your regular income is less than this, then it is still possible to apply the fire method. It just may take longer to gain financial freedom. Look for ways to increase your income. Whether it’s by upskilling or taking on a second job, it all adds up. 

  2. Keep expenses low

    One of the fire movement’s key ingredients is keeping your costs as low as possible for as long as possible. Don’t upgrade if you don’t need to. Make do with what you have for as long as you can.

  3. Be mindful of your spending

    So much of our spending is emotional. The fire movement focuses on knowing where you are spending your money and spending it on things that matter.

    It’s not about being a tight a## for years, but about spending on things you value and knowing exactly where your money is going. 

  4. Prioritize saving and investing

    Saving your income and then looking for great investments is what the F.I.R.E movement is all about. As the old saying goes, ‘there are many ways to skin a cat’ investment opportunities will differ for everyone.

    Don’t get overwhelmed but start somewhere. Diversify your investment portfolio so that you mitigate your risk. Start with some shares or even a rental property. But begin to research opportunities that are around you, something will stick. 

How has the FIRE Movement Changed How We Think About Retirement?

This growing movement believes that the status quo retirement age of 65 is far too old. By saving a large portion of your income, investing inexpensively, and living frugally, it’s possible to reduce it substantially. Subscribers to this lifestyle rarely believe in living a miserly, deprived existence just to save every penny.

Instead, they use careful planning and honest assessments of their finances to determine exactly how much they’ll need to save up to maintain their lifestyle indefinitely during retirement. You can learn more about saving and investing here.

What is the 4% Rule?

For years, financial experts and advisors have relied on the 4% rule of thumb, which states that the maximum annual withdrawal amount is equal to 4% of total savings for retirees to ensure that their funds will last. Like many other pieces of “traditional financial wisdom,” the 4% rule is coming under increased scrutiny in recent years.

Does the 4% rule of thumb for retirement spending still apply if you’re striving towards the ultimate goal of the FIRE lifestyle movement — Financial Independence; Retire Early?

So what are the drawbacks to this conservative financial approach to retirement spending?

  • It’s incredibly conservative. Many would argue that it’s entirely too conservative and often leads to retirees having large sums left to pass on through inheritance or other means.
  • It doesn’t take fluctuating market conditions into account. The 4% rule is based on a relatively low rate of return on your savings and investments. It doesn’t consider the possibility that your gains will exceed this conservative estimate, and that you can safely spend more in this case.
  • It’s not dynamic or flexible enough. Just applying the 4% rule across your retirement portfolio fails to consider other income sources and the timing of when you’ll receive them. For someone who retires at age 62 but doesn’t begin collecting Social Security until they’re 70 years old, the 4% rule is an unnecessary austerity measure during the yeas in between.

>> Learn how to get retirement right here.

Does the 4% Rule Make Sense if Your Goal is Early Retirement?

While the 4% rule can be a good starting point, it just doesn’t fit with the FIRE mentality to suddenly “set and forget” retirement spending. When you value making informed decisions about your finances and take a hands-on approach to achieve financial independence.

It wouldn’t make sense to abandon these principles as soon as you reach your retirement goals, especially when retiring early. Use our compound interest calculator to see how your savings can grow over time.

A 4% rate of return is well below the average total return in the current investment environment. Even low-fee, relatively low-risk index funds have returned an average of 10% over the past decade, which has had its share of market volatility. 

Once you have achieved financial independence through the FIRE movement, you will want to continue to play an active role in your investments to ensure you can stay financially free throughout the years. 

Whether your goal is to retire early at 45 or work until you’re 65, making actionable steps toward retirement savings is vital for a financially free future. There is no one size fits all when chasing financial freedom. 

Here are 10 steps to ensuring financial freedom

Financial Freedom checklist

  1. Start saving – whatever amount you can
  2. Cut down expenses – really analyze your budget
  3. Live out of your values
  4. Set financial steppingstones
  5. Do what you need to, to increase your income
  6. Pay down debt and then increase mortgage repayments
  7. Get financially literate
  8. Learn simple investment principals
  9. Take the opportunities that are in front of you
  10. Stay the course until you reach financial freedom 
Author Lauren Scungio

Lauren is a mortgage professional and personal finance writer in Scottsdale Arizona. She enjoys creating interesting and educational content geared towards spreading financial literacy and helping people make the best financial decisions.

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Last Updated: September 7, 2020

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