Your Guide to F.I.R.E.

FIRE Investing
Published on: September 7, 2021
Author: Thomas Chan

F.I.R.E, or financial independence retire early (FIRE), is an investing movement that began through online blogs, podcasts and forums in 2010. It’s a trendy movement amongst millennials and this post will guide you through this lifestyle so you can determine for yourself if FIRE investing is right for you.

The FIRE Lifestyle

The core element of FIRE investing is to maximize savings and leverage the appreciation of assets; you want to earn more while spending less. Many who follow FIRE will also maintain a certain spending and saving rules too.

If you want to follow the FIRE lifestyle, the second thing you want to do is accumulate assets, or possessions that give you a return over time like stocks, bonds, real estate, etc. The idea is that passive income from your assets will cover your living expenses throughout your retirement. The goal is not only to maintain your buying power – meaning you can still afford to eat a double cheeseburger instead of a single cheeseburger now and in the next 20 years – but also multiply your income without using your time.

Now how does this help you retire early? The passive income from your assets will allow you to not rely on the retirement plan from traditional work. Paid work becomes optional so you can choose when to retire.

Saving money with FIRE

FIRE has a much more aggressive saving strategy. Most financial planners recommend 10-15% but the FIRE lifestyle can be 25%, 50% or even 75%! Here is an example to compare the different saving levels with a constant income with no returns from investments:

If you were to save 10%, it will take 9 years to save 1 year of living expenses

If you were to save 25%, it will take 3 years to save for 1 year of living expenses

If you were to save 50%, it will take 1 year to save for 1 year of living expenses

If you were to save 75%, it would take 4 months to save for 1 year of living expenses

Increasing your savings will allow you to retire a lot faster and while this seems attractive, being able to save 75% of your income is not feasible for most. This is where investments would come in so you can earn bigger returns like stocks or real estate. However, not all followers of the FIRE movement do this.

Three types of FIRE Investing

There are three types of followers to FIRE.

  1.  Lean FIRE – Lean FIRE stands for people who want to retire early with small wealth and live more frugally during retirement. This is an option for people who want freedom and don’t have high expenses.
  2. Fat FIRE is the exact opposite of Lean FIRE – It’s for people who want to accumulate huge wealth and passive income and want no concerns about living expenses in your retirement. If you want to follow Fat FIRE, it might mean that you will be working a lot in the years before your retirement. Most of your money would go into stocks or real estate so you can earn returns.
  3. Barista FIRE is like a middle ground between Fat FIRE and Lean FIRE. It describes a semi-retired lifestyle where you might do part time work for supplemental income, but either way, to retire early, you don’t only have to keep track of your savings but also of your expenses.

They are two sides of one coin after all. When it comes to spending money, most followers of the FIRE movement recommend the 4% rule.

The 4% rule of FIRE investing

The 4% rule was first introduced in 1994 by William P Bengen, a financial planner. It is an idea that is used to calculate retirement spending in that your first year of retirement allows you to safely spend 4% of an investment portfolio. Then, for the rest of your life you will adjust the amount according to the inflation each year. This rule was created based on historical data on stock and bond returns over a 50 year period. According to Bengen, his calculations show that the 4% rule is perfectly safe for retirement that lasts about 30 years. Bengen continues to update with his findings over the years and his withdrawal rate is adopted by several major financial firms. That being said, the 4% rule is not perfect. You can still apply it as a rule of thumb but be aware that times have changed since Bengen’s calculations.

Critics will say the 4% rule is too easy of an answer for a complex topic of retirement spending but here’s a thought starter on how it is tricky to apply to FIRE:

The 4% rule is based on the assumption of a 30 year long retirement yet FIRE is about retiring early (or earlier than the 30 years). If you are retiring at 40 years old, the 4% rule will now only have a 87% success rate assuming your returns are coming from a 50-50% portfolio. So the earlier your retirement, the more likely this 4% rule would fail. So while the 4% rule has flaws, you can follow it as a rule of thumb and supplement with other strategies.

Is the FIRE Investing for me?

If done right, you can enjoy a long retirement with time freedom, location freedom and financial freedom but remember, FIRE is not a strategy. It is a lifestyle and should be customized to your needs. Also keep in mind that some principles of FIRE are flawed and it’s hard to predict what will happen during a long retirement.

As a financial consultant of over 10 years, here is my advice when it comes to FIRE:

  • Keep educating and informing yourself so you can manage your wealth yourself and make informed decisions
  • Understand your desired retirement lifestyle
  • Calculate the expenses you want to have during your retirement
  • The key is to increase savings and have a tax shelter strategy
  • And always remember, the sooner you start planning, the easier it gets so talk to a professional who can help you develop a concrete strategy

If you’d like to chat more about whether FIRE investing is a fit for you, feel free to contact me for a complimentary consultation. Also if you want to grow your wealth in Canada, I cover all types of financial topics on my YouTube channel.

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Thomas Chan

Thomas C.Chan has been advising for over 10 years and has built a reputation for his approach in developing personal finance strategies, setting up risk management, and accumulating wealth for Canadians.

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