Financial Independence, Retire Early AKA FIRE is a concept populated by the book ‘Your Money or Your Life‘ written by Vicki Robin and Joe Dominguez in 1992. The concept sets forth a “fire” plan to save up to even 70% of your income so that you can retire early and comfortably. This level of savings and investments are often categorized “extreme.”

Traditional Retirement

The concept of traditional retirement comes with the plan that a normal working citizen will retire at his mandated retiring age, which is usually between 55-65 depending on each country’s law. A normal citizen would still usually struggle after retirement, after dedicating around 40 years of his life to work, due to mismanaged expenses. So at a glance, this does not make sense and just. This is why concepts such as frugal living, retirement planning and Financial Independence, Retire Early (FIRE) have come forth.

Financial Independence, Retire Early (FIRE)

In the FIRE scheme, you will be making certain sacrifices. But you will be free from the stresses of the world and will be your own financial boss. Sounds like a fair deal!

The FIRE concept suggests that no matter how much you earn, your living standard should remain more or less the same. This way, any amount you earn extra could be put aside for your retirement fund.

Where do you put aside this money? This is the key area that you need to focus on. Keeping your funds in a savings account, albeit being the safest way, is not so effective with returns. Most savings accounts give you below 5% per annum.

Hence, the ideal way to set aside your money is to create a portfolio of investments. This way, you have different modes of investments which would yield different levels of returns. The benefit of a portfolio is that even though the returns of one mode of investment drops, there will be other sources of return to minimize the fall. Also “never put all your eggs in one basket.”

Once your fund reaches 30 times your annual expenses, you can retire. Still, you will not withdraw from the fund itself, unless necessary. You will be able to live off of the returns this portfolio provides you. Even though you make withdrawals from the fund, it will still have the propensity to grow on its own thanks to re-investments.

However, retiring early with a FIRE plan does not mean you can burn through your savings over one-weekend trip to Vegas. It will still require some careful planning and maintenance of your living standard so you can enjoy your retirement in peace.

Is ‘FIRE’ Practical Enough?

There are many criticisms against FIRE as being a scheme that best works with people who are already rich. If you earn $20,000 per year, it might not be feasible to set aside 70% of that into a retirement fund. Which is true enough!

However, the trick is that you don’t target for 70% savings at every income level. Maybe you can do 30% savings at $20,000 income and increase it to 50% savings at $28,000 income. In both cases, you survive with $14,000 per annum. But your savings rate is drastically improved and the remaining years for retirement is drastically reduced.

Your Living Standard =< Your Income

Most of the time, people tend to adjust their living standard according to their income. This is what should be done. But often, people don’t realize where to draw the line. Most often, people tend to get into an upward spiral in uplifting their living standards and let it go out of control.

But is this really necessary?

When you earned $20,000 per annum, you still survived and you still had friends. When you start earning $30,000 per annum, you will still survive and still, most likely, have the same friends. Finally, you start earning $100,000 per annum, you will still survive and you will still have the same friends. So what changed? You uplift your living standard at each of these income junctions. But you will realize that you are still struggling or not content. This is the wealth trap that most get stuck in.

Pro tip for financial independence is always manage your living standard within your means. Buy a BMW when you can do so easily, without compromising on your other standards of living.

Don’t try to impress others for a day and suffer years and years in debt or financial crisis.

Peace of mind > everything else