What Is the FIRE Method?

It doesn’t matter how much you love what you do — the thought of getting to spend your days doing exactly what you want with total freedom is certainly an appealing concept. Retirement is one of those far-off, one-day phases of life that we’re all slowly working towards — but most of us are resolved to the fact that retirement is synonymous with getting older and slowing down. That doesn’t have to be the case — and for many everyday folks, it’s quite the opposite. The FIRE method is a trendy financial practice that essentially sets you up for an early retirement by working toward living off your investment income and achieving financial freedom at a young age. It requires incredible discipline and frugal living but it might just be the way to fast track to getting to do what you want, when you want, without having to wait on a pension. RELATED: How to Avoid the Dangers of Lifestyle Creep In order to better understand exactly how the FIRE method works — and how we could potentially achieve FIRE — we spoke to Steve Sexton, personal finance expert and CEO of Sexton Advisory Group. Here’s what you need to know about the FIRE method and what steps (and sacrifices) you’ll need to take in order to set yourself up for an early retirement. What Is the FIRE Method? FIRE stands for “Financial Independence, Retire Early” and is an aggressive approach to finances that recommends saving up to 70 percent of annual income in order to make way for financial independence and early retirement. “This method emphasizes extreme savings, investing, and a frugal way of life,” explains Sexton. “While there are different approaches to practicing FIRE, those who follow this method are typically working to achieve savings of 30x their yearly expenses and plan to allocate 3-4% of their savings annually to cover retirement expenses.” Who Is This Method for? Can Anyone Work Towards FIRE? According to Sexton, this method is ideal for those who are passionate about retiring early and have the discipline and diligence to live by stringent financial parameters to accomplish this goal. “The FIRE method is likely more appropriate for moderate- to high earners who have the flexibility to allocate up to 70 percent of their annual income to savings and investments while still being able to afford the cost of living needs,” he explains. “It would be challenging for someone living paycheck to paycheck to implement FIRE, especially if much of your paycheck is allocated to your cost-of-living needs.” This method can also be challenging for those who cannot live by the frugal principles of FIRE on a long-term basis; for many people, this way of life is unsustainable, says Sexton. That doesn’t mean that those living on a middle class salary can’t work towards achieving FIRE — especially if you’re open to achieving a more modest nest egg to supplement your income. There are various different kinds of FIRE such as Barista FIRE — which is a generalized term that means living off your investment return while supplementing your income with a part-time job or casual consulting work. The more lenient FIRE alternatives like this one are also a great option to strive for if you’re hoping to eventually work on passion projects that might not bring in enough income for you to live comfortably. Are There Any Downsides to FIRE? “As mentioned above, the FIRE method isn’t accessible or realistic to some people, depending on how much you earn and whether this type of frugal living is sustainable for you,” says Sexton. “For those who care more about striking a financial balance that allows them to enjoy life while saving money in the process, FIRE is likely not the right financial approach.” According to Sexton, FIRE can also foster a negative relationship with work. For example, some FIRE followers will put up with a higher-paying position that causes them unnecessary stress in order to achieve their financial goals but underestimate the long-term intangible costs of staying in a job they hate. Best Tips for Working Towards FIRE? So you’re set on achieving FIRE? Here are Sexton’s best tips for how just about anyone can achieve some form of early retirement if they’re ready to make the sacrifices required. Plan Every Detail “Having a detailed plan and having the discipline to stick to it is the first step in being able to work towards FIRE,” says Sexton. “This starts with following a budget that is primarily focused on the essentials.” Make More Money In addition to an effective budget, those who follow FIRE are always in pursuit of a higher-earning job or position that allows them to earn as much money as possible, adds Sexton. This extends to retirement benefits associated with a job, including 401k matching, HSAs, and other perks that get you closer to FIRE. Invest Aggressively Lastly, an aggressive retirement investing plan is critical to achieve FIRE — this means investing in your retirement accounts as early as possible to take advantage of compound interest over time. Sexton also urges folks to remember that FIRE takes time! “Success doesn’t happen overnight and you’ll have to be prepared to commit to this lifestyle change for the next 10-20 years,” he explains. “It’s also OK to try FIRE and realize it’s not for you — it’s important to know there’s more than one method to achieve financial freedom.” You Might Also Dig: 10 Apps That Will Help You Save MoneyHow to Improve Your Financial Situation100 Things Every Guy Should Do