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Is the FIRE Movement for You?

Have you heard of the FIRE movement? It’s an acronym for Financial Independence, Retire Early and it’s currently a widely discussed topic. We’ll explore a few FIRE approaches, achievability, and pitfalls so you’re in the know.

The Concept
The idea behind FIRE is to spend less and save more. More specifically, to maximize your savings rate through less spending and/or higher income to achieve financial independence and retire early. Most people applying this concept are aiming to retire in their 40s to early 50s. 

The Approaches
There are many approaches to achieving FIRE. We’ll look at minimalism to extreme frugality to focusing on extra income for savings.  

Minimalism: We see more and more people practicing minimalism as a lifestyle. It is a conscious decision to buy with purpose. This could naturally translate into spending less as you’re no longer buying items for the sake of buying. With less distraction and clutter, there is room for focus on saving and earning more.    

Extreme Frugality: It’s all in the name – it’s the practice of living extremely cheap. This differs from minimalism as the focus is mostly on eliminating costs.    

Earning More: Side hustles are the new wave of work. If you have the time to pick-up extra income, but you don’t want to necessarily eliminate anything from your lifestyle, the earning more approach works well. The focus is on earning extra money and saving that money for early retirement. It’s a game of hustle now and relax later. 

The Pitfalls 
Regardless of the FIRE approach you find most attractive, there are pitfalls in the concept. The biggest is underestimated future costs. Let’s look at the top three: 

1. Expenses. The biggest pitfall is underestimating expenses. It may be doable now to live on $25,000 a year, but is that realistic in retirement when you may have no other income to rely on? There are always unexpected expenses for medical care, home repair, vehicle maintenance, and other emergencies. 

2. Investment Performance. FIRE uses an annual retirement withdrawal estimate of four percent as a “safe” withdrawal rate for the market. But what if the market suffers a major downtown in the 40 years or more while you’re living off of your retirement savings? Will your estimated savings be enough?

3. Healthcare. Government programs cannot be relied upon. Social security is already dwindling and there could be changes in Medicare in the future. Your retirement plan needs to have healthcare costs factored into the equation, and at a much higher expense than your current coverage. Why? Because we typically need more healthcare as we age. That’s a difficult thought to monetize when you’re young and in good health.

The Short of It
If we’re to take anything away from the FIRE movement, it’s that becoming financially independent and retiring early is achievable for anyone. It’s about saving to that magical number you’ll need in retirement and getting there sooner than age 65. 

Perhaps, it’s best to take a little from each approach by living more minimalistic since you probably don’t need half of the things you buy, saving more by spending less, and aiming to earn more with the valuable time you spend working.

Whatever way you choose to get to a comfortable retirement savings, just make sure you get there and have fun along with way.  

Source: The College Investor