There’s so much confusion as of late when it comes to the Financial Independence Retire Early (FIRE) movement. I like to think that when the FIRE movement was first hitting the scene over a decade ago it was so much easier to understand because the early adopters were an ‘all or nothing’ bunch of individuals. They were going to reach Financial Independence AND Retire Early!
Reaching financial independence
They seemed to be completely devoted to the idea of reaching Financial Independence in order to be able to Retire Early. As a result, in my mind these two phrases together made a ton of sense.
However, over the following years since FIRE has really become the hot thing in the personal finance space (bad pun intended) the single term of Financial Independence Retire Early has been badly misunderstood and even misused in many corners of the Internet.
I would argue that if you’re all in on putting the two phrases together so as to never have to work again and to do so at much earlier age than what conventional practice has in store for you, then you’re doing just fine. Keep it up.
That said, if you are in that category and somehow think that there are no ‘qualifiers’ to pursuing this brand of FIRE then you’re going to potentially be badly disappointed if you don’t understand some of the thresholds that are part of this pursuit.
You need enough income to Retire Early
Let me explain. For starters, of those individuals that are seeking Financial Independence and believe that they’ll also be able to Retire Early, let me perhaps be the bearer of bad news.
Regardless of how dedicated someone might be to following the aspects of Financial Independence. especially those looking to reach FIRE in 10 years, retiring early is not a guarantee. The reason for this is that many individuals pursuing Financial Independence nowadays just simply do not make enough income to be able to retire early. To that end, every one of use has a financial number, how large or small, but there needs to be enough income to reach it.
Not everyone gets to retire early
One of the biggest fallacies of the FIRE movement is that there is an expectation that everyone who follows it will be in a position to also Retire Early. Not SO.
The biggest reason for this is that many individuals don’t realize that they simply don’t make enough money beyond their daily living expenses to have the available funds needed in order to invest in the income generating assets that are needed to build wealth.
The bottom line is that they make just about enough income to cover their expenses and not much, if anything, more than that. It’s just math.
In a prior post, I wrote that it would not be uncommon for a single young person living in a rural community in a low-cost US state to have a bare bones annual expense budget of around $25,000 to $30,000 net.
In any situation where this individual does not have more than $25,000 to $30,000 net income after expenses, they will simply not be able to meet the second half of the FIRE movement and will not be able to retire early.
Now that being said, if this same individual wasn’t at least pursuing the first half of the movement, or financial independence, they would undoubtedly be in a much worse financial situation and I would even argue, be in a distressful financial situation where they might not even be able to pay their bills from one month to another.
You’ll need 25 times your annual expenses to Retire
Therefore, not everyone who religiously pursues financial independence will be able to retire early. An individual who is looking to ALSO retire early needs to be able to make an amount of income more than their expenses that is adequate when invested that will meet the amount needed for that individual to be able to hit their retirement number (which in the FIRE community is 25 times annual expenses).
Let’s look at an example of someone with a higher annual income and who might be able to easily hit their early retirement number without having to do anything special.
Let’s consider an individual who is making a $75,000 annual gross salary in Texas (no state income tax).
They would otherwise have a net annual income of $59,995 after federal income and associated payroll taxes. Let’s also assume that this individual is relatively young, say 30-years old and has pledged to keep their annual net expenses to $37,000 a year.
Invest a little bit early over a long period of time
If this individual were to invest $18,000 annually (keeping the remaining annual $4,995 dollars in a rainy day emergency account) in an investment that would average a 6% annual rate of return each and every year for the next 25 years, our subject would have $1.064 million dollars in their retirement account and another $130,000 or so in their rainy day fund once they hit 55-years of age.
Assuming that our individual was steadfast in their $37,000 annual expense lifestyle, they would need $925,000 dollars to retire early based on the FIRE retirement calculation of $37,000 x 25 = $925,000.
With a retirement account of $1.064 and an emergency fund of $130,000 at age 55, our case subject would certainly have met their goals of early retirement based on the financial numbers they need.
So would it be possible for a young individual to retire early without having to make a six figure annual salary?
Well, we just showed that it is more than possible, it would be highly probable should they have followed the FIRE way of life.
A different interpretation of FIRE
What I am championing here is a shift in the interpretation and application of FIRE. What if the simple pursuit of the financial independence ideals was onto itself an end goal? Would anyone truly be in a worse financial position for doing so?
I don’t believe they would be. The great thing about taking the actions of FIRE is that there are different levels of financial independence. These levels of financial independence range from ‘Lean FI’ (someone who saved 25 times their annual expenses and lives frugally) whereas ‘Fat FI’ has an individual comfortably retired and not necessarily cutting costs or following a spending budget. The following pst does a great job of describing the different levels of financial independence. https://www.moneycrashers.com/leanfire-vs-fatfire-differences/
The truth of the matter is that if someone were to embrace the principles and put into practice the activities of financial independence it would be realistic to believe that an individual would be in a much better financial position at the end of their working life than if they hadn’t in the first place.
In addition, the individual who at least followed the financial independence way of life would overall have made much better financial decisions over their lifetime than their counterparts who didn’t and have a much better financial situation than they ever would have had they done nothing.
Conclusion
Therefore, the simple pursuit of Financial Independence onto itself should be the default practice if an individual wants to at least reach financial security (which I define simply as having enough money to cover your monthly expenses, being able to cover an unforeseen or unplanned expense and having an available emergency fund).
In the event an individual makes enough money to invest beyond their expenses, the pursuit of Financial Independence is a pathway to be able to Retire Early.
The bottom line is that you can have Financial Independence without Retire Early, but you can’t have Retire Early WITHOUT Financial Independence!
