Want To Retire Early? Learn To F.I.R.E.
Financial Independence Retire Early, better known as the FIRE movement, is an ambitious movement aimed at achieving financial freedom in the shortest amount of time possible. While the most common interpretation of this movement is to retire early, many FIRE practitioners aim to have enough passive income to do whatever they want without worrying about money.
In the Philippines, this movement hasn’t earned much popularity yet despite early retirement being a familiar concept as more and more millennials engage in non-conventional means of employment such as freelancing and remote work.
How does FIRE work?
FIRE advocates strive to save enough to cover their annual cost of living for many years. They don’t just wing it along the way; they follow a technique based on two popular retirement strategies: the 25x Rule and the 4% Rule, both of which assist people in determining “safe” withdrawal rates from their retirement assets.
What is the 25x rule?
This rule follows that in order for a person to retire, he or she must save at least 25 times his or her annual salary. Say for example your salary is ₱30,000 a month, equating to ₱360,000 a year. In order for you to meet the 25x rule, you must have at least ₱9 million in your bank account.
This rule states that in your first year of retirement, you should be able to live comfortably on 4% of your money in investments, then adjust that amount to account for inflation each year. According to historical data, living on just 4% of your income for 30 years will allow you to use your retirement portfolio to cover costs.
These two rules govern the overall direction of a person’s journey towards FIRE. Think of it as a standard template on how you can achieve the ultimate financial freedom. However, this is an evolving concept and people from different walks of life take this differently.
Two types of scenarios when FIRE is achieved
FIRE is not a one-size-fits-all aim. Some people simply aspire to be financially self-sufficient, while others are hell-bent on beating the system and retiring early. The amount of money people are willing to save each year, as well as what they expect to do and how they want to live in “retirement,” all influence how people define FIRE.
One of the most common misconceptions about the FIRE movement is that participants desire to retire. Instead, some see it as a means to do the work that they really want to do. They might use their free time to volunteer, work part-time, or even establish a business, thereby assisting others in achieving their FIRE goals.
FIRE is more about being able to take on initiatives and activities that they’ve always wanted to accomplish for this group than it is about disappearing out of society.
Do whatever they want in life
For others, living a FIRE lifestyle means having complete control over their lives. They may desire to travel, but rather than taking a two-week vacation, they may look for a place to stay for months. This group may elect to work on a personal project when the time is right or choose to sleep in for the next six months.
How to achieve the 25x and 4% rule?
Achieving FIRE is no easy feat, but there are proven methods to make it less difficult to follow.
- Make a list
To find out how much money you’ll need to retire, first estimate how much money you’ll spend each year. As a starting point, think about the costs listed below:
- Rent or mortgage
- Health care and long-term care costs
- Annual cost of groceries
- Annual cost of medication
- Transportation costs (whether that’s car payments and maintenance or public transportation expenses)
- Amount you plan to spend on travel each year
- Pet expenses
The list above isn’t a very exhaustive list, and it can be different for you and for everyone else depending on the type of lifestyle you lead or want to pursue when you retire. However, the bottom line is, you start it off by making an exhaustive list of everything you need to be paying for when you reach that retirement period.
- Add miscellaneous spending
Unexpected things just happen in life, and most of the time we end up spending on them whether we like it or not. So, after adding up all your potential cost for a year, make sure you make room for some discretionary spending. Think of it as your yearly emergency fund.
- Get an insurance policy
To shave off all the expenses you don’t necessarily need to make when you retire, it’s worth getting insurance – a health care plan, life insurance, and even a retirement plan.
- Start investing and diversifying
Investments pay off in the long run, the more you accumulate these investment assets early, the bigger pay off you will get in the future. You don’t need to follow traditional investment routes such as stocks, bonds, or index funds, there are other rewarding options available today like cryptocurrency and DeFi, although they’re riskier. And of course, don’t put all your investments in a single portfolio, you should mix and match different investments to diversify.
- Hustle hard
Since the goal is to retire as early as possible, you should be hustling harder than everyone else. Get a side job or start a business. Do whatever it takes to increase your cash flow and income so that you can set aside as much money as you can to achieve financial independence.
Misconceptions about FIRE
- Early retirement is not doing nothing for the rest of your life
While FIRE members are retiring early, it is not for the purpose of sitting about all day. Instead, FIRE’s “retire early” component emphasizes the freedom to leave a 9-to-5 corporate job and pursue employment that is more meaningful to them.
- You don’t need to forego your necessities to achieve FIRE
Passive income is important to FIRE members in order to achieve financial success. For example, you can live off the money you make from passive income streams like a property you put up for rent, your business, or other sources of income where you are not required to put in a lot of effort. That’s why it’s important to establish a passive income stream before you go living a life of FIRE fully.
- You don’t need a six-figure income to be financially independent
The amount of money a person earns has no influence on their ability to achieve FIRE. Many people whose income improves over time become victims of inflation, which increases their quality of living beyond their financial means. Someone might upgrade their car or go on a shopping spree because they believe they “deserve” it.
Should you pursue FIRE?
If your goal is to hustle hard to enjoy a life of freedom in the earliest time possible, FIRE is probably one of the best templates you can follow. You don’t have to, but if you’re looking for a collective sentiment that fits your goal, this movement should be able to give you enough resources, support, and motivation to keep that FIRE burning within you.
Otherwise, if you’re the kind of person who is happy with the simple life – taking things slow and still find meaning and fulfillment pursuing the typical 9-to-5 life, no one should tell you to stop otherwise. At the end of the day, it’s all about pursuing what will make you truly happy.