FIRE is a movement of people who strive for financial independence. They are also interested in retiring early. The main ways to achieve this goal are maximizing consumption reduction and investing. Saving 75% of one’s income is considered the standard.
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Early retirement calculator
An early retirement calculator helps a person determine how long they need to work before retiring early. To do this, one needs to input individual parameters such as:
- Annual income;
- Amount planned to save per year;
- Current savings balance;
- Annual expenses;
- Expected investment return;
- Withdrawal rate after retirement.
Advanced tools allow for additional factors to be considered, such as expected lifespan, extra income from dividends, social security, and more.
The most sophisticated tools automatically suggest various scenarios of fluctuating returns based on asset allocation and historical data.
If someone wants to retire early, they should use a tool that accounts for dividends and other financial streams.
A key idea of the FIRE movement is generating passive income to cover expenses. The best option is not to reduce the capital base, at least until reaching the usual age for retirement.
You can use the BeatMarket passive income calculator to figure out what investments and timelines will get you to your target monthly passive income.
Step 1: Think strategically about pension and Social Security benefits
FIRE advocates strive to build their own wealth to retire early, aiming to be independent of government-set frameworks. Nevertheless, social benefits can serve as an additional source of income.
Therefore, accounting for these payments is a key part of financial self-sufficiency planning. Social benefits and pensions can also retire earlier than the standard age, starting at 62.
The bad news is that early retirement and having less than 35 years of work experience reduce the amount of benefits. Applying for them early also has a negative effect.
A person who has earned fewer than 40 social credits during their lifetime will not be eligible for benefits. It takes a minimum of 10 years to accumulate them. In 2024, one social security and Medicare credit is earned for every $1,730 of insured income per year.
Everything you need to know about your individual situation can be found on the Social Security website.
Step 2: Planning and Calculation for early retirement
To achieve financial independence, it’s essential to create a measurable action plan. This requires a series of calculations. The first step is developing financial literacy. A brief action guide includes five stages:
- Tracking expenses;
- Identifying ways to reduce expenses;
- Analyzing current income;
- Calculating the amount needed for early retirement;
- Determining the monthly savings needed to reach the desired result.
The next steps involve learning about investments and finding suitable assets. For initial investments, low-risk tools such as high-yield savings accounts or government bonds are appropriate.
Exchange-traded index investment funds may also be useful. A financial consultant will help you choose the right ones. There are special mutual trust funds. Their strategy is a ready-made plan to retire .
Step 3: Tax Optimization
Tax optimization is an important aspect for anyone aiming to retire before the age 65. USA laws offer numerous opportunities for this, such as:
- targeted accounts (401(k), IRA, Health Savings Accounts, etc.);
- reduced tax rates for long-term capital gains by comparison short-term capital gains;
- tax-free income investment tools (Municipal Bonds).
Tax-advantaged retirement accounts come with certain restrictions, which should be considered when planning for retirement.
Step 4: Ongoing Monitoring
Building wealth takes decades. A FIRE advocate should check at least once a year whether:
- they are sticking to their established retirement savings plan;
- there is a need to adjust the budget;
- their asset portfolio is meeting the expected rate of return.
All the same rules that apply to long-term investors will also apply to a FIRE advocate. This includes recommendations for rebalancing asset allocation, and so on.
Step 5: Financial Independence
There is no single criterion for determining when to throw a retirement party. The most popular general rule is that your capital should be 25 times your annual expenses. As of October 4, 2024, the yield on 30-year United States Treasury bonds is 4.268%. Investors must pay taxes on this income. To cover annual expenses, one would need to invest more than 25 times their annual expenses in this asset.
High-yield savings accounts offer up to 5.5%, which can help increase cash flow. However, periods of high interest rates are typically short-lived.
An important idea from the book Your Money or Your Life by Vicki Robin and Joe Dominguez is that income in retirement should exceed regular expenses, with the surplus reinvested. This approach helps increase cash flow and prevents a decline in living standards due to inflation.
Not all FIRE advocates plan to completely give up active income. There is a movement called “Barista FIRE.” instead of aiming to retire, these individuals plan to continue working after achieving financial independence. This might involve:
- part-time work;
- monetizing a hobby;
- changing careers to fulfill a childhood dream.
Another classification is between Lean FIRE and Fat FIRE. The first group adheres to the traditional definition of FIRE, focusing on extreme frugality. The second group consists of wealthy individuals who save significant amounts due to their high income but are less inclined to drastically cut spending.
The difference in which category a person belongs to determines how much money they need to retire ahead of schedule.
Considerations for FIRE Planning
Here are a few tips for beginners in the FIRE ideology:
- Start by building an emergency fund in case of job loss or illness. It should be liquid and cover 3-6 months of expenses.
- Be realistic about your saving potential. Extreme frugality may be easy in the first few months, but living this way for years is much harder.
- Focus not only on minimizing expenses but also on maximizing your active income. It’s harder to save for people with a small salary.
- Learn various ways of investing and tax optimization. This will help increase your rate of return.
- Diversify your sources of passive income.
It’s important to have multiple retirement nest egg. In addition to tax-advantaged accounts, you should also have a regular brokerage account. The funds from this account can be used before reaching the traditional retirement age.
How Many People Achieve FIRE?
There is no current data available for 2024 on this topic. Similar studies were conducted by Motley Fool from 2016 to 2022. According to their statistics, during that period, only 1% of Americans aged 40-45 retired. The most common retirement ages are as follows:
- 6% of Americans retire between the ages of 50s-54;
- 11% retire between the ages of 55-59.
What is early retirement age?
Followers of the FIRE movement aim to retire by their 40-year-olds. In the standard financial model, early retirement usually refers to retiring between the ages of 55 and 60-year-olds.
FAQ
How to retire at 62 with little money?
If a person needs to retire, they have the right to do so. Starting at age 62, they are eligible for retirement benefits, but the amount will be lower than the standard. Therefore, someone retiring early without savings will likely need to reduce their expenses.
Can I retire at 55 and collect Social Security?
You can start receiving Social Security benefits at age 62.
What qualifies you for early retirement?
You can access funds from a 401(k) account starting at age 55, provided you leave the company where the account was established after turning 55. If you leave your job before turning 55, you won’t be able to access the funds until you reach age 59½, and early withdrawals will incur a penalty.
What is the $1000 a month rule for retirement?
This rule allows for a quick calculation of the required savings with a 5% annual withdrawal rate. According to it, every $240,000 increases the potential monthly spending by $1,000. This rule is based on the median life expectancy of someone retiring at the standard age.
What counts as early retirement?
Early retirement refers to ending your working life before the age of 65.
What are the 4 rules for early retirement?
According to the rule, in the first year in retirement, you can spend no more than 4% of your capital. This amount is fixed and adjusted for inflation in subsequent years. Annual expenses should not exceed this amount. The capital needs to last for 30 years, assuming that the investor’s investments continue to appreciate.
Additional Considerations
There are several factors that must be considered in order to retire early.
First, the idea of extreme saving needs to be supported by the spouse of the FIRE advocate. Without unanimous agreement on this issue, the goal of saving up to 75% of income becomes unrealistic.
Second, the birth of children can significantly affect a person’s ability to save for retirement.
The third important factor is the emergence of additional expenses. For example, one would need to pay for health insurance independently, whereas previously it was covered by the employer.
Desired activities after premature retirement also play a role. Many people plan to travel, at least during the first few years of retirement, which will incur additional costs.
When retiring, it can be beneficial to move. Local income tax rates vary state-by-state, so choosing a different place of residence on the map of the U.S. is a common piece of advice among FIRE advocates.
