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The FIRE Movement: Financial Independence Retire Early
Tags: Ideas in Finance
Posted in: Ideas in Finance
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The FIRE Movement: Financial Independence Retire Early

There’s something interesting in the world of finance called the FIRE movement. It stands for Financial Independence Retire Early. It has a big following online and a set of rules for achieving its headline goal, including one rule that’s described as extreme saving. The objective is to save enough money so that the passive income (interest, dividends etc) that derives from it is enough to cover one’s expenses. At that point, it’s retirement time. But the time horizon is not 30+ years. The objective of the FIRE bugs is to get there fast.

The logic of financial mathematics underpins the idea. If you want to cover your expenses in a sustainable way, your need to make sure you maintain your capital and live off the interest. If you aim to withdraw 4% p.a. from your capital, you need 25x your expenses in capital to avoid whittling it away. This is not a new insight because that’s been told to potential retirees for decades. If you have expenses of $75,000 a year, you need 25 times this amount or $1,875,000 because 4% p.a. on $1,875,000 is $75,000. Vary the calculation based on your expenses. Also, if you have reliable dividend payouts from companies, especially in countries such as Australia with dividend imputation tax schemes, you might increase the 4% to, say, 5.5% or even 6%. Divide your expenses by this rate to see how much you’ll need in capital. Let’s say it’s $75,000. Then $75,000 divided by 0.06 is $1,250,000. The rate makes a big difference. 

If you’re aiming for a regular retirement at, say, age 65, you might not need that much because you can draw down your capital as you near the end of your life. But the FIRE movement is a young people’s game, and they want to maintain their capital indefinitely. 

The FIRE movement is explored in detail in books such as Steve Adcock’s (2024) Millionaire Habits: How to Achieve Financial Independence, Retire Early, and Make a Difference by Focusing on Yourself First.  At the end of the day, the strategy boils down to saving as much as possible as quickly as possible, including living very frugally. Beans on toast now, caviar later. In short, it’s an early retirement movement and the only way to get there is saving hard. The question is, how hard do you have to save?

Saving $1,250,000 to $1,750,000 or more seems a big stretch. However, one must think about it carefully. This is a young person’s movement. A young person’s expenses might be lower than $75,000. So, they can save more now. Assume you’re young and you can get your living expenses down to say $25,000. This might involve sharing a house etc. Assume that you earn $60,000. Tax will be around $9,000, leaving you about $51,000. After expenses you’re left with $26,000. FIRE enthusiasts aim to save around 50% of their income, so this works out on target for them. Assume the $26,000 is saved. Next year, another $26,000 is saved and the first $26,000 earns, say, 4% or $1,040. At the end of two years, you have about $53,000 which earns $2,120 the following year. And so on. At this rate, it will take about 15-20 years before the original expenses of $25,000 can be covered by the income earned on the accumulated capital. You can make various assumptions, such as expenses and income will rise together, or income growth will outstrip expenses and so forth to narrow down how long it will take. Most FIRE writers say that it will take about 20 years. If you’re 20, being 40 might seem a lifetime away. But your 40-year-old self might be very pleased or very disappointed with how you filled the intervening years. The FIRE people want their 40-year-old self to be very impressed. 

Ultimately, the most important thing to note is that it’s entirely possible to achieve the FIRE goal. It’s not a pipedream. And if you forget about the young part of FIRE and concentrate on retirement at 60, say, then it’s very, very do-able. But you need a plan and discipline, and you must make sacrifices. 

I see this and other financial strategies, including those emanating from the crypto community, as new takes on an old theme. When things get sticky and the malaise sets in as it has in most of the Western economies since at least 2001, you need to think about unorthodox moves. The same thing happened in the late 1970s. Inflation and stagnation set in. People found their wages going backwards and their mortgage payments going forward. I know two people who made two different moves in response back in 1980. Both around the same age (30s), both with government jobs, young families, and mortgages. One sold his house and bought a store (which the existing owner had neglected) with a residence attached, kept the job, worked the store 5 am to 7.30 am and 5 pm to 6.30 pm while his wife quit her job and worked in the store during the day. Three years later, sold up, debt free. The other didn’t make a move. Eventually got made redundant and has struggled ever since, though he luckily managed to hang onto his modest house. It takes real courage to make a move. The FIRE movement is at least encouraging people to think about things differently. 

As an aside, I’ve noticed something interesting in the neighbourhoods that I drive through on the way to work. There were a couple of very big houses for sale. These appear to have been sold to either multiple generation families or friend/family groups, who are now living their together. The houses are big enough to house 3 couples plus two sets of kids (maybe more at a squeeze). Divide the price of the house by 3 and you can see the move they’re making. This also seems to be something of a movement and I’m seeing more people recommend buying a house together with their brother or sister. Old ideas, but sometimes old ideas are old because they stood the test of time. Extraordinary times call for extraordinary measures, or maybe just tried and tested measures.

30 April 2025