FIRE Investing – the roadmap to early retirement

You’ve heard of extreme athletes, but have you ever heard of extreme savers? Okay, granted, they might not sound as sexy, but perhaps you’ll change your mind once you realise that the pastime involves early retirement and an escape from the 9-5 grind.

These extreme savers are part of the FIRE – Financial Independence, Retire Early –movement, which is focused on a grueling saving and investment strategy that aims to allow for a retirement age long before the traditional 65. The general rule would be for FIRE Investors to invest as much as 70% of their income while they are working so that they can achieve retirement as early as possible.

Flexibility

One of the key drivers of the movement is “flexibility” – a desire for freedom from traditional employment. Many FIRE Investors aim to continue working, but on their own terms, while others want to put aside enough money to allow for a life completely free of work.

But to put aside the majority of one’s income in order to save enough to allow for early retirement requires intense discipline, sacrifice and aggressive investment – hence the “extreme saver” tag. Those who follow this lifestyle generally live as frugally as possible in order to drastically reduce expenses, work to find a variety of income streams and invest their money as wisely as possible.

First off, FIRE investors need to know their “FIRE number” – the amount of money they need to accumulate in order to allow for early retirement.

The Rule of 25%

This is a method that is often used by FIRE investors (and anyone else) to get a high-level understanding what their retirement savings goal or FIRE number is. 

The rule says you need to save 25 times your annual expenses to retire (and maintain your current lifestyle).

For example, Fire Investor A earns R60 000 a month / R720 000 a year.

Fire Investor A is happy with this annual amount as it is enough to cover her lifestyle.

The annual figure of R720 000 multiplied by 25 is R18-million.

R18-million would be Fire Investor A’s “FIRE number” – the target amount that she needs to save in order to retire and draw down the same annual income as she receives now.

For most people it would take a lifetime of working, disciplined saving and clever investing to get to the 25 x annual expenses, but FIRE savers aim to get there much earlier by extreme sacrifice and saving and/or by reducing their annual income requirements so that they can reach the 25x goal as soon as possible. (Of course the latter option would mean that you’ll have to continue living the pared-down lifestyle.)

It must be noted that the Rule of 25% is a broad guide, and its accuracy depends on a variety of factors (eg how the savings are invested, or whether lifestyle needs change) and individual circumstance.

FIRE types

As the FIRE movement has matured, so has its permutations. The traditional method of FIRE investment is known as “Trad Fire”, with a variety of other categories of extreme savers within the movement:

Fat FIRE: Fat FIRE investors want to enjoy the good life forever, and to do so they know that they need to accumulate a very generous lump sum to invest so that when they retire and apply the 25% Rule, they will be able to live off a generous passive income.  Unless you’re the beneficiary of an unexpected “liquidity event”, most Fat FIRE investors will only achieve this by reaching Trad FIRE level early on, and then continually adding to their lump sum

Lean FIRE: This is the opposite of the Fat FIRE investor, requiring the utmost dedication to cutting costs so that their annual living expenses and thus the total amount required to accumulate in order to retire (based on the 25% Rule) is minimised. This is the most frugal and extreme FIRE investing philosophy and would require a lifetime of pared-down existence.

Barista FIRE: The Barista falls between Fat and Lean Fire. Those who follow this strategy don’t necessarily want to stop working altogether – but want to build enough of a nest egg early on so that they can ultimately choose to work part time or on projects that they love but don’t necessarily pay huge salaries.

Investing

A critical element for FIRE investors is how to invest the money that they are working so hard to put aside. Stashing cash in a general savings account is not going to be any help in getting to the fabled FIRE number – but if it’s invested wisely, the money can be put to work. Typical FIRE investment strategies would include using tax-advantaged accounts (like a tax-free savings account) or low-cost index funds. Putting aside money from as early as possible also allows for investors to reap the rewards of compound interest.

Universal principles

Although following a FIRE investment strategy may seem like an incredibly unrealistic lifestyle to maintain – if you earn a modest salary or if you have a family to support, for example – the movement encompasses general principles that are useful for anyone. These include:

1. The importance of retirement planning: whether you aim to retire at 50 or 70, it’s critical to understand how much you need to save for retirement so that you can continue to support the lifestyle you desire once you stop working. Without a plan, you’re relying on luck.
2. Living within your means: FIRE investors live well below their means so that they can put aside as much money as quickly as possible. For everyone else, a more realistic goal is to spend only as much as you earn, and to manage any debt wisely.  
3. Investing for growth: A savings account won’t cut it – in order to put your money to work you need to invest your money in products that suit your risk profile and life stage.