What is FIRE all about?
FIRE stands for Financial Independence Retire Early. It’s an acronym that was popularised in the USA by the likes of Financial Samurai and Mr. Money Mustache. Both have been blogging for years about their successes with a FIRE approach to their finances and lifestyle. The original spark for the whole phenomenon, Vicki Robin, started her own FIRE campaign almost 30 years ago in 1992 with her book Your Money or Your Life.
So what is all the fuss about FIRE? The name summarises the results you’re aiming for quite neatly. But it doesn’t tell you about the financial habits and lifestyle you can expect to adopt if you want to stop relying on a salary for your income and enjoy early ‘retirement’ instead. And by early, we don’t mean 59 instead of 65. Some FIRE devotees plan to become financially independent, living off their investment income, by the tender age of 40 or less.
The FIRE Method
How you get to this point isn’t rocket science. You spend less than you earn and invest the extra. How much you’ll actually need in your investment portfolio to be retirement-ready is also a simple equation. According to Mr. Money Mustache (and many other FIRE bloggers and podcast hosts) you’ve reached the magic number when your total net worth (assets minus liabilities) is 25 times what you spend in a year.
If you’re new to the idea, this probably sounds like far more money than you can imagine saving over the next 10-15 years, let alone before a more traditional retirement age of 65. But the important thing here is your savings target is relative to what you spend. To save enough to make FIRE work, you’re going to be living fairly frugally and this is essential to the FIRE way of life in the pre-retirement years. As well as blogging about investment strategies, most FIRE devotees also wax lyrical about how to enjoy life on a tiny budget. Takeaways, expensive holidays and clothes are out, a basic wardrobe and spending time in nature are in.
And once you’ve quit your job, your FIRE life won’t be all champagne and limousines. To make sure your nest egg lasts, you can only spend it at what’s called a Safe Withdrawal Rate. The figure the FIRE community have agreed on for this is 4%. So if you have $500,000 invested, you can spend $20,000 a year. Sounds tough but many FIRE practitioners in retirement have found they can achieve this easily by traveling to countries where rent, food,and general expenses are far lower. Without the daily demands of paid work to worry about, they can roam the world and enjoy a lower cost of living.
Is COVID-19 a spoiler for FIRE followers?
With this in mind, it’s easy to see how the COVID-19 pandemic has disrupted early retirement FIRE-style. With travel restrictions in place for many countries, people have had to cancel overseas trips and return home to live a much more restricted lifestyle. Some have no choice but to withdraw more than 4% of their investment portfolio just to cover their basic living costs in their home country.
What makes this worse is that investment markets have fallen in recent months, with the US stock market recording its steepest drop in history in March 2020. For retired people of all ages with investment portfolios, this is bad news. When you don’t have any other income to pay your expenses, you have no choice but to withdraw money from your investment balance, locking in losses for good.
For FIRE followers still in the saving phase, investment losses will also be a set back. They’re likely to have to wait longer until they can leave their job for good. With the possibility of limits on our lifestyle continuing because of COVID-19, the sort of freedom we expect from retirement may not be possible anyway.
In times like these, having a job seems a bit less like a sentence. In fact, many FIRE people in retirement continue to work occasionally, doing something they enjoy. With the economic impact of COVID-19, we could be seeing more of our retired population, young and old, returning to the workforce.
How a FIRE mindset can help your finances
Investment markets are just one part of our economy to have felt the impacts of COVID-19. Unemployment is rising and property values are likely to take a hit in months to come. Under these circumstances, uncertainty about income and finances is something we may have to get used to for a while. Now could be a good time to take on these attitudes and habits of FIRE practitioners to stay in control of your money.
1. Know where you stand financially
Getting on the FIRE bandwagon starts with calculating your net worth. This includes your savings, debts and assets you already own, such as property or shares. Taking stock of your financial position in this way can help you come up with a contingency plan if you lose some or all of your income.
2. Get to know what you spend
At a time when your job may be less secure, it’s a good idea to get clear on where your money is going so you can cut back on non-essential spending, and save for a rainy day instead.
3. Question every spending decision
In her book, Vicki Robin talks about resisting the ‘thrall of consumer culture’ and being more aware of how you’re managing your ‘life energy.’ As Robin points out, we spend many hours working to earn while making split-second decisions about spending. By considering how much ‘life energy’ you’re putting into each purchase, you might think more carefully about your spending habits.
4. Invest to boost your potential ‘passive’ income
If you do have some savings, give some thought to investing a portion to earn a passive income. But when investment markets are volatile, you’d be wise to get professional financial advice on how much to invest and a strategy that suits your risk appetite and timeframe. And make sure you keep some savings in an instant-access account just in case. Having an emergency fund on hand is a goal you should aim to meet before looking at potential returns you can earn from your savings.
A reality check for the FIRE concept
Up until now, the whole concept of planning for the unexpected hasn’t been part of the FIRE manifesto. However, the COVID-19 pandemic has shown just how extreme events can mess with your ideal financial plan. It’s a reminder that financial independence is also about protecting wealth as well as having the discipline to save it and spend it wisely.
The FIRE approach also depends on placing limits on how you live now for the promise of future freedom. Of course, we’re all having our freedom limited in some way due to the major public health crisis of coronavirus. When we do get back to a ‘normal’ way of living and spending, it might seem more important to really enjoy the present moment. Instead of an aggressive FIRE-style savings strategy, perhaps a balance between spending on your current lifestyle and saving for your future might be the way to go.
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About Miriam DeLacy
Miriam DeLacy is editor for Money & Life, a website dedicated to supporting Australians to make better money choices.