The Financial Independence, Retire Early (FIRE) movement has become the new face of frugality. Investopedia defines FIRE as a program that promotes extreme saving and shrewd investing. Proponents of the methodology tout the dream of early retirement as the biggest enticement. It is also the point of departure between FIRE and traditional retirement plans and budgets. If you chose FIRE, you may be asked to save up to 70% of your income. The accrued savings will make it possible to quit your job and live comfortably on qualified withdrawals well before the typical age of retirement.
The program is broadly divided into four plans; Fat FIRE, Lean FIRE, Barista FIRE and Coast FIRE. Fat FIRE adheres to the canons of traditional lifestyle, which encourages more savings for retirement. Lean FIRE for its part is more stringent since it is grounded on minimalist living and demands extraordinary savings. To adhere to this program, you must follow a restricted lifestyle. Coast FIRE is fairly adjustable, which make it an ideal program for persons with sufficient retirement package. However, followers can take up part time jobs to boost their retirement quickly.
Beginner’s guide to FIRE
Traditionally, the early retirement age was pegged at 50. The new FIRE movement is driven by dreamers who want to retire in their 30’s and 40’s. To live according to the dictates of FIRE, you must have sufficient savings to support your current and future expenditures. According to the Forbes magazine, the FIRE approach is anchored in the following counts:
1. Track your expenses
Taking time to track your expenses will help you know where your money is spent. Using this information, you can plan your expenditure more prudently and identify the areas where cuts and savings can be made. The assessment will also help you find ways to boost your income.
2. Slash spending
Slashing your spending will help you achieve FIRE. With the right mindset, you can make the right spending cuts. For most people, a large portion of expenses usually goes into paying rent, food, transportation and entertainment. A workable assessment can be done by analyzing the weekly and monthly expenses.
3. Calculate your financial independence number
The safe withdrawal rule for FIRE during the retirement period is set at 4% of savings. However, this number may be adjusted depending on your level of frugality and what you consider a safe rate. On the whole, the standard rule stipulates savings of up to 25 times your yearly expenses and adjusting conservatively for inflation.
4. Get tax efficient
You need to maneuver your way through taxes in a proactive and efficient way. To leverage tax benefits, try to work out ways to reduce your income tax and save your money with lucrative, qualified accounts. For instance, you can channel some of the accrued savings to high yield, qualified accounts like a ROTH IRA during the retirement period.
5. Invest aggressively and wisely
Investment is a key constituent of FIRE. However, the choice of investment has to be targeted at achieving your financial goals. Money can be invested in various portfolios, including real estate, mutual funds, fixed deposits and the stock market. If you invest your money in the stock market at an early age, you can still recover from a down market down the line. As you invest passively, you need to work full time to enhance your financial well-being and achieve FIRE.
Challenges of achieving FIRE
Even with the promise of early retirement, FIRE may not fit everybody’s budget and lifestyle. Creating a financial buffer to provide cushion during retirement takes serious sacrifices and hard work. According to Market Watch, some of the questions you need to answer to ensure FIRE works for you include:
• How will you cover your health insurance before reaching the retirement age? The Medicare plan usually kicks in at retirement.
• What guaranteed income options do you have? Think annuities and pensions.
• In your estimation, how many years do you expect to live?
• How will the performance of the stock market affect your investment portfolio and how well are you prepared for future market downturn?
• Do you have a workable financial plan to cater for your retirement?
• Do have a healthy financial reserve separate from social security benefits?
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