Have you heard about the trendy
retirement movement called F.I.R.E.?
It is based on the attractive
sounding idea of retiring early.
But what does FIRE really stand for?
and does it actually help you to retire earlier?
That's what we are going to cover in this video.
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What is the FIRE movement?
FIRE stands for financial independence and retire early.
It's a lifestyle movement that became popular
among millennials around 2010.
The interesting thing about FIRE is that
it first spread online through blogs, podcasts and forums.
The core element of FIRE is to maximize savings
and leverage the appreciation of assets.
You can increase your savings in a number of ways.
Find ways to increase your income or decrease expenses
In a nutshell,
you want to earn more, but spend less.
Many people who feel drawn towards the FIRE movement
follow certain spending and saving rules.
We will have a closer look at those in a minute.
For now, keep in mind that maximizing savings
is a core part of FIRE.
If you want to follow the FIRE lifestyle,
the second thing you want to do is to accumulate assets.
Assets are possessions that give you
some sort of return over time.
It could be stocks, bonds, real estate and other things.
The idea is that passive income from your assets
will cover your living expenses throughout your retirement.
The goal is not only to maintain your buying power
meaning you can still afford to eat a double cheeseburger
instead of a single now and in the next 20 years
but also multiply your income without using your time
So far so good?
But how does all of this help you to retire earlier?
Well, the idea is this:
Because of the passive income from your assets,
you don't have to rely on the retirement plan from traditional work.
Paid work becomes optional for you
and you can choose to retire early.
How to save money following the FIRE movement?
Most financial planners recommend
saving 10-15% of your income
But FIRE recommends becoming
an even more aggressive saver.
Let's look at a simple example to show you
how aggressive saving could help you retire early
For the sake of this example,
let's assume your income is constant
and you get no returns from investments.
If you save the recommended 10%
it takes you 9 years to save for 1 year of living expenses.
But what if you save more?
Let's say you save 25%,
now you only need 3 years to save
for one year’s living expenses.
At 50% it takes only 1 year and
at 75% it's down to a third of a year!
increasing your savings allows you to retire a lot faster.
Now, for sure the idea that strict saving allows you
to retire faster seems attractive at first.
But being able to save 75% of your income
is just not feasible for most people.
It would mean you live below your means
pretty much all the time.
That’s why If you want to retire early,
there is no way around putting some of your money
in investments that will earn you big returns
such as stocks or real estate.
However,
not all followers of the FIRE movement do this.
Over time, it becomes apparent
that there are 3 main types of FIRE.
Which one can you identify with?
First we have Lean FIRE
Lean FIRE stands for people who want to retire early
with small wealth and live more frugal during retirement.
This is an option for people who want freedom
and don’t have high expenses.
But it can mean moving into a small, cheap apartment
and collecting coupons for groceries.
Fat FIRE is the exact opposite of Lean FIRE.
It’s for people who want to accumulate
huge wealth and passive income
and want no concerns about
living expenses in your retirement.
If you want to follow Fat FIRE
it might mean that you will be working a lot
in the years before your retirement.
Most of your money would go into
stocks or real estate so you can earn returns.
Barista FIRE is like a middle ground between
Fat FIRE and Lean FIRE.
It describes a semi-retired lifestyle where
you might do part time work for supplemental income.
but either way, to retire early,
you don’t only have to keep track of your savings
but also of your expenses.
They are like two sides of one coin after all.
When it comes to spending money,
most followers of the FIRE movement
recommend the 4% rule.
What exactly is that?
The 4% rule is an idea that got popular
as a rule to calculate retirement spending.
It says that in the first year of retirement,
you can safely spend 4% of an investment portfolio.
For the rest of your life,
you then adjust the amount according to inflation each year.
The 4% rule was established
by the financial planner William P Bengen
He first introduced the 4% rule in 1994
and frequently updates his findings throughout the years.
Today, Bengen’s withdrawal rate is adopted
by several major financial firms.
He created this rule based on historical data
on stock and bond returns over a 50-year period.
According to his calculations,
the 4% rule is perfectly safe
for a retirement that lasts about 30 years.
Unfortunately, the 4% rule is not perfect.
You can still apply it as a rule of thumb
but be aware that times have changed
since Bengen’s calculations.
It’s not a rule that is set in stone.
Critics of the 4% rule say that it’s too easy of an answer
for the complex topic of retirement spending.
FIRE is about retiring early.
Which likely results in a retirement
much longer than 30 years.
But the 4% rule was based on the assumption
of a 30 year long retirement.
Now here’s where it gets interesting.
If we assume you retire at age 40,
the 4% rule has only a success rate of 87%
assuming your returns are coming from a 50/50% portfolio
The longer your retirement,
the more likely the 4% rule will fail.
Some calculations even indicate that,
if you retire at age 40 and live until age 95
then your withdrawal rate is only 2.2%.
What’s more,
the 4% rule was calculated on historical US data.
This data might not be representative
for the world we live in today.
As you can see,
the 4% rule has its flaws and
is therefore not a rule to live by to extremes.
It can be helpful as a rule of thumb
but you want to supplement it with other rules and strategies.
It is a good idea to follow a spectrum of spending rules
and not one single, inflexible rule.
For example, you can practice variable spending,
where you spend more when times are good
and less when times are bad.
let’s sum up the pros and cons
of the FIRE movement you learned so far.
If done right,
you can enjoy a long retirement with time freedom,
location freedom and financial freedom
FIRE is not a strategy but a lifestyle
and therefore you can customize it to your needs
Some principles of FIRE
like the 4% rule - might be flawed
It’s hard to predict what will happen during a long retirement
You might see yourself forced to save every last penny
and live below means
If FIRE is attractive to you
but you don’t know how to deal with the downside,
here are a couple of my advices that you can do:
Keep educating and informing yourself.
so you can manage your wealth yourself
and make informed decisions.
Understand your desired retirement lifestyle
Calculate the expenses you want to have
during your retirement
The key is to increase savings
and have a tax shelter strategy
And always rememeber,
the sooner you start planning , the easier it gets
Keep in mind, FIRE is a lifestyle,
not just an investment strategy.
so it’s always a good idea to talk to professionals
who helps you develop a concrete strategy.
They can help you create a blueprint together
so you can reach your financial goals much faster.
Hey, Thanks so much for watching!
If you want to have more clarity on your retirement options
I have left something for you in the description below.
Feel free to check it out
and I will see you in the next video!