[Editor's Note: Here at WCI this week we are celebrating all things FIRE, especially our WCI Network partner, The Physician on FIRE, who left medicine over a year ago at age 43.]
By Dr. James M. Dahle, WCI Founder
What Does FIRE Stand For?
For those who aren't in the know, FIRE stands for Financial Independence, Retire Early. The FIRE Movement has its own Wikipedia page these days and has technically been around for decades, at least since Vicki Robin penned Your Money or Your Life in 1992. However, nobody was really talking about it when I started blogging in 2011.
Who Started the FIRE Movement?
The term came into common usage in the financial blogosphere between 2014 and 2016. Mr. Money Mustache (whose blog started the month before The White Coat Investor) was considered to have one of the early FIRE financial independence retire early blogs, having retired in his early thirties before ever having children, with a stoic philosophy on a relatively small income, but it was several years before dozens of blogs with the term FIRE in the name showed up, including The Physician on FIRE who started in 2016.
My first discussion of FIRE was published in late 2011, although I didn't use that term and in fact, wasn't all that positive about the concept. That post discussing the FIRE methodology and why it may not be worth the sacrifice was called 14 Reasons Why You Shouldn't Retire Early. It took me five years to get around to writing the rebuttal with 14 Reasons to Retire Early. That post further discussed the concepts of the FIRE movement and pointed out the obvious benefits of retiring early.
I've had a lot of fun observing The FIRE early retirement movement over the last decade, including its boom, some growing pains, Peak FIRE in 2018, and even some failures. I don't know if most people consider me a FIRE blogger and The White Coat Investor a FIRE blog, but I am financially independent, I do blog, and we do talk about FIRE concepts frequently. So I see myself as more of an insider than an outsider, but I'm sure I spend too much money for many FIRE bloggers' taste and I certainly don't qualify for the RE part of FIRE given I'm not only running WCI, but still practicing half-time.
The FIRE Method to Reach Financial Independence
What is the FIRE method and how do you live the FIRE lifestyle? Let’s dig into the five Financial Independence Retire Early principles.
#1 Retirement Is a Number
When people hear the word retirement, most of them think about old people playing golf or sitting around watching TV and hoping the grandkids come over this weekend. Retirement is putting in your 20 or 30 years for the company, getting a pension and a gold watch, and moving into the golden years. Early retirement is 62, 60, or GASP! Even 55. The financially literate, however, think of retirement not as an age, but as a number.
“How much money do I need to retire?“, you may ask. Well, it varies between people but it can be calculated. Roughly, it's 25 times what you spend per year. If you are talking about a very early retirement, perhaps it is 30 or even 33 times what you spend each year. That's all of your expenses, of course, including taxes and any financial advisory fees. Where does that number come from? It mostly comes from the 4%
What Is the 4% Rule for Retirement?
Basically, there were a bunch of studies that showed, using historical data, that if you only spend 4% or so of your nest egg per year, adjusted upward each year with inflation, you were very unlikely to run out of money over the course of a 30-year retirement. In fact, on average you still had 2.7X what you retired with after 30 years. If you reverse engineer the 4% rule, you get 25 times what you spend, so you can calculate your retirement (financial independence) number. Obviously, you have to actually have some idea how much you spend to figure this all out.
#2 Lower Your Expenses: Savings Rate Matters More Than Rate of Return
The second most important concept in FIRE is to realize that the faster you want to reach financial independence, the more important how much you earn and how much of that income you save becomes. Traditional retirement investors rely on decades of compound interest to do the heavy lifting on their portfolios. FIRE fanatics don't have that kind of time and they must apply the FIRE saving strategy. They want to be retired in a decade. Or less. On average, their retirement savings aren't even going to double once between the time the money was earned and the time of retirement. If saving 15% of gross income is an adequate savings rate for a typical American to have a typical career and retirement, and 20% is adequate for doctors with their usual late start, you can imagine that a true FIRE fan needs to be saving much more money. You're right, and it's not unusual for these folks to be saving 40%, 50%, even 70% of their gross income for retirement. The more you save, the sooner you reach financial independence. Most famously, this concept was explained by Mr. Money Mustache in a chart similar to this one:
Note this chart uses NET savings rate, not the gross savings rate I mentioned above. It's constructed using reasonable return assumptions and the 4% rule. As you can see, though, if you're only saving 10% of your income, you'll be working from age 20 to age 70. But if you'll save 50%, you can cut 34 years off that career. Big difference! The most fanatic of FIREees start looking at those savings rates that get them to FI in less than a decade and see possibilities.
#3 Capitalists Don't Have to Work
The FIRE Movement may be the most solidly pro-capitalist movement ever. The whole idea of FIRE is to live not from your labor, but from your capital. As such, the focus is on getting capital ASAP so you can live on it. Well, there are only two ways to get capital. You can either borrow it (which comes with its own costs and risks) or you can do it the old-fashioned way, by earning it and not spending it.
The most hard-core of the FIRE folks want to be able to not work by the age where most doctors complete their training—in their 30s, or even late 20s. That means they need to get a good income, get it early in life, save most of it, and invest it wisely. The classic FIRE person is a “tech-bro” that came out of college at 22 as a software engineer and earned a six-figure salary, possibly with some stock options, but then kept living like they were in college. Maybe no partner. Probably no kids. Inexpensive tastes. Cheap hobbies and maybe a love of traveling on a budget or even travel-hacking. The physician version of this is similar, but generally involves retiring at 40 instead of 30 and perhaps a bit more expensive tastes. Instead of living like a resident for 2-5 years as I've advised all docs, you do it for 10 years and then quit completely.
The concept here, though, is that either you can work hard or you can get some money and then make that money work hard.
#4 The Correlation Between Spending and Happiness Is Very Loose
FIRE folks are convinced that you cannot spend your way to happiness, either before or after you hit your financial independence number. The evidence is pretty strong that people become accustomed to higher incomes, higher spending, nicer stuff, and fancier experiences relatively quickly, and are not left any happier. Certainly, the law of diminishing returns applies. Driving eight hours to spend a long weekend at Aunt Cindy's is great. Flying to Cancun and staying in a three-star resort is even better. But flying to Cancun first class and staying in a five-star resort is only a little better, even if it costs five times as much. As Socrates said, “He is richest who is content with the least.” FIRE folks really do believe that spending more won't make them any happier.
#5 Many FIREd People Work, and Most Get Paid
If there is anything that has become clear over the last decade, it is that most of these people who FIRE don't actually stop doing meaningful work. People who are driven enough to save up a lifetime's worth of assets in a decade are not the same types who can binge Netflix for weeks on end and be content. They're simply not the same people. They work. Sometimes it is just volunteer work, but more often it is paid work. However, it tends to be part-time, on their own terms, and usually involving a passion project. They've discovered that not only does that work engage their mind and make them happier, but it also provides additional financial security and opportunities, even if that opportunity is just to give more money away. The Internet Retirement Police might say they've just changed jobs and aren't really retired, but FIREes don't care what you say because they're FI and doing what they want and you're not and aren't. So shove it.
Let's Have Some Fun with the FIRE Method
All right, it's FIRE week here at WCI, so if any of the above sounds good to you, be sure to check out The Physician on FIRE for an in-depth treatment and some fun with spreadsheets. At least do yourself a favor and calculate how far away you are from financial independence to retire early given your current level of assets, spending, income, and savings rate.
Now, let's see if we can poke some fun at the FIRE Movement. There's a lot to poke fun at.
#1 The FIRE Method Isn't Anything New
One of the weird things about FIRE is that these folks think they came up with something new. They didn't. I mean, financial authors and bloggers have been talking about saving, investing, and living off your assets for decades. Imagine a hypothetical conversation.
Financial author: If you save 20% of your income for 30 years, you'll have enough money that you never have to work again. For example, if you make $250K and save $50K at year at 5% real for 30 years, you'll have $3.3 million. At 4% per year, you'll then be able to spend $133K a year, which should be enough to maintain your lifestyle in retirement.
Reader: What happens if I save more than 20%?
Financial author: Well, you can either retire sooner or you can spend more in retirement.
Reader: What happens if I spend less both before and after retirement?
Financial author: Well, you could retire a lot sooner.
Reader: What happens if I spend A LOT less both before and after retirement?
Financial author: Well, I'd have to run the numbers, but I'll bet you could retire in no time at all.
Reader: I'VE INVENTED FIRE!!!!!
That was kind of my first reaction to the FIRE Movement. I just found it kind of funny that people thought it was some kind of new thing or profound revelation.
#2 Different Types of FIRE
This one makes me laugh, too. Some people decided they needed to divide FIRE into categories. Definitions are a bit murky, but these should get you by.
This the most extreme version of FIRE and requires significant sacrifice.
Spend more and risk less than a Lean FIRE person.
Coast FIRE (Slow FIRE)
Still have to work for now but you don't have to actually save any more money to reach retirement goals.
Saved enough to FIRE but still working part-time for health insurance or to live a more Fat FIRE lifestyle.
Hitting FIRE, that isn't LEAN FIRE, in 3-7 years instead of 10-15.
So there was regular FIRE and there was Lean FIRE, and Fat FIRE, and even among doctors, Morbidly Obese FIRE. (Join POF's Fat Fire Facebook Fraternity to learn more.) The idea being that you spend less and take on more financial risk by retiring with less if you're a Lean FIRE person, and you can spend more and risk less if you're a Fat FIRE person. The best part is that people started to actually assign dollar values to these categories and argue about them.
“Nope, you're spending $28K a year, that's not a Lean FIRE at all! What's wrong with you? That's clearly at least Love Handle FIRE.”
It keeps going. Now there is Coast FIRE which is the concept that you can stop saving, keep working, and eventually hit financial independence. The fact that you no longer need to save for retirement, but can “coast” into it may allow you to work less or take a job that pays less. At first glance, it doesn't make sense because if you were perfectly happy living on only part of your income so you could save most of it last month, and you'll eventually have enough to provide for that income when you do FIRE, what are you going to do with it all now? But I think it allows people to justify cutting back at work even though they're not truly FI yet. Then, there's Barista FIRE for those that have saved just enough to fund their retirement but still work part-time for health insurance benefits or to earn extra income for a more comfortable retirement. Barista FIRE allows you to maintain your pre-FIRE existence with a smaller nest egg than would otherwise be required.
#3 The Religion of FIRE
Any group of people can become somewhat cultish over time. But if you really want to see the religious side of FIRE, wait until a prominent national finance guru says something mean about them. Take Suze Orman when asked about FIRE:
“I hate it. I hate it. I hate it. I hate it. Listen, everybody. I know you want to retire at 25. At 30. At 35, but… as you get older, things happen. You get hit by a car. You fall down on the ice, You get sick. You get cancer. If a catastrophe happens, if something goes wrong, what are you going to do? You are going to burn alive. You need at least $5 million, or $6 million. Really, you might need $10 million, short of that, it’s just not going to be enough for most people. You can do it if you want to. I personally think it is the biggest mistake, financially speaking, you will ever, ever make in your lifetime. I think it’s just ridiculous. You will get burned if you play with FIRE.”
Oh boy, did the FIRE blogosphere go nuts about that interview done on one of their own podcasts. The reaction to Dave Ramsey saying, “At 40 you’re never going to work again another day in your life?” was just as harsh. Vox got into it, too, calling FIRE “implausible”.
Who cares if someone doesn't want to do what you're doing, no big deal, right? That's not the way at least some people in the FIRE movement view it. Not only are you wasting your life, but you're slaughtering the planet with your wasteful ways, driving back and forth to your job every day. The intolerance makes me laugh a little.
#4 Buying Happiness
Anyone who thinks you can't buy happiness has never been heli-skiing. Heck, skiing itself is an expensive hobby. Lift tickets are now over $200 a day at some places. I can remember skiing as a kid for $9.99. Don't even get me started about $1500 skis, $500 jackets, and $200 goggles. But guess what? It's more fun than playing disc golf. It really is. Especially when you have the entire mountain range to yourself and your four best ski buddies. And lunch is delivered to you on a beautiful glacier.
Driving a Tesla can also be a lot of fun. A bigger house with a bigger backyard in a nicer neighborhood in a better school district has its perks, too. Sometimes I wonder if the truly stoic, hard-core frugalistas just need to be exposed to more cool products, services, and experiences. Maybe you really would rather work on whittling a new seat for your backyard than pick up a well-made lawn chair at REI, hire somebody else to mow the lawn, and spend your time on a rafting trip through the Grand Canyon, but forgive my skepticism.
All right, enough fun for now. We'll continue discussing more about FIRE throughout the week. The most ironic thing about this week, of course, is that as you read this, I (the one who is “still working”) am in the Grand Canyon rafting and canyoneering and The Physician on FIRE (the one who is “retired”) will be hosting the WCI podcast! I know he'll do a great job and I hope you enjoy it.
What do you think? Have you heard of FIRE? What do you think of it? Would you consider leaving medicine in your 30s or 40s if you had the means? What would you be willing to give up to leave that early? Comment below!