All around the world the FIRE movement has been turning into a big thing recently. In this article, we will learn more about the idea behind the movement, its goals, strategies, and prerequisites. We will also find out why subscribing to the FIRE lifestyle is becoming more and more popular in our country.
The FIRE stands for Financial Independence, Retire Early. The movement had originated in the USA amongst IT-specialists and then became particularly popular in the 2010’s.
The goals of the FIRE movement
The key objective of the FIRE lies in accumulation of enough assets for early yet comfortable retirement. This lifestyle is supposed to provide one with an opportunity to make paid work optional by the age of 30–40.
The strategy for achieving the FIRE goals
Those seeking to attain the FIRE try to cut their expenses to such an extent that allows for accumulation of retirement savings in 10 to 20 years. Up to 50% of income might be saved which leads to quite a frugal lifestyle. Eventually, the followers of the FIRE move away from the cult of consumerism. Modesty and austerity become prerequisites of financial independence.
The proponents of the FIRE movement follow the 4% rule that helps to calculate the maximum percent of savings that can be spent annually — the safe withdrawal rate. This allows for maintaining reserves for as long as possible.
How can one calculate this rate?
First of all, the volume of annual expenses should be estimated. For instance, it equals to approx. $6,800. This sum should be divided by 4 and then multiplied by 100. The target will be $170,000 — the passive income that should be enough for at least 30 years of retirement.
In this model, the savings are normally invested in long-term low-risk assets such as index ETF. This provides enough money for living expenses and covering the inflation.
The background for the FIRE movement
Those who pursue the FIRE strive for having an opportunity to create, practice their hobbies, travel and spend more time with their families in middle age.
They believe that the retirement cushion provides one with freedom to choose the employer. In particular, if the employer disrespects the person or neglects his interests the latter can always quit the paid job. In this way, the movement occurred in response to age discrimination in the labor market.
To sum up, it is clear that following the FIRE principles can be quite beneficial for individual financial welfare. The followers of the movement develop self-discipline in matters of expenses, limit their growing demands, live within means without having to borrow money and stay away from emotional buying. In this case, they actually gain an opportunity to save part of their income and accumulate reserves. Besides that, the supporters of the FIRE aim for increasing their financial and investment literacy.