FIRE FAQ | White Coat Investor

[Editor’s Note: This week we’ve been discussing all things FIRE! Today’s WCI Network post is from Physician on FIRE and does a great job of wrapping up the Financial Independence Retire Early movement with a list of FAQs. If you’ve enjoyed the FIRE focus this week be sure to check out PoFs site and join the community of FIREes that gather on his fatFIRE and Physicians on FIRE Facebook Groups.]

So you’ve discovered this FIRE movement, and you’d love to learn more. You wish there were a FIRE FAQ. Well, now there is!

I’ve done my best to compile many of the questions I had when I first learned about financial independence and how it infers the ability to retire early. An alternate title could be “All the questions you had about FIRE but were afraid to ask”.

I’ve been writing about FIRE since 2016, and have managed two large FIRE-focused Facebook groups (fatFIRE & Physicians on FIRE) for several years. If there’s a question to be asked about FIRE, I’ve probably addressed it.

These are some of the most frequently asked questions, answered to the best of my ability.

 

Frequently Asked Questions About Financial Independence and Retiring Early

We’ll be tackling the following questions today, and I’ll give you an opportunity to ask more in the comments section. Click on a particular question to jump to my answer or scroll through the list and read ’em all.

What does FIRE stand for?

What does it mean to be financially independent?

How much money do you need to claim financial independence?

Can you FIRE based on cash flow?

What about taxes and FIRE?

Is there an age requirement for early retirement?

How long will it take to reach FI?

Are there any FIRE calculators available?

Are there books on the topic of FIRE?

Are there different types of FIRE?

Is FIRE a recent concept?

In what accounts should an aspiring early retiree invest?

Are there particular investments that work best for FIRE?

Why does it seem like everyone who “retired early” still works in some capacity?

What’s the best profession for FIRE?

Is it more important to spend less or earn more?

Where can I learn more about FIRE?

 

What Does FIRE Stand for?

Seriously? It’s right there in the title. Financial Independence. Retire Early.

Next!

 

What Does It Mean to Be Financially Independent?

Some people consider their kids to be “financially independent” when they’re out of the house and paying for their own cell phone and auto insurance. That’s not the kind of independence we’re talking about here.

In this case, financial independence means that one’s desired standard of living is fully funded indefinitely without the need for earned income.

In the situation where an individual has a family, FI for them typically means that the couple’s or family’s needs can be met without either partner working again. Some couples manage their finances separately. In that case, it is possible for one partner to be FI while the other is not.

 

How Much Money Do You Need to Claim Financial Independence?

To begin to answer this question, I will say that FI can be defined by a lump sum of invested money, a steady and reliable cash flow, or a combination thereof.

In terms of a lump sum, when you have saved and invested about 25 to 30 years’ worth of expenses, you can be considered FI. That translates to spending 3.3% to 4% of your portfolio’s value in a year.

The “4% Rule (of thumb)” states that you can afford to retire and spend 4% of your total nest egg that first year and increase spending with inflation to maintain your standard of living. The odds of running out of money over a 30-year timeframe using this withdrawal method with a mix of stocks and bonds was found to be about 3%, giving you a 97% chance of success if you make no adjustments or modifications to your spending (other than increasing with inflation) and you never earn another dime.

This is based on work published by William Bengen in 1994 and Trinity College in 1998. At the time, financial advisors were often recommending higher withdrawal rates in the 6% to 10% range, so reducing that to 4% was a conservative recommendation.

Note that the studies looked at the past performance of U.S. investments, and past performance may not be indicative of future returns. Also, if you had invested exclusively in other countries’ stocks and bonds, an even lower withdrawal rate would be necessary to achieve a high likelihood of success.

 

Can You FIRE Based on Cash Flow?

The short answer is yes. I mentioned that above.

The long answer is that most cash flow streams require some maintenance (i.e. work) and all of them require work up-front.

That said, if you have consistent, reliable cash flow that more than covers your living expenses, you can claim financial independence. If those income streams truly require minimal time or stress on your part, you can also be retired early.

The term “passive income” is often used to describe cash flow that requires virtually no ongoing efforts. It’s also used inappropriately quite frequently to describe income that is at least somewhat active. Don’t ever let anyone tell you that blogging provides “passive income”.

Passive income could include dividends or cash yields from stocks, bonds, mutual funds, certificates of deposit, and savings accounts. This is truly passive for a buy-and-hold investor.

Social Security benefits are another form of passive income that we can expect to receive in some form, although it may not be until decades after retiring.

You can also earn passive income from a book you wrote, a product you created, or a song you performed. There was work to do up-front, but once that work is done and you’re no longer actively promoting whatever it is that you created, ongoing income can be passive.

Real estate investments run the gamut from fairly passive (REITs, real estate funds, crowdfunded deals) to quite active (scouting and purchasing single family homes and managing them as rental properties). The latter can become more passive with a good property manager and the right systems in place.

You can be FI based on some combination of cash flow and money invested. Let’s say your expenses are $10,000 a month and you have consistent, reliable passive income of $5,000 a month. You would need to cover the remaining $5,000 a month, or $60,000 a year with 25 to 30 times $60,000 = $1.5 Million to $1.8 Million.

Or cut your expenses in half and you shouldn’t need another penny!

 

What About Taxes and FIRE?

This question comes up a lot, and it’s a little tricky since everyone will have a different tax burden in retirement, but it’s an important question to consider.

Some taxes, like sales taxes and property taxes, are basically consumption taxes and you should just consider them as part of your annual spending.

Income taxes should also be considered part of your annual expenses, but realize that they will very likely be much lower in retirement than they were during your working years. Many early retirees will pay no federal income taxes at all.

If the majority of your retirement savings is in tax-deferred accounts, plan on paying income taxes and do your best to estimate what they will be based on your drawdown plan using a tax calculator like TaxCaster from TurboTax.

Plan on the tax code changing any number of times in the future. If you’ll have a low taxable income in retirement, the impact on you may be small, but the introduction of a European-style value-added tax (VAT) could have a major impact on all retirees.

 

Is There an Age Requirement for Early Retirement?

If you’re receiving your golden watch in your 60s, that’s a pretty typical age to retire. The Social Security Administration considers age 66 to 67 to be full retirement age.

While you could probably claim an early retirement in your early 60s, you’re only shaving a few years off. Most people would consider retiring in your 50s to be early.

It’s not at all uncommon for FIRE aficionados to retire in their 40s and 30s. Some even pull it off in their late 20s, although retiring that early often leads to an encore career of some sort.

 

How Long Will It Take to Reach FI?

Getting antsy?

The more you earn and the less you spend, the quicker it will happen for you. There are also some factors beyond your control, like stock market returns or real estate appreciation, that will help determine how long it will take.

If you’re starting from broke and you live on half your take-home pay (after-tax income), you can be FI in about 15 years. That’s the Live on Half Challenge.

I’ve created a calculator to help you determine how many years it will take you based on your current retirement savings, monthly additions, and assumed rate of return. Plug your numbers in here.

 

Are There Any FIRE Calculators Available?

Why, yes there are!

In addition to the one I just mentioned, I’ve made a few others.

Savings Rate Calculator
Added Time to FI
Social Security

More sophisticated FIRE calculators can be found at FIRECalc, CFIRESim, and Portfolio Visualizer.

 

Are There Books on the Topic of FIRE?

Why yes, there are!

Many were introduced to FIRE by Vicki Robin and Joe Dominguez, the authors of Your Money or Your Life. (My Review)

In the past five years or so, a number of newer FIRE volumes have hit the shelves. You can find an expanded list on my recommended books page and read a few reviews I’ve written.

Choose FI by Mamula, Barrett, Mendonsa

Work Optional: Retire Early the Non-Penny-Pinching Way by Hester (My Review)

Set For Life: Dominate Life, Money and the American Dream by Trench

How Much Money Do I Need to Retire by Tresidder

RESET: How to Restart Your Life and Get F.U. Money by Sawyer (My Review)

Financial Freedom: A Proven Path to All the Money You Will Ever Need by Sabatier (My Review)

Playing with FIRE: How Far Would You Go for Financial Freedom? by Rieckens (My Review)

Quit like a Millionaire: No Gimmicks, Luck, or Trust Fund Required by Shen & Lueng

 

Are There Different Types of FIRE?

Do these seem like leading questions to you? It’s almost as if I wrote them myself.

It just so happens that FIRE does indeed come in several flavors.

There’s leanFIRE, which is FIRE on what most would consider a very lean budget. Think rice, beans, and spending of less than about $20,000 as an individual or $40,000 as a family.

The opposite of that would obviously be fatFIRE, which is FIRE with an above-average spend. This would generally indicate a multimillion-dollar net worth and usually spending (or having the ability to spend) six figures annually. An individual in a low cost of living area could easily claim fatFIRE with less, though.

There’s barista FIRE, in which one has a part-time job mainly for the health insurance. Slow FIRE or coast FIRE describes someone who has made substantial progress towards FIRE and is earning enough to cover their expenses while letting their accumulated nest egg do the heavy lifting.

Another variation on the theme is seasonal FIRE where one is largely retired but works a seasonal job. That could be working at a ski resort in the winter or cruising the festival and fair circuit in the summers while bumming around doing what you please the rest of the year.

 

Is FIRE a Recent Concept?

It depends on what you mean by recent. Retirement of any kind is a recent phenomenon in the historical sense. Retirement didn’t really exist until the late 1800s and didn’t become commonplace until the 20th century.

FIRE has seemingly exploded in popularity in the last decade, but early retirement made it into TIME Magazine in the 1950s.

For a detailed account of the history of the FIRE movement, check out the Early Retirement Dude’s writeup.

 

In What Accounts Should an Aspiring Early Retiree Invest?

Ideally, you should invest the maximum allowed into all tax-advantaged retirement accounts and then invest any additional savings into a taxable brokerage account or alternative taxable investments.

Those tax-advantaged accounts could include the following:

• Traditional or Roth IRA
• Traditional or Roth 401(k) or 403(b)
• 457(b)
• HSA
• Cash Balance (Defined Benefit) Plan
• SEP IRA
• SIMPLE IRA

For an overview of these and a few other accounts you may have available to you, please head over to my two-part Investing Basics for Busy Professionals series.

If you’re concerned about an inability to access funds in retirement accounts before a certain age, recognize that there are many ways to get to that money penalty-free before you hit the magical age of 59.5.

 

Are There Particular Investments That Work Best for FIRE?

No, not really. It depends on the individual.

Some will invest heavily into real estate. Others will invest heavily into their own business with the hope of selling it for millions one day.

For those that mainly rely on investing in publicly traded stocks and bonds, and that’s probably most of us, there is a propensity to invest in simple index funds.

The three-fund portfolio, consisting of a total US stock market index fund, an international stock index fund, and a total US bond fund will get you great diversity with nearly every publicly traded company worldwide and about 8,000 different bonds.

I think a three-fund portfolio is a great place to start and a fine place to stay. You can tilt more to certain asset classes in hopes of boosting returns, but there are no guarantees. Popular choices include adding a REIT (real estate index trust) fund, a small cap value fund, or an emerging markets fund.

Dividend-focused investing is a strategy that some favor. If you choose to pursue this, understand that a dividend is functionally the return of a portion of your invested money. If owned outside of a tax-advantaged account, you’ll pay taxes on that dividend distribution whether you need the money or not.

The tax-inefficiency of dividends, particularly for high-income professionals, has kept me uninterested in pursuing such a strategy. If you believe a dividend-focused strategy could give you a greater total return, I would implore you to use that strategy in a tax-advantaged account like an IRA or 401(k).

 

Why Does It Seem like Everyone Who “Retires Early” Still Works in Some Capacity?

Mainstream media has missed the mark on the FIRE movement. The people who are profiled in newspapers and magazines are those that are most visible—people like me who very actively run a blog, podcast, or Youtube channel.

Yet, for every content creator featured, there are thousands of people who have achieved early financial independence and retired early. They don’t make the headlines because they don’t share their stories on a platform like this.

You’ll find them in places like the financial independence subreddit, Mr. Money Mustache forum, and at in-person events like Camp FI.

 

What’s the Best Profession for FIRE?

It’s not medicine; I can tell you that! The pay can be outstanding, but most of us are flat broke or worse at 30 years old. I retired from medicine at 43, but it was not the easiest path by any means.

If early financial independence is important to you, look for a profession that offers a high salary at a young age. Information technology and software engineering are common careers among the FI-inclined, but there are certainly other fields that fit the criteria.

The quicker you can achieve a six-figure salary, the easier FI will come. This is not to say that money is the only thing; don’t work a job you despise. And FIRE can be achieved without a six-figure salary—but it’s a lot easier with one.

Small business ownership can definitely get you there quickly if you build a successful company. Founders of startups that are acquired by larger corporations have become instant decamillionaires.

 

Is It More Important to Spend Less or Earn More?

Yes.

I say “yes” because ideally, you’re doing both. If I had to pick one, though, I’d go with spending less, as long as you’re earning a decent income already.

Earning more is great, but there is no amount of income that can’t be outspent. Countless celebrities have infamously declared bankruptcy after earning tens of millions of dollars.

Also, when you earn more, you do increase the amount you can invest each year (assuming spending remains constant), but you don’t move the needle with respect to how much money you need to FIRE.

Spending less, on the other hand, not only increases the amount you can invest each year, but it also decreases your nest egg goal. It’s a win on two fronts.

If you can reduce your spending needs from $120,000 a year to $80,000 a year (our post-FIRE budget), you’ve lowered your nest egg target by a million dollars from $3 Million to $2 Million, assuming a 4% withdrawal rate.

Your standard of living may not even change much at all, especially if you reduce expenses by eliminating your student loan balance or paying off your mortgage.

 

Where Can I Learn More About FIRE?

I’ve written dozens of posts on the topic of financial independence.

I’ve written dozens of posts on the topic of retiring early.

But I’m just one voice among hundreds.

On my blogroll, you’ll find a diverse collection of bloggers, podcasters, and Youtubers creating unique content from different perspectives.

And don’t forget those FIRE books.

What other questions do you have about FIRE? I’ll be happy to answer them in the comments, and your question may find its way into this blog post!