Understanding Financial Independence, Retire Early

July 13, 2023
Many investors are interested in the idea of financial independence and retiring early, a movement know as FIRE. Here's an overview.

The financial independence, retire early (FIRE) community has long been associated with the idea of retiring before the age of 60, even earlier if possible. Here are some basics of the FIRE movement, and some strategies people use to retire early.

What is FIRE?

For members of the FIRE movement, achieving early retirement isn't about quitting a job. Instead, it's about designing a life to enjoy. The main thrust of the movement is to connect to others who hope to retire from "traditional" work early and have the financial independence to pursue other projects. Many members of the FIRE movement are entrepreneurs and investors, although these aren't requirements to begin pursuing financial independence.

Tips for achieving FIRE

Many members of the FIRE community suggest investing as part of the strategy to reach financial independence. They also focus on developing multiple revenue streams by starting businesses or engaging in other activities with the potential to provide some type of passive income.

Here are some strategies someone attempting to pursue early retirement with FIRE might consider: 

  • Choose a target number. Settle on a retirement goal and understand what it takes to reach that target number. For example, someone might want to have $800,000 in a portfolio to retire by age 50. That starting point allows them to decide how much to set aside.
  • Learn about money. Seek good financial advice and become educated about money and how it works.
  • Use a variety of investment vehicles. Consider using low-fee and dividend-paying investments as well as a mix of tax-advantaged and taxable investment accounts. Early retirement might mean portfolio access prior to age 59 ½.
  • Manage spending. Review needs versus wants and consider adjusting your spending to focus on what matters and how to reach target goals.
  • Avoid high-interest debt. Getting rid of high-interest debt is one of the cornerstones of FIRE. The idea is that more money can go toward retirement goals when it's not going to pay interest charges.
  • Look for income outside traditional employment. In addition to working a more traditional job, many FIRE enthusiasts also have side gigs and find other ways to generate income. This income can be used to build a portfolio as well as provide ongoing income during early retirement.
  • Make changes if necessary. Depending on the situation, someone trying to achieve FIRE might need to adjust their target, change their asset allocation, or take alternative steps to achieve their goal when events like market downtowns occur that might impact their goals.

Potential drawbacks to pursuing FIRE

While FIRE can have advantages, such as reaching retirement goals sooner, there are potential drawbacks. Additionally, trying to live a lifestyle compatible with FIRE might not work for everyone.

  • Underperforming investments. There's no guarantee investments will perform as expected. One of the main strategies to reaching FIRE is often setting a lot of money aside in investments. If a portfolio doesn't perform as expected, or if the market crashes near the beginning of an early retirement, the numbers might not be achievable.
  • Higher retirement costs. Predictions about rising costs might not always be accurate. Additionally, during times of inflation, there's a chance prices could head even higher, forcing someone to liquidate more of their assets than expected to cover living expenses.
  • Limited resources. Not everyone can cut back on costs. Frugality is often part of the FIRE approach. There is only so much a budget can be tightened, though, before there's nothing left to cut. For those with limited resources, FIRE might not be an option.
  • Burnout. In some cases, it can feel difficult to sustain the actions required to reach FIRE. Someone might be required to cut back on simple pleasures to reach their goals.
  • Family issues. In some cases, a life partner might not be on board with FIRE. In this case, it can cause stress in the relationship. Additionally, for families with children, it might be difficult to achieve the needed savings rate while paying for activities children participate in.
  • Lack of fulfillment. For some early retirees, it can be difficult to find something meaningful to fill time. Without a plan to use their time and energy, some retirees might want to go back to work.

Another potential drawback to FIRE is some of those who achieve their goals might have to "unretire" later if they start running out of money or if they no longer feel fulfilled.

In the end, retirement is about figuring out what matters to you and what you envision your retirement will look like, and then using your finances and resources as a tool to help you pursue your retirement goals. True financial independence means you get to spend your time—as well as your money—the way you want.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

There are risks associated with investing in dividend paying stocks, including but not limited to the risk that stocks may reduce or stop paying dividends.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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