Let’s answer the first question.

What is FIRE?

FIRE stands for Finacial Independence Retire Early.

Let’s break that down into two parts.

Financial Independence

Most consider financial independence the point at which you can stop working and live off of your investments and passive income streams.

How will I know when I have enough money to retire?

Great question. Let’s dive into that.

Investments

The 4% withdrawal rate is generally accepted by most to be a safe rate of withdrawal for retirees.

What does that mean?

To retire, you will need a lump sum large enough to support you that you can cover your annual expenses with a withdrawal rate of 4% a year.

How’s that?

An easy way to do this calculation is to take your annual expenses and multiply them by 25.

Let’s say your annual expenses are $50,000.

$50,000 x 25 = $1,250,000

To retire, you will need to amass $1.25 million to adhere to what most financial planners refer to as a “safe” withdrawal rate. You would then theoretically take a withdrawal of 4% annually, covering your $50,000 in expenses for the next 30 years. This equation assumes that you inflation-adjust the initial withdrawal amount and that your retirement portfolio is made up of 50% stocks and 50% bonds, or a close approximation.

Your inflation adjustment would go something like this.

Year 1 $1,250,000 x .04 = $50,000 Withdrawal of $50,000

Let’s say the following year inflation runs at 2%. You would inflation adjust the initial withdrawal amount of $50,000.

Year 2 $50,000 x .02 = $1000 Withdrawal of $51,000

William Bengen came up with the 4% rule. It is sometimes referred to as the “Bengen rule.”

This retirement method will more often than not be the workhorse of your FI journey.

Passive Income

Oh, the elusive passive income stream. I have heard passive income defined in many different ways. The Wikipedia version is the most accurate, in my opinion.

“Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.”

Different forms of passive income streams include income from stocks, dividend from shares, high yield accounts, royalties from a book or song, to name a few.

There is also a handful of items that often get lumped in the passive income pile that should not be there. The keywords in the definition of passive income being “minimal to no effort.”

Real estate as an investment, in particular, I would make a strong argument; this is not a passive form of income. It is an excellent addition to your portfolio. But passive, it most certainly is not.

If you are looking to own investment real estate and are wanting it to be a passive stream of income, investing in a REIT can be a great option.

Another form of passive income that is often overlooked is debt elimination.

Let’s say you are paying 6% on a $30,000 car loan over six years. The payment works out to roughly $500 a month. Now let’s say you sell the car leaving you with $8000 profit. You use this money to buy a dependable and far less flashy used vehicle. But more importantly, you have eliminated that $500 a month payment.

You then take that $500 a month you were making on a car payment and invest it into Vanguards Total Stock Market Index Fund (VTSMX). Historical average returns run right around 9%. You make monthly contributions of $500 for the next six years (the length of the original car loan), you would then have $49,202.

So to reach financial independence, your combined investments and passive income stream must be sufficient to cover your annual expense.

One thing to point out, the lower you can get your annual expenses, the less you will need to save to retire. I’m just saying.

Retire Early

The elusive Holy Grail. Retire early.

The great irony of the FIRE movement is that those who choose to pursue it and eventually attain it so rarely retire in the traditional sense. The pursuits that compel them more often than not come with monetary compensation. And if they do decide to pursue endeavors that provide little or no income that is now an option. Extreme Ironing anyone?

This brings us to the second question.

Why should you care?

Another great question!

Maybe you hear the term retire early, and it does not necessarily compel you in any real way. That is fine. That is more than fine.

The vision we have of retirement is often of drinking Mai Tais on white sandy beaches. Now don’t get me wrong I love a good Mai Tai on a white sandy beach, but for how long?

To get excited about this idea financial independences retire early, you have to come up with your vision. What is it that compels you, truly compels you. What is the thing, good or bad, easy or hard that you would do day in and day out if money were not an issue?

Even if you have no plans to retire early, even if you are one of the fortunate ones who loves what they do, wouldn’t it be nice to have the choice to work?

Let’s say you are an engineer and wake up one day and decide that you want to pursue your passion for photography. Great, give your two weeks and see where the art takes you.

You realize your children are growing faster than should be humanly possible and you want to spend every minute with them while they are yet to be embarrassed by you. Great, stop working and travel the world with your family.

You are currently a librarian but hear of extreme ironing and decide it is your life calling.

This is why you should care. It is your life, and it is a big deal. You are a big deal. Make that shit matter. Make memories that movie montages would be jealous of.

The thing is, it is hard to do this when the interest rate on your maxed-out Discover card is 22%.

As always, I would LOVE to hear from you! What do you think of the FIRE movement? Do you have aspirations of retiring early? Do you love your job? Do you hate your job to the point thinking of it makes you vomit in your mouth just a little?