As soon as people enter the workforce there is often talk about retirement, from parents, co-workers, friends and financial planners. But dreams of retirement can seem years or even decades away.
For some, that timeline is too distant. And the idea that they should be able to retire in their 30s and 40s is the premise behind the FIRE (Financial Independence Retire Early) movement, a financial plan that has picked up speed since the early 2010s and is often thought to be rooted in the teachings of authors Vicki Robin and Joe Dominguez, and their 1992 best-selling book Your Money or Your Life.
Why FIRE?
The premise of FIRE is to drastically cut one’s current spending, alongside an aggressive investment strategy, so there is enough money saved to quit your day job. It’s not for the faint of heart, as it requires some hardcore lifestyle changes. There are also some factors that can significantly impact a person’s ability to “FIRE,” as they say, including where the person lives and what kind of income they currently bring in.
Derrick Higgins, an advisor at Sun Life, says he’s seeing an uptick in individuals who are interested in the FIRE movement in the younger generation.
“It’s a bit of a paradigm shift as far as the way those individuals are thinking as far as retirement goes. They’re sacrificing the quality of life now for a better quality of life later,” he explains.
On average, it’s advised that people save around 15 per cent of their annual pre-tax income to put towards their retirement. As part of the FIRE movement, that would have to increase to between 50 to 70 per cent.
“Typically, we’re seeing it with clients who are young professionals and not generally overspending,” says Higgins. “They’re not going out, they’re not eating out, going to movies, going to shows. They’re more or less staying at home, one vehicle, low rent or mortgages, and just really aggressively putting a large chunk, 50 per cent or more, into their savings to attempt to get to that 40 to 45 retirement age group. It’s possible, but for the right person with the discipline to do so.”
FIRE can also be tougher for those with children as this can come with added expenses including a larger home or vehicle. However, nothing is impossible and there are those with children that have managed to FIRE.
What does FIRE look like?
So what does the preparation look like for a financial goal like this?
A budget is a logical place to start as this is something that is going to require a very good assessment of one’s ins and outs, and where significant cuts can be made. Some FIRE movement practitioners have ditched their cars, their vacations and even changed cities to make this type of retirement savings work.
To Higgins, that’s why FIRE is not right for everyone, and why it’s a good idea to seek expert advice if this is something you’re considering.
“Knowing yourself and knowing what your future goals are is going to help to determine whether or not it’s even realistic to go after this type of aggressive retirement plan,” he says.
Being able to save more than half of one’s income also assumes that there is that much disposable income available. But it’s not always the case for people who have big incomes, says Andrea Thompson, certified financial planner and founder of financial advice business, Modern Cents.
“I have had a client who was working towards their own FIRE goal, and they were not a high-income client. I think she made $50,000, he made $55,000 pre-tax,” Thompson said.
Indeed, what may be considered extreme savings to one individual may not seem as extreme to others.
Who could FIRE?
There are options, even within the FIRE movement, to bring variety to its rules.
Thompson’s clients also embrace a version of FIRE, called Coast FIRE, which is regarded as a less severe version of the original movement. With Coast FIRE, individuals aim to secure enough savings early on in their career to pay for their lifestyle in retirement and are seeking financial independence.
However, they don’t need to save as aggressively as they are not as fixated on the early retirement portion. The objective is to eventually be able to stop saving, letting investments and compound interest add up, and simply “coast” into your retirement years.
It’s worthwhile saying that both of these options still require the ability to save around half your income to make it work. Those that are staring at a significant debt load are also not likely candidates for these movements.
Planning considerations
The amount of planning that should go into a move like this is significant and should not rest on the advice found on the Internet or other people’s stories, advises Thompson.
“It’s not as simple as this is the amount of money that I’m going to need every year for the rest of my life. We know that that’s not accurate either. We don’t know what long-term care costs are going to be, how healthcare is going to change, what types of expenses that we’re going to have in the future that don’t even exist today.”
Building a financial cushion into a FIRE plan is also a necessity, explains Thompson, and that can impact how much you need to save and how long it might take a person until they can FIRE.
“There are things that we didn’t pay for 20 years ago that are now part of our reality,” she says. “There’s a whole bunch of unknowns when we’re dealing with a FIRE timeline that are really not being talked about or factored into the types of instruction that people are getting just by Googling it online.”
Can you stand the heat?
In the way that FIRE may not be for every income or saving philosophy, it may not be for every future retiree. There have been people who quit the movement for a variety of reasons, but the most common seem to be that these individuals just don’t want to live under the severe budgeting constraints they require both before and after they FIRE. They want to loosen the purse strings a little and they go back into the employment world to achieve this.
Others have left their plans to FIRE behind because of sheer boredom. This is why Thompson, as part of her client consultations, encourages people to have a plan about what they plan on doing in their post retirement years.
Aside from the financial outlook, Thompson advises her clients to make a post-retirement life plan.
“There’s a lot of discussions and really in-depth discussions on what that truly means, and not just financially, but what that means for lifestyle,” says Thompson.
“Sometimes it’s talking about that transition and saying, ‘As much as you might dislike your job or not want to work anymore … what are you going to do otherwise?’ Because otherwise, you’re going to end up back in the workforce, which I’ve seen with FIRE clients.”
