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If you’ve ever gone home after a long day of work, pulled out your phone, and Googled “How to retire early,” you aren’t alone. In fact, you’re one of many Canadians who are ready to give up their dissatisfying jobs to embrace the joys of early retirement. There’s even a name for this: “FIRE movement.”
FIRE stands for “Financial Independence Retire Early,” and the phrase was popularized by a 1992 best-selling book called Your Money or Your Life by Vicky Robin and Joe Dominguez. This book’s central ideology is that you should weigh the value of your expenses against the hours spent at work earning an income to pay for them.
The FIRE movement takes this concept to the extreme, by encouraging followers to live an ultra-low expense life and saving enough money to cover these expenses in early retirement. Here’s everything you need to know about the FIRE movement.
What is the FIRE Movement?
Think of FIRE as the modest, achievable version of a stockbroker making a huge profit in the market and retiring early to sail around the Caribbean. Except instead of a stockbroker, anyone can theoretically follow the FIRE ideology, and instead of a single huge return in the stock market, you’ll invest up to 70% of your net income, building a nest egg over several years. Most Canadians who are successful at achieving early retirement do so in their late 30’s to mid 40’s.
FIRE used to be an obscure term, but the movement has gained popularity in recent years, as wages stagnate and pressure on employees to be ever present at their jobs increases. The term “Financial Independence Fire Early” has 47 million search results on Google, along with pages upon pages of YouTube videos, blog posts, and first-hand accounts from successful FIRE followers.
The FIRE movement is based on two important concepts. The first concept is saving: FIRE followers are encouraged to save and invest a huge percentage of their income (usually around 70%). This super high savings rate allows you to build up a sizeable retirement portfolio far earlier than the typical age of 65.
The second key concept is frugal living. To save that much money, FIRE followers must live as frugally as possible, cutting their expenses to the bone. After achieving retirement, the frugal lifestyle continues, which allows the retiree to live solely off small withdrawals from their portfolios.
How Can I Achieve FIRE?
If the FIRE lifestyle appeals to you, here’s how to achieve it.
First, as we mentioned above, you’ll need to save a massive portion of your income, ideally 70%. You can achieve this aggressive savings rate by reducing your expenses to as low as possible, including paying off large debts like your mortgage.
Your savings should be invested in low-cost ETFs, either via a robo advisor like Weathsimple (our top pick) or use a Couch Potato Portfolio and invest yourself online discount brokerage like Questrade (our #1 choice). Whenever possible, max out your registered accounts like your RRSP and TFSA.
Once invested, your nest egg should grow to a target amount, and once you hit that target amount (often $1 million), you can retire, and begin withdrawing money in very small increments.
How Much Do I Need to Save to Retire Early?
Most advocates of the FIRE lifestyle recommend saving at least 30 times your yearly expenses, or 1 million dollars before you should consider quitting your full-time job. For example, if your minimum annual expenses were $40,000 per year, you’d need to grow your retirement fund to $1,200,000 before you could retire. This calculation explains why the incentive to slash your expenses to the bone is so strong. The lower your expenses, the sooner you can retire early.
If building a retirement fund that large in just a few years feels daunting, you could take a modified approach and work part-time to cover a portion of your expenses.
How can $1 Million Last 30 Years or More in Retirement?
The FIRE ideology dictates that, once you retire, you’ll need to keep your withdrawals from your savings small, usually between 3% and 4%. This conservative withdrawal rate prevents the average, balanced, ETF-based portfolio from depleting over time, and gives you enough money to live on, provided you maintain a frugal lifestyle.
For instance, if you had a $1,000,000 portfolio, and you withdrew 4% per year, you would have $40,000 in income to cover your expenses. $40,000 isn’t endless money, so you’ll need to be cautious with your spending to ensure you don’t deplete your portfolio ahead of schedule. Eliminating expenses like mortgage payments and car payments help to reduce your spending significantly.
Is FIRE Realistic?
As with any popular movement, FIRE has come under criticism recently because it’s inaccessible to a large portion of the population. It’s difficult to retire at 40 if you work a minimum wage job, have crushing debt, or are supporting young children or elderly parents. As a result, FIRE retirees tend to be overwhelmingly highly-educated white men.
Depending on your financial circumstances, the FIRE dream may be impossible for you to achieve, and selling the idea that FIRE is accessible to everyone glosses over the financial struggles that many Canadians face.
On top of that, FIRE doesn’t guarantee happiness. Even amongst the lucky few who have been able to retire early, many FIRE followers return to some form of work out of boredom, or a need to connect with their community.
How to Benefit From FIRE
Fortunately, you can benefit from the FIRE ideology without living the extreme lifestyle. Reducing your spending and increasing your savings is almost always good for your finances, as is tracking your progress towards your retirement goals. Instead of committing fully to FIRE, you can set “FIRE-lite” goals by choosing to retire early, but not quite so early as a FIRE devotee. You could also commit to lowering your expenses as much as possible but refrain from taking drastic measures like selling your home or giving up your car.
The FIRE movement is an inspirational community of determined people attempting to achieve their dreams of financial independence and early retirement. Not everyone can (or should) join the FIRE movement; but if you find yourself wishing you could ditch your day job for a life of frugal early retirement, it might the right path for you.
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