What is the Financial Independence Retire Early (FIRE) movement? – Bankrate.com

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The Financial Independence Retire Early movement, or FIRE, is a group of people trying to gain financial independence by amassing enough wealth and cutting their expenses so that they can retire extremely early. Many FIRE proponents are looking to retire in their 30s or 40s.

So how do people in the FIRE movement achieve their goal, and what are the drawbacks?

The FIRE movement centers on taking control of your finances, and proponents focus less on increasing their earnings than on spending less. FIRE participants focus on two areas, which are really two sides of the same coin:

By saving and investing their money, participants grow an amount of money that can generate enough income to sustain their lifestyles. They use detailed spreadsheets and financial plans to model out how theyll be able to meet their needs based on their income and the rate of return they can expect from their savings and investments in stocks or stock funds.

To meet their goals, FIRE participants must take on extra risk by investing in stocks, and that means understanding how the stock market works and having a brokerage account. They wont be able to rely on the low returns and absolute safety of a bank account to amass their fortune.

And by spending less, they reduce the level of savings they need in order to retire early. While some FIRE critics say that FIRE participants live a too-frugal lifestyle to reach their goal, many proponents say that theyre not making extraordinary sacrifices. In fact, they say by spending on what they really love that they actually derive more enjoyment from those things. Plus, they enjoy moving toward independence, when they can do what they truly love.

But however they approach it, FIRE participants see the lifestyle as a way to spend their time doing what they really want to do rather than what society tells them they should want.

Because of their desire to retire early, many participants wont be able to take full advantage of employer-sponsored retirement plans such as a 401(k). They may or may not be able to take advantage of plans such as an IRA, depending on whether they earn income in retirement. Instead, theyll need to save in taxable accounts or in accounts such as a Roth IRA, both of which offer access to cash (at least at some level with the IRA) without any penalties.

Financial independence is not something that usually drops in your lap, and the FIRE movement works hard to achieve its dream, thinking years out instead of whether they should buy that new car this year. The movement is also really supportive of members who have started the journey, and members provide spreadsheets and other tools to help each other.

This social solidarity helps FIRE participants realize that there is a community that values what theyre trying to achieve, making it that much easier to do.

While these savers are all classified in the FIRE movement, there are many different subsets of the movement. Theyre all striving for the ultimate goal, but participants have different objectives and approaches, based on what they see as valuable and the sacrifices theyre able to make.

But they can be divided into some key groups based on their approach:

And FIRE participants can also be divided into how they want to spend their independent lifestyle:

In both cases, these new retirees now with financial independence can do what they really want without worrying about where their money comes from. Not only do they have their emergency funds stocked with cash, they know where next years income is coming from, too.

Criticisms of the FIRE movement generally fall into one of two key categories:

Some early retirees, for example, may assume that they could generate the kind of returns that investors saw in stocks in 2019, when the S&P 500 rose a whopping 29 percent. Thats well above the markets long-term average of about 10 percent annually. Or perhaps some may rely on their ability to pick stocks and have had a few lucky years.

Critics also say that FIRE participants are not factoring in the longer-term costs of major expenses such as health care and housing, which have continued to increase substantially. Plus, leaving the workforce may create an employment gap that many employers will view negatively. For sure, staying out of the workforce will ding the amount of Social Security income you can draw later in life, and thats when those on a fixed income may most need the money.

These are all relevant concerns, but many in the FIRE community say they have considered these scenarios and have planned accordingly. They may cite their financial models as proof that they have been realistic, pointing to detailed projections of their income and expenses.

In any case, a major decline in stocks, which typically occurs as part of a recession, will stress-test these plans and forecasts, and may challenge the security of many early retirees.

The FIRE movement has attracted a lot of attention in recent years some of it negative. Yet its hard to see how people consciously spending their money and time on what they truly love is anything but a net positive, even if it does have some costs along the way.

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What is the Financial Independence Retire Early (FIRE) movement? - Bankrate.com