How to create a FIRE plan

Brian Acton


Brian Acton

Brian Acton

Contributing Reporter

Brian Acton is a contributing reporter at Policygenius, where he covers personal finance and insurance news. His work has also appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, and HuffPost. 

Published|7 min read

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The FIRE movement, short for Financial Independence, Retire Early, has gained popularity in recent years among folks who wish to establish financial security earlier in life, quit their day jobs and spend time pursuing their passions.

Sounds great, right? But achieving that level of financial independence early in life can require meticulous planning, budgeting and big lifestyle adjustments. If that appeals to you, you need to know where to start.

Here’s how to create a FIRE plan.

Determine if FIRE is right for you

Before commiting to FIRE, know that it’s not right for everybody. FIRE practitioners strive to save and invest large portions of their income — as much as 70% in extreme cases — for years until they have enough to stop working and live off their savings. Saving this much may require big spending cuts.

If you aren’t willing to make the necessary financial sacrifices, FIRE probably isn’t right for you. You also need to earn a certain baseline before FIRE becomes feasible. If you’re already struggling to meet your current financial goals, FIRE may not be all that realistic.

“The reality is: the 'RE' of FIRE just isn't possible for everyone. To reach early retirement, there needs to be a sizeable gap between income and expenses. For many of us, that's not easily achievable,” said Chrissy Kay, a financial independence blogger. Chrissy blogs for Eat Sleep Breathe FI and chooses not to use her real last name online.

If you start saving early in your career and give yourself a long time to save, you may not need to set aside as much of your income as someone starting later in life.

Establish your FIRE goals

When you’re ready to start building your FIRE plan, you need to define what early retirement means to you and determine the amount of money you’ll need to save.

Define your early retirement plans

Decide your target date for retiring early. Achieving financial independence will take most people at least ten years. Next, decide if you will still be working after retirement. For many who retire in their 30s, 40s and 50s, early retirement could mean an exit from your current career, but not necessarily an end to work.

“FIRE is about creating a lifestyle that allows you to pursue things that are important to you, that you may not be able to do if you're working a ‘normal’ job. That may be travel, a second career that doesn't earn much money, or volunteer work,” said Daniel Kenny, CPA, CFP and owner at FI-nancial Planner, LLC, a financial planning firm focusing on financial independence.

It’s a good idea to have alternate sources of income to prepare for an unexpected increase in expenses due to a medical emergency, family needs, housing and more, he said.

Consider your goals. Do you want to quit your full-time job and work part-time? Do you want to open your own business or pursue a freelance career? Do you want to quit work entirely and live only on savings? Answering these questions will help you establish your FIRE plan.

Establishing your goals is important beyond planning purposes. Knowing your reasons for pursuing FIRE helps keep you motivated and moving forward, said Chrissy.

FIRE isn’t just one size fits all. There are many variations on the FIRE plan, including:

  • Lean FIRE: a minimalist lifestyle characterized by extreme savings and restricted spending

  • Fat FIRE: modest cuts to spending, with the goal of saving more than the average investor

  • Barista FIRE: planning to work part time in early retirement to cover expenses and reduce the reliance on savings

  • Coast FIRE: planning to work part time in early retirement despite having ample savings

Establishing an alternate source of income in retirement — whether it’s a part time job, freelance work, rental income or something else — is a good idea. It can help you prepare for an unexpected increase in expenses.

Define your financial independence number

The amount of money you need to retire early is highly dependent on how much you plan to spend annually, whether or not you plan to have income in retirement, how old you will be when you retire and other factors (the younger you plan to retire, the more money you will need to save).

The FIRE community often follows the 4% rule, which is saving up enough to withdraw 4% of your portfolio for annual expenses each year (though Kenny recommends staying closer to 3%). Some FIRE practitioners aim to save around 30 times their projected annual spending.

“Most people use their current living expenses to formulate a FIRE plan. However, when doing a plan with clients, I bring in expenses from old age into the calculation, whether it's health care, changing living accommodations for long term care, or otherwise,” said Kenny. “It's also a great time to discuss how regular lifestyle expenses change as you age.”

It may be beneficial to hire a financial advisor. It’s not required, but there are so many variables in play that building a plan may benefit from some professional support.

Plan to reduce your expenses

Saving a much larger amount of money likely means you’ll have to make cuts elsewhere. Take a look at your current spending habits. Start with larger cuts first. Lifestyle changes such as moving to a smaller home or an area with cheaper housing, reducing the number of household vehicles and using public transportation are all places to start.

“You'll get the most bang for your buck by starting with the big three: housing, transportation and food,” said Chrissy. “If you're already optimized in these areas, move on to recurring monthly expenses. Finally, examine the rest of your spending to see if there are other areas you can cut back on.”

Reducing or eliminating optional expenses such as dining out, concert tickets, sporting events and other pricey activities will free up some cash. Smart savings methods such as clipping coupons, reducing energy usage and avoiding credit card interest will also add up over time.

Establish your savings plan

Determine where to invest your savings and how much to allocate to each investment. Over time, your investments should grow into a large portfolio that you will draw from and live off of in early retirement.

“When working with clients, I analyze several factors, including risk tolerance, cash needs from the portfolio and the required growth rate you need to achieve your goals,” said Kenny.

Where you invest may change depending on your goals and investing experience. Ideally, your investments will meet at least three criteria:

  • Provide enough potential for growth to build a sizeable nest egg for early retirement

  • Diversified enough to minimize risk and guard against market downturns

  • They have low fees so you can save the money you’d otherwise be paying to an investment manager or broker.

“Basic index funds and ETFs are the simplest, most passive investments. They're about as close to set-it-and-forget-it as investments get,” said Chrissy. “Real estate is another good investment choice that can help you reach FIRE sooner. However, real estate investing isn’t passive, and good properties can be hard to find.”

Beyond investing in stocks, bonds and other options, you need money that can be made liquid quickly in case of emergency, so don’t neglect an emergency fund in a high-yield savings account or money market account.

If your employer offers a retirement account such as a 401(k), it’s a good idea to make contributions there to reap the tax benefits (though you may pay a penalty for withdrawing these retirement savings earlier than age 59 ½). Make sure to take advantage of any employer matching policy, as it’s free money.

Alternatives to FIRE

There are some criticisms of the FIRE movement. For some people, the spending cuts necessary to save a large percentage of income are unappealing or unrealistic. FIRE requires dedication and some delayed gratification, as you’re saving for years to achieve financial independence in the future. The movement is most suitable for people who can create large gaps between income and expenses, and isn’t realistic for everyone. By drawing from investment savings early, you will diminish the future potential of those earrings.

Remember that there may be some middle ground between FIRE and your current lifestyle. If you don’t want to grind for a decade or longer to retire early, you may be able to make some smaller adjustments now to improve your quality of life. You could save a little extra to retire a few years early, or reduce your expenses so you can work a little less now.

Looking for new ways to save? Here are 25 ways to start right now.

Image: Aleksander Nakic

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