The Simple Rules of the FIRE Movement

What is FIRE

There very simple rules to achieve FIRE. FIRE is the acronym for Financial Independence Retire Early.  It’s the term coined for a community of people who are attempting to stop formally working much earlier than the typical American retirement age of 65 or later (or never).  Even as a natural born saver I had no idea this community existed until I made the realization that how I spend my time is way more important than how I spend my money.  It’s changed the way I look at time and money entirely.

It doesn’t have to be complicated

This is not advocating the “you can’t take it with you when you go” so spend it all approach! Far from it but the idea is very simple. Have just enough money so you can take your time back. You can easily calculate how much money you need to maintain a specific lifestyle indefinitely. This money goal is known as your “F.I.R.E. Number”.  Then you can build a plan to achieve that goal in your desired timeframe.

After that you simply track and adjust as needed to recover from variation or accelerate your path. I’ll share with you the most simplified versions of the rules of FIRE in this post.  After this you’ll be able to roughly calculate your retirement plan on a single sticky note.

Start with your FIRE number

We’ll start at retirement and work our way back to today. How much money would you need to maintain your current lifestyle indefinitely? Probably a lot smaller number than you’d think.  The general rule of thumb is that you need to have 25 times your annual spending invested.  Let’s break that statement down and make some assumptions to simplify our example.

In real life your annual expenses will vary.  They may go up and down over time due to lifestyle creep, cost of living, paying off loans/mortgage, addition or ageing out of dependents, etc.  However, since you’re living frugally you should have already created a budget and know exactly what expenses are necessary by managing your monthlies. Consider if your expenses will be higher or lower in retirement.

For this example, let’s assume a very realistic average of $50k a year in expenses in retirement. That means 25x $50k = $1.25 million required to be invested in order to retire and live off that money indefinitely.

The Trinity Study

How can you live off a large chunk of money indefinitely?  Wouldn’t you eventually spend it all? The key is the investment part.  The “Trinity Study” shows that when invested in a mix of stocks and bonds, you can draw down 4% of that investment annually with a high level of confidence on not depleting the account over a 30 year time period.  “Mix of stocks and bonds” is a little too loose of an asset allocation for me so we’re going to assume instead that we’ll invest in low cost index funds as somewhat of a safety factor. No GME or Dogecoin only portfolios here folks.

Also, if we want to retire early, 30 years may not be enough. So, we’ll include another factor of safety in there to comfortably achieve “indefinitely” by targeting an extra 10%.  This makes our desired investment goal, aka our “FIRE number” $1.375 million.

Calculate the power of compounding interest

Okay maybe $1.375 million is a large number. If this sounds unobtainable as you’re looking across all your current investments and savings, lets walk it backwards next. The second key calculation in achieving fire is the rule of 72.  In a super simplified version of this rule, you divide the random number of 72 by your projected investment return rate (we’ll use 7.2% investment return for a nice round number) to get approximate time in years to double your investment.  Therefore 72/7.2 = 10 years to double your money with a 7.2% average annual return.  This is without contributing a single penny to the starting amount! OR if you achieved a 10% return rate, your money would double in only 7.2 years.

Through the power of compounding interest though, our earlier contributions will have a much stronger effect on our retirement date than our later contributions. Here’s why. If we take the full $1.375 million dollars invested at retirement and work the rule of 72 backwards at 7.2% return rate it means that 10 years prior to retirement the investment would have been worth $687,500. If we step back 10 years prior to that then it would have been worth $343,750 and 10 years prior that only $171,875. That means if you wanted to hit your FIRE number of $1.375 million in 30 years from now and you currently have $171,875 invested? You can stop investing right now! Then just let compounding interest do the heavy lifting. 

Calculate the impact of consistent contributions

Again, we want to retire even earlier so instead we’re going to contribute the whole way. We’re not going to just let the stock market be in control of our future. We’re going to bolster that rule of 72 with continual frugal savings.  Let’s make the next few assumptions that with a $60k salary and a 50% savings rate you’re socking away $30k a year.

But Fill! I don’t make that much money. My income is all required just to live and pay debts. I can only save 5%, blah blah blah. That’s okay. We can start there but FIRE is all about systematically removing these roadblocks over time to achieve your goals. It does take some work and planning but it’s simple to start.

If on the first day of each year, you deposit that $30k annual investment, here’s how it’ll grow.  This is a simple example of compounding interest at 7.2% annually and also the rule of 72.

At the start of your 11^th year, (10 years invested) your first $30k has doubled to $60k! While your last $30k invested is still just $30k.  Every year in between, each investment is growing at the same rate and adding on top of the previous years gains. So as you can see, the more you put away earlier and consistently, the more exponential the growth becomes.

 Here’s another comparison of how much you stand to miss out on by not investing. The orange curve is your $30k a year contributions growing exponentially through compound interest. The blue line is if you were to just save your $30k every year in cash. It would actually be worth less over time due to inflation.

Start Early

Every single person who has grown their wealth through investing when asked for advice always says “I wish I would have started earlier”.  I know it’s hard when you’ve been living the broke college kid lifestyle for years and are finally out on your own to not start acquiring nice things and taking on payments to show others how “successful” you are.  The real success is in starting to invest early while before lifestyle creep occurs so that you can enjoy complete financial freedom while you’re still young. 

Putting it all together

Finally, we’re going to go back to our handy dandy investment calculator to see how long it will take us to reach FIRE if we start from nothing, continuously invest $30k per year ($2,500/month), at 7.2% annual return.

So there you have it, just shy of 21 years.  Assuming you start dumping in some savings fresh out college at the age of 22, you can live this retirement dream by just 43. 

That’s a very oversimplified version of how it works and there are many other variables that can set you back or bump you ahead. We’ll get into those variables later on, but for now ignore them.  Calculate the big and simple picture first.  Get a FIRE number in mind.  Then as mentioned in my personal favorite resources post, start honing your frugal practices by following the FIRE roadmap (updated link to version 4.3 dated October 2023).  Create a budget and sign up for Personal Capital (Now Empower as of Feb 2023) <-(referral link, add a qualified investment account on their service and get $20!) to track your monthlies and net worth.

You can go back through and adjust your goals at any time if for example you incur a large medical expense that’s not covered by insurance or receive a windfall from inheritance. We’ll delve into some of these variables and variations of FIRE in the next post.

Planning is half the battle

I’ve got a buddy whose goal is to “beat death to retirement” and that’s the extent of his retirement planning.  Don’t be like that guy.  We just walked through how simple it is to put a plan together. Armed with these simple rules of FIRE, you can start taking steps today to work towards your goal.  It may take a few years to start seeing any significant progress but once you see the plan starting to work though, you’ll be hooked too!