Freedom, financial independence, self-reliance. Those three words sum up the FIRE movement. Find the concept appealing? Here’s everything you need to know!
- What is the FIRE movement?
- How do you join the FIRE movement?
- Who is the FIRE movement for?
- How do you achieve financial independence?
- How do you calculate your FIRE number?
- FIRE movement: do you need to understand the stock market?
- Which investments are best for an early retirement?
- Using the FIRE movement principles as inspiration
- FIRE movement reference books and blogs
What is the FIRE movement?
Formed in the United States in the 1990s, Financial Independence, Retire Early (FIRE) is a movement whose members strive to maximize their savings so they can retire by age 40 or 45.
How do you join the FIRE movement?
As you might assume, some pretty drastic lifestyle changes are in order. The average person may set aside between 10% and 20% of their annual income for retirement. But proponents of the FIRE movement aim for a savings rate of 50% to 70%. To achieve that level of savings, they have to cut back on spending. That means they have to overhaul their lifestyle from top to bottom. It requires determination and clear goals from the outset!
Here are some common goals of FIRE devotees:
- freedom to live life on your own terms
- starting up a business without the pressure to make a profit
- becoming a digital nomad
- working for half the year and travelling the rest of the year
Who is the FIRE movement for?
With discipline and determination, anyone can join the movement. But it’s easier for people with high paying jobs to live on a small portion of their income.
Households with children have many more unavoidable expenses:
- bigger house
- bigger vehicle
- higher grocery bills
So families have a harder time achieving a high level of savings.
The movement tends to attract young professionals who are just starting their career. That’s the case for Jean-Sébastien Pilotte, FIRE proponent and creator of a blog called Jeune Retraité (in French). He was able to retire at 39.
“The process really started after I finished my education. I worked for 14 years and I resisted social status inflation. My salary increased over the years, but I stuck to a minimalist lifestyle. That allowed me to save aggressively,” he explains.
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How do you achieve financial independence?
“The money you make is certainly important. But the biggest impact comes from reducing your spending,” confirms Shan-David Beaulieu, Sun Life advisor and another FIRE practitioner.
The first step is to make a budget. This allows you to take stock of all your expenses and determine where you can cut costs.
Here are some expenses you can rein in:
- Your car: If you absolutely need to own a car, choose a reliable and less expensive model. Limit yourself to one car per household.
- Your house: Prioritize renting, or buy a small, modest house or condo, and avoid moving.
- Trips: As few as possible, and always on the cheap.
- Going out: Always prioritize activities at home.
- Restaurants: Avoid them! Learn to cook and make your own bread, preserves, marinades, etc.
Other ways to save: Avoid “contracting out” small jobs if you can. For example, teach yourself:
- basic sewing techniques so you can mend your own clothes
- basic home repairs so you can fix minor things around the house
- basic car mechanics
How do you calculate your FIRE number?
“If you’re able to save 25 times your annual expenses, you can say you’ve achieved financial independence. This means that, technically, you could live off the returns on your savings for the rest of your life,” Shan-David Beaulieu explains.
A person who lives on $30,000 would have to save $750,000 to achieve financial independence. That’s what is known as the FIRE number. After that, the annual returns from your investments should cover your expenses every year for the rest of your life.
However, you can’t be frivolous with your spending. To make sure you don’t run out of money in your golden years, you have to follow the 4% rule. “This rule is based on a study out of the United States called the “Trinity Study”. It shows that over a long period of time, the stock market return is an average of 7%. Over the same period, the inflation rate averages 3%. Subtracting one from the other gives you 4%. This means that you live on a 4% annual return on your stock market investments,” explains Jean-Sébastien Pilotte.
FIRE movement: do you need to understand the stock market?
If you retire at age 40, statistically, you would have another 45 years ahead of you. That means you need a portfolio of stock market investments that performs better than an employer’s retirement pension. It’s your defence against inflation for the next forty years. And it requires a different approach to managing your investments, which is why you need to really understand the stock market.
Shan-David points out that it’s a good idea to rely on professional advice. “It’s like building my own house. If I do all the work myself, I’ll have saved money by the time I finish. But if I make mistakes, especially at the foundation stage, I might end up saving nothing at all. It’s the same with your finances.”
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Which investments are best for an early retirement?
FIRE proponents aim for a portfolio with an optimal balance of stocks and bonds. But a willingness to take risks is also required, since most of the savings will be withdrawn over 40 to 50 years.
Real estate is an option that can be profitable over the long term. But you need to remember that it’s an active investment and you need to be physically present. It may not be ideal for people who want to travel once they retire. Make sure this investment fits with your lifestyle and goals.
Using the FIRE movement principles as inspiration
Saving 50% to 70% of your money is a commitment. Achieving that level of savings requires real motivation. But most people don’t do it for the money; they’re doing it for freedom, self-reliance and independence.
“If you think about diets, some of them are very strict, but you can use them for inspiration instead of following them to the letter. It’s hard to live on 30% of your income. But if you do some reading about the movement, you’ll find many tips to help you achieve your financial goals faster,” Shan-David Beaulieu concludes.
You don’t have to join the movement to benefit from the lessons you can learn. As well, the FIRE movement intersects with the Zero Waste movement, because proponents reduce, reuse and recycle as much as possible. So it’s both economical and eco-friendly.
FIRE movement reference books and blogs
- Do you really need it?, Pierre-Yves McSween
- Liberté 45, Pierre-Yves McSween
- Rich Dad Poor Dad, Robert T Kyosaki
- The Automatic Millionaire, David Bach
- Canadian Couch Potato blog
- Mr. Money Mustache blog
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.