The 5 lessons of the FIRE movement for early retirement

Have you heard about FIRE? It’s an acronym for Financial Independence, Retire Early. For the thrifty at heart, here’s your calling!

Perhaps you already apply some of the movement’s principles without even knowing it. And if you’re a big spender, all is not lost. Many of the movement’s enthusiasts were just like you before making a 180-degree turn.

So what can the FIRE movement teach us about personal finances and freedom? 

​FIRE lesson #1: We must withdraw from the rat race

In a way, FIRE is a counter-cultural movement. I’m exaggerating a bit, but in short, it’s goal is to free us from the rat race.

This expression refers to the culture that makes us a prisoner to a crazy race . It is the “subway, work, sleep” routine that fuels our society of (over)consumption.

When you get a raise or a little extra income, the money is often quickly spent. We then find ourselves with a financial leeway just as narrow as the day before. Sometimes we even take on bigger debt “thanks” to our salary increase.

The FIRE movement, therefore, opposes this rat race. It seeks to demonstrate that financial independence is also accessible to middle-class people.

Just spend less than what you earn. It’s easy to say, but difficult to do. So let’s ask the bloggers who have achieved this feat! 

​ FIRE lesson #2: We must be disciplined and determined

The starting point is to have a good budget so you can compare your income and expenses. It also helps you to take stock.

• What is your current savings rate?
• How much are your debts?

You have to change your perspective on saving. You must consider it as a recurring and obligatory expense, just as important as the rent or the mortgage.

Repeat the exercise every month and calculate the change in your net worth. Equity is your assets (money, investments, real estate, etc.) minus your liabilities (debts).

Avid FIRE movement followers are able to save up to 50% of their annual net income!  In comparison, it is recommended that you save between 10% and 20% for a “normal” (not early) retirement.

How is it possible to save 50% of your net income? You can do this by reducing your expenses, paying off your debts and increasing your income. Go back to your budget and…cut the fat! For example, once a car loan is paid off, keep that car, even if you just got a promotion and your increased income would enable you to buy a better one.

You can see that this requires a lot of discipline and determination to get down to business. In the beginning, your savings grow slowly, but over time, your interest generates interest, and your nest egg grows faster.

​FIRE lesson #3: invest and accumulate assets

What is the purpose of all this financial discipline? To create leeway to invest and accumulate assets. These will generate passive income, and this is THE key to independence.

What are the best investments for you?

It all depends on your situation. The type of job you have and your current assets will influence the level of risk you can afford, for example. In general, we seek to invest in fairly risky investments because historically, these are the ones that pay the most.

Many FIRE followers invest on online brokerage platforms, especially in exchange-traded funds (ETFs). These are passive investments that do not require much time, and cost little. For example, some allocation ETFs do almost all the diversification work for you (business sectors, stocks/bonds, geography) with fees around 0.25%. You can still choose something else, such as mutual funds, products typically offered by financial institutions, with management fees between 2 and 2.5%.

Real estate is another investment vehicle which can yield an attractive return. These are just examples, as each situation is unique and everything should be analyzed on a case-by-case basis.

​ FIRE lesson #4: know the math behind the “FIRE number” and apply the 4% rule

Giving yourself a clear and precise objective works. I therefore suggest that you calculate your FIRE number (once your budget is completed, because you’ll need it). This number is 25 times your annual expenses. The result will tell you, for example, if you need to accumulate $650,000 or $2 million to be able to live on the income generated by your assets.

What does it mean to live on income generated by assets?

For example, this could mean that the annual capital gain on your $650,000 would cover all of your annual expenses for the rest of your life. We want to avoid having to return to the labour market at age 70. Income doesn’t necessarily need to come from capital gains, it all depends on your investments. Dividend investing is also a good approach to FIRE.

How can you be sure not to liquidate your funds too quickly? According to FIRE followers, you can withdraw up to 4% of your investments each year. This percentage is considered a safe withdrawal rate so you never run out of funds.

FIRE lesson #5: don’t be afraid of boredom

Followers of the FIRE movement say they are often asked by people who obviously lack a bit of imagination: “What are you going to do with your time when you’re 40 and retired?”

There are many things you can do. You can travel, build a cottage with your own hands, learn a new language, work on contract on projects that really interest you, start an NPO for a cause that is dear to you, start a business, become a YouTuber… It shouldn’t be too difficult to come up with ideas.

Amongst bloggers who have taken an early retirement, none seem to complain that time drags on! Not to mention that stopping work completely is only an option. No one will stop you from continuing to work, even part-time, if this is what you want to do.

In fact, the founder of Hardbacon spoke on the subject with FIRE proponent Jean-Sébastien Pilotte last May. (the interview is in French)

Is FIRE right for you?

The success stories of a few bloggers are very inspiring, but that doesn’t mean this is accessible to all of us. Why? Because not everyone will find themself in a situation with the right conditions, like earning a decent income, having some knowledge of the markets, and the lack of large debt that would undermine the ability to save.

We can still draw inspiration from certain principles of the FIRE movement without applying them to the letter. After all, a decent retirement at age 65 is a great goal too!