Does your FIRE Burn?
Re-Igniting your FIRE and the 4% Rule.
As we start the new year I thought I’d share a concept that may resonate with some of you, especially if you’re curious about embracing minimalism, or concerned about your retirement fund.
Financial Independence Retirement Early (FIRE) is a lifestyle movement encouraging people to spend less and save more aggressively.
The concept is based around the idea of building enough wealth that it provides an income so that work becomes optional.
Or, it could provide you with enough security to do the job you really wish to pursue that does not pay well but gives you fulfilment.
The good news is that you don’t have to become a Sadhu and renounce worldly processions in order to achieve financial independence, but you will have to make sacrifices in order to achieve your goal.
The FIRE concept was coined in the book, Your Money or Your Life by Vicki Robin and Joseph R Dominguez. There are 9 steps, but there are two core tenets behind the philosophy.
Extreme saving and budgeting strategies.
FIRE followers live frugal lifestyles in order to save a high percentage of their income. It is mostly common sense saving, such as cooking your own meals as apposed to dining out. Doing your own home maintenance or car servicing. Driving older cars and kicking costly habits such as smoking or drinking.
2. Early and aggressive investment strategies
Proponents of FIRE invest larger than average portions of their income. As a result, they begin to earn interest on their savings early. Often, they choose more aggressive investments with a higher earning potential. FIRE followers prioritise compound interest. They focus on asset allocation and diversification to ensure their investments pay off and their money works for them and not the other way around. Growing their income and cutting their spending habits.
It may sound straight forward but it does require discipline.
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t… pays it.”
Invest in income generating assets such as index funds, stocks or real estate and let compound interest grow your wealth.
Time is going to pass anyway so you may as well let time do the heavy lifting for you.
It may be self explanatory but the reason the rich keep getting richer and the poor get poorer is because stocks outperform countries’ economic growth.
If a country grows at 4% per annum and you’re getting 10-20% on the markets, its a no brainer. If you want to play safe and keep your money in the bank earning bank interest, coupled against an average inflation rate of 5%, you will always be behind in the game.
Now, your FIRE number is the amount of money you need to achieve financial independence.
The 4% Rule goes as follows:
Multiply your annual expenses by 25 and that is the amount you need to comfortably retire.
If you withdraw 4% of that annually, you will have enough funds for 30 years.
This approach is simple: You take out 4% of your savings the first year, and each successive year you take out that same dollar amount plus an inflation adjustment. For example, if you’ve saved $1 million, you’ll spend $40,000 in the first year after you retire.
This rule is based on research finding that if you invested at least 50% of your money in stocks and the rest in bonds, you’d have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years.
William Benger, who published these findings in 1994, tested his theory across some of the worst financial markets in U.S. history, including the Great Depression, and 4% was the safe withdrawal rate.
Ultimately, the FIRE movement may not be right for everyone. It requires a great deal of sacrifice, and there is risk along the way if you invest in high yield stocks. You will need to consider your lifestyle preferences and level of risk tolerance. The concept is based on the fact that historical gains in the market will be matched going forward. But it is worth thinking about. Most people do not have enough savings to retire.
Here’s an overview of what we’ve discussed:
Variations of FIRE
Lean FIRE: Achieving financial independence with a very frugal lifestyle and minimal expenses.
Fat FIRE: Retiring early but maintaining a more comfortable, higher standard of living.
Barista FIRE: Achieving partial financial independence where you rely on part-time work to supplement retirement savings.
Coast FIRE: Saving enough early so that your investments grow on autopilot without needing additional contributions.
Steps to Achieve Early Retirement
Set Clear Financial Goals
Determine your FIRE number and desired retirement lifestyle.
Break the goal into actionable milestones.
Track Your Income and Expenses
Use budgeting tools to know where every dollar goes.
Identify areas where you can cut expenses significantly.
Maximise Savings and Investments
Automate contributions to retirement accounts like 401(k), IRA, or equivalents.
Invest in low-cost index funds or ETFs to grow wealth steadily.
Increase Income
Negotiate raises at work.
Start a side hustle or small business.
Monetise hobbies or skills.
Reduce Housing and Transportation Costs
These are typically the largest expenses. Consider downsizing or using public transport.
Pay Off Bad Debt
Eliminate high-interest debt (like credit cards) as soon as possible to avoid financial drag.
Build Passive Income Streams
Invest in dividend-paying stocks, rental properties, or other income-producing assets.
Stay Consistent
Stick to your savings and investment plan even during market downturns.
Avoid impulsive spending or lifestyle inflation.
I love quotes and thought I’d end off with this one from Dame Maggie Smith:
“Ask yourself about the kind of life you want: What would you do day to day, and with whom, and where?
Consider the life you have. Do one thing today, however small, to close the gap between the two.”