F.I.R.E. (Financial Independence, Retire Early) is a lifestyle movement with a focus of making money work for you instead of you working for money. FIRE community values freedom, which comes from saving and investing now and living off the investments after early retirement instead of depending on a typical 9 to 5 work life.
Borne out of the 1992 best-selling book “Your Money or Your Life” by Vicki Robin and Joe Dominguez the book contemplates the difference between making a living and making a life. The mission is to free people from consumerism and educate people on what really brings happiness. Enticed by the belief that material goods bring happiness people entangle themselves into piles of debt or spend years working at a job they don't like to support a high expenditure lifestyle that doesn't make them happy.
Do you come home from your job full of life?
Do you have time to participate in things you believe are worthwhile?
If you were laid off from your job, would you see it as an opportunity?
If you answered no, FIRE might be a solution.
Especially popular among college educated and tech-savvy millennials the movement questions the retirement age of 65.
“The standard narrative is to get a job, buy a house, work until you’re 65, and get a pension. Be loyal to the company and they will take care of you in your old age. You have to throw out that outdated advice and create a new rulebook.” Kristy Shen (Author of 'Quit like a millionaire'.)
An alternative is to evaluate your financial situation, realize what truly makes you happy and cut down all expenses that does not bring you real value. The goal is to save up to 70% of income in order to reach an amount equal 25 times of annual expenses. The savings are put into diversified financial products (mostly ETFs and fixed-income products) and FIREes can withdraw 4% per year from their portfolio without diluting the portfolio's value.
The model is based on historic stock market returns of 7%, therefore, adjusting annually for inflation, 4% is safe to withdraw and live off until the final days of your life.
Retirement with FIRE does not necessarily mean spending all your time in the beach with a drink in your hands and not working ever again. Yet it gives you an opportunity to do that if it really makes you happy. Most FIREes end up doing voluntary job, writing blogs, learning new skills and monetize on their hobbies.
According to Investopedia, there are at least 4 types of FIRE:
Fat FIRE: an individual with a more traditional lifestyle who saves more than the average retirement investor
Lean FIRE: refers to stringent adherence to minimalist living and extreme savings, necessitating a far more restricted lifestyle.
Barista FIRE: refers to followers who have quit their traditional 9-to-5 job but still employ some form of part-time work to cover current expenses that would otherwise erode their retirement fund
Coast FIRE: also applies to followers with a part-time job, but these proponents do have enough saved to fund their retirement and current living expenses.
The 4% rule was developed in the 90s for a 30-year time horizon when interest rates were higher and stock valuations were significantly lower than they are right now. Back in 1990 the S&P 500 price per share (P/E) ratio was at 15.13 and as of December 2020 it stands at 37.11. In 2010, when the FIRE movement gained momentum, the ratio was 20.70.
Predicting market fluctuations is a notoriously difficult task, and despite FIRE member's determination to invest in the stock market based on dollar-cost averaging strategy even during the downturn, losses in the early years of retirement would make use of the 4% rule unsafe for many retirees.
Based on calculations by a FIREe Brad McCarthy who used historical investment returns and a 100,000 simulations, early retirees with at least 80 percent of their portfolios invested stocks and a starting withdrawal rate of 2 percent would have an 85% chance of successful retirement over a 50-year retirement.
In other words, a successful retirement would require to either withdraw 2% instead 4% proposed by FIRE community or save up to 50 times the yearly expenditure.
At FIREDAO we believe that there is a better alternative. Instead of decreasing the withdrawal/increasing savings rate, we will offer new generation high yield financial products that will bring you financial freedom earlier.