June 27, 2022

FIRE: Ensuring You’re Ready for Retirement, Whatever That Means to You

No one wants to work forever, even if they’re a business owner. Eventually, retirement rolls around, whatever that might mean for an individual on a personal basis. The challenge, of course, is being ready for retirement, preferably before the age of 65 or 70. The good news is that with the FIRE strategy, it’s possible to retire long before the official age when an individual still has plenty of life left to enjoy.

What Is FIRE?

FIRE stands for “financial independence, retire early”. It’s all about getting to a place where someone can own their own time and do what they want, whether that’s lounging on a beach with a piña colada in hand or something else completely.

Most people don’t want to retire and do nothing. They still want a purpose – something that gets them out of bed in the morning. However, that something must be tied to their interests, goals, and desires, not to the whims of a boss or the need to earn a paycheck.

Those do not let someone own their own time. They allow others to own your time.

The Secret of FIRE

Anyone who has ever delved into retirement planning understands one thing. To live life on your terms, it’s essential to earn more than you spend. Of course, “earning” doesn’t have to mean earning a paycheck by punching the clock in a 9-5 job. It can mean any number of things, from stocks and bonds to business investments.

Part of ensuring that an individual can generate more than they spend is paying close attention to the cost of living in the areas where that individual spends the most time. For instance, life in most US cities is far more expensive than living almost anywhere else in the world, although cities like Los Angeles and New York certainly have the highest cost of living.

So, part of ensuring optimum income generation and reducing expenditures is making smart decisions about the place you call home. For many people, international travel is not just a way to explore the world and get to know other cultures, but to save a considerable amount of money compared to their expenses at home in the States.

For those who want to achieve that optimum generation versus spending ratio, there are two prerequisites – changing your mindset and planning accurately.

Why Pursue the FIRE Method?

There’s no shortage of retirement planning strategies out there. They’re a dime a dozen these days, and all seem to offer some sort of benefit. So, why follow the FIRE method? It comes down to realizing what it is that matters the most.

Is it the right path? FIRE is a good fit for anyone who:

  • Feels like they’re running endlessly between meetings and putting work off until their “off” time
  • Feels like they’re living for the weekends when they can focus on what matters to them
  • Feels burned out by never being able to focus on things with value to them personally
  • Realizes that if they keep going like this, they will be 70 before they know it and that life has passed them by

Time is too precious for anyone to continue living on autopilot. It’s time to begin living consciously.

Changing Your Mindset

The most important aspect of changing the traditional mindset is realizing that time is money and coming to value time more than things. For those still caught in the rat race, chasing a lifestyle filled with nice cars, lavish homes, and private jets, this can be challenging. The mindset shift requires realizing that the only thing you truly will ever possess is time and there is no guarantee as to how much time you have. Every minute spent chasing a thing, a possession, is a sacrifice of life.

Simply put, time is the most precious resource anyone has. If you’re unable to shift your mindset in this way, FIRE will not work. For it to work, a person must want to have complete freedom over their time.

An example of this can be found in the new car purchase process. An individual is faced with a choice – buy a new car or take six to 12 months off work. For some, the new car will be most valuable. For others, taking a year off work to do what they want will be the most valuable option.

It’s not just about big-ticket expenses and chasing things, though. It’s also about chasing experiences and keeping up with the Joneses. All these things require a sacrifice of time in exchange for something with little to no return. That new car becomes a used car the moment it’s driven off the lot. Those experiences cost money that takes months or years to replace. That luxury home, those designer clothes, those imported foods, they all come at an expense, which usually means sacrificing control over our only real possession – time.

Achieving this shift in mindset requires just one thing – deciding consciously not to chase after things that detract from the ability to control your time. Those who want to become financially independent and avoid being tied to earning a certain amount of money to keep up with their lifestyle must see the trap hidden within the modern Western lifestyle.

There is more to it than that, though. Deciding to opt-out of the rat race is only part of the equation. There’s also the question of what someone will do with the time they now control. Fear keeps many people from retiring and even from retiring early. They’re afraid that they will have nothing to do. They fear being without a purpose. They worry that they will just waste away with nothing to show for their time.

So, as part of shifting a mindset, anyone following the FIRE strategy must have a good sense of what they want to do with that time or be able to define what it is that they need to feel authentic, genuine, and alive. It’s not that someone must plan how they will spend every minute of their time, that’s not the point. Controlling your time is the point.

A Word on Intention

Achieving early retirement does not necessarily mean stepping out of the world and living on a secluded beach somewhere for the next 50 years. For many people, it’s more about living an empowered, conscious life. For those thinking of following the FIRE method, it’s important to ask several questions, including:

  • What would you like to pursue if you didn’t have to think about money?
  • What would you be doing every day if you woke up and didn’t have to earn a living?
  • What fuels and drives you that you would like to pursue if money was not a problem?

The Need for Planning

Planning is vital to creating the path to reaching FIRE or the point at which someone may not have to work and be able to rely on their investments. Without accurate, ongoing, in-depth planning, FIRE is impossible. Of course, planning can be challenging and is not something that everyone has experienced.

One of the first things to consider is visibility – how does an individual tell where they are on the path? How do they determine what it takes to reach the end of the path? How do they even tell what the “end” looks like?

There are several ways to determine what someone will need in terms of assets. Many of them also involve making assumptions, such as defining a reasonable rate of return on an investment, how to apply those to passive and active investments, and the like.

Take the stock market as an example. A good rule of thumb is to assume a 7% return to give investors a sense of what will be required. A 7% return on a passive investment offers considerable cash flow when expenses are managed correctly. Of course, investors need to account for other things, which involve assumptions. Inflation is an example – historically, it’s been around 3%, so investors must remove 3% from their returns, meaning that if their return is 7%, they will only see 4% once it has been adjusted for inflation.

That 4% rule is often used for those in their 60s and 70s, but for anyone attempting to retire early, it’s important to be more conservative. Other costs will eat into that 4%, leaving you with less and requiring greater diversification of investments. The best recommendation is to calculate life expenses at each phase while planning for a life expectancy of about 95 years.

Here’s a startling statistic. If someone retires and then withdraws 4% of their passive portfolio over 30 years, there’s an 84% chance of retiring successfully. However, someone retiring early will see something like 50 years of retirement, and that drops the success rate from 84% to 15-20%. This means it’s important to balance passive investments with active ones. It’s part of being independent and being able to choose how time is spent, rather than having that dictated by a boss or the need to earn a paycheck.

The Need for Additional Cash Flow

Passive investments should be left alone to continue generating returns and then allowing those returns to compound. Dipping into those returns prematurely is a sure way to reduce the chances of successfully retiring. The good news is that by layering in additional sources of income, it’s possible to leave your passive income-generating investments alone.

One example of this is rental income. By owning several rentals (or being involved in rental real estate deals that split ownership up among multiple people), investors can build up cash flow. When this is done correctly, retirees can earn more money during retirement than they did while working full-time.

Taking the First Step

What should someone who wants to make FIRE a reality do first? Visibility is the most important thing. It’s important to have visibility into all aspects of an individual’s financial life, from current income levels to portfolio performance. Thankfully, the modern world makes that much easier to achieve thanks to tools like Mint.com and PersonalCapital.com. It’s now possible to create and stick to a budget while tracking a person’s whole net worth.

It's critical to track expenses and stay on top of them throughout different life stages. For instance, at age 30, someone will have a very different outlook than someone at 59.5 years of age, when it becomes possible to start tapping into retirement accounts. Other things to track and consider include:

  • Changes to accounts over time
  • Different tax laws that apply across various accounts
  • How each account works, including 401(k)s, traditional and Roth IRAs, etc.
  • The expectations with pre-tax and post-tax contributions
  • The value of homes and other real property

With this information, it becomes possible to predict income into and through retirement. Likely, most people will also find that they won’t have nearly enough passive investments, which might require them to sell properties or liquidate other assets to ensure they have enough capital to meet their needs.

Is a Financial Advisor Necessary?

A financial advisor may be necessary, particularly for those who lack the experience required to accurately direct their investments and plan for their financial future. However, individuals with experience and a good understanding of how investments work may not require professional help.

What Does Early Retirement Look Like?

Early retirement can look like almost anything and the picture will vary from person to person. For some, it’s the ability to set their schedule without any outside demands. For others, it’s building cash flows and working on projects that pay off, but it doesn’t feel like “work” – it’s tied into passion and securing a financially independent future.


What Does Financial Independence Mean?

Like early retirement, financial independence will look different for every person. For some, it just means that they are not dependent on working to earn an income to sustain their lifestyle. It’s about more than just not needing money – it’s about being free to choose what you spend your time doing.

In Conclusion

The FIRE method allows anyone to step out of the workaday world and take control of their most precious asset – their time. By cultivating the right mindset, setting intentions, and then planning accurately, it’s possible to create income streams (active and passive) that will carry you through retirement, even if you step out of the workforce decades before the “official” retirement age.

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