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For many, the prospect of working a 9 to 5 job for the next 30+ years seems monotonous and disheartening. FIRE or ‘financial independence, retire early’ is a solution to that issue. People who follow FIRE save and invest more than 50% of their annual income in the hopes that their investments will yield enough money to retire in their 30s or 40s.
FIRE adherents invest anywhere from 50% to 70% of their annual income by aggressively cutting costs. There are many lifestyle changes FIRE followers make to achieve their goal of retiring early. Many eat at home instead of eating out, opt out of vacations and forgo a car for public transportation or a bike.
With the money they invest, FIRE followers typically use low-fee index funds that yield a modest 5% to 8% return a year. Most followers use the 4% rule, first developed by financial planner William Bengen in 1994, in order to figure out their FIRE number. The 4% rule dictates how much a person is able to withdraw from their retirement savings, and the FIRE number is the total amount of money someone needs to retire.
Your FIRE number calculated by multiplying your yearly living expenses by 25. For example, if your yearly living expenses were $50,000, you would invest $1.25 million and withdraw no more than 4% of your money each year in retirement, adjusting for inflation. While the 4% withdrawal rate has been contested, especially for FIRE followers who have longer retirement horizons, most FIRE followers still adhere to this rule.
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FIRE, however, is not a realistic lifestyle for many. If you’re struggling to pay off medical debt, haven’t started building up your emergency fund, or don’t make more than six-figures, retiring early likely isn’t an option for you.
Though FIRE isn’t meant for everybody, there are some takeaways that might be useful for your own finances. Select spoke to three FIRE followers (who are either fully retired or who work part-time) about some of the financial and life lessons they’ve learned by retiring early.
1. Focus on participating in the market rather than beating it
Most FIRE followers choose low-fee index funds over riskier, more volatile investments like individual stocks or cryptocurrency. Index funds are essentially a basket of different stocks that are intended to mimic the performance of a major stock index, like the S&…….