Retiring at 40-years old is possible and many people do it using the FIRE method.
How does early retirement sound? Yes, everyone dreams of it, but did you know that many people also make it a reality? The FIRE movement (Financial Independence, Retire Early) has taken off in recent years allowing more people to retire long before the illustrious age of 65.
What is FIRE?
People that take advantage of the FIRE movement invest aggressively in their younger years. When we say aggressively, we’re talking half to three-quarters of your income gets invested. While that sounds appalling, how does retiring by age 40 sound? Suddenly investing aggressively sounds achievable.
When you apply the FIRE standards to your life you:
- Cut your expenses as much as humanly possible
- Raise your income as much as you can
- Invest in low fee investments, for example, index funds and real estate investments
People using FIRE often retire once they have at least 30 times their annual expenses saved, which usually equals around $1 million or more. At this point, you can retire (quit your job) and decide how to proceed. Some people stop working altogether while others find a job they do for ‘fun.’
Covering Daily Expenses Once you Retire
Covering your daily expenses once you no longer have a job is an important factor. Early retirees try to keep their withdrawals at no more than 4% of their savings (they call it the 4% rule). This could mean large sacrifices even during your retirement years. You must monitor your expenses and actively manage your investments to ensure growth in order to make up for the withdrawals you make on an annual basis. Since the market is volatile, this can be risky for many.
Who Qualifies for FIRE?
Anyone can try the FIRE method, but those that succeed the most at early retirement are:
- Those that have ‘bigger’ plans for their life that working full-time doesn’t allow
- Those that want financial freedom to work at a job that they love rather than have to work
- Those that have the ability to continually earn more money year after year, making it possible to aggressively invest
How to Retire Early with FIRE
Are you ready to start the FIRE method? Do the following:
- Think about why you want to do this. Is it enough of a reason? Remember, you will be sacrificing greatly.
- What are your goals? Think about both short-term and long-term goals.
- Check out your spending. Is it possible to cut back drastically without feeling depressed or regretting your decision?
- Are you in over your head in debt? You need to get out of it first.
- Did you pay off your mortgage yet?
- Have you saved for your child’s college education?
Consider all of these factors before starting the FIRE method and trying to achieve early retirement. Even if you don’t want to go as extreme as that, you can use alternative methods, simply saving for retirement as much as possible, allowing you to retire much earlier than the standard age of 65 years old.