If you’ve spent much time reading financial blogs, you’re probably at least remotely aware of the FIRE Movement. “FIRE” is the abbreviation for Financial Independence, Retire Early. It’s a popular topic and even a dominant theme on financial blogs.

The FIRE movement got started roughly around 2000, and it’s been gaining ground ever since. You can and should participate in it at any stage of your life, and whatever your financial situation. Even though the emphasis is often placed on the retire early side, the more important concept may be financial independence part.

And who doesn’t want to reach that?

What is the FIRE Movement?

The FIRE movement is made up of people who are committed to the idea of reaching financial independence and/or retiring much earlier than the more traditional ages of 62 or 65. Some are working to retire by 50, and many in their 40s or even 30s.

In the podcast, Rob uses the example of Clark Howard. His life and journey perfectly exemplify the FIRE movement, even though he reached financial independence well before the movement spread.

Most people know Clark Howard to be well-known and successful. But what they don’t know is that it’s not how he started out. When he went to college, his parents couldn’t afford to pay–they had fallen on hard times. Clark went to night school and worked his way through college.

Once he started working, he decided to live on every other paycheck. What that really meant was that he was banking 50% of his income. He used the money saved to buy a foreclosure, and then to start a travel agency. After a few years, he sold the travel agency, and was able to retire and live on the beach in Florida at the age of 31.

Circumstances eventually brought him back home to Atlanta, where he started a radio program on personal finance. But now he works only because he wants to and not because he has to. Clark is in his 60s now, but he continues to live beneath his means.

The four key takeaways on the FIRE movement from the Clark Howard story are:

• Anyone can adopt the strategy.


• Live beneath your means.


• Save and invest more money than you ever thought you could.


• Create the option to retire, or to simply change direction in your life.

Those are the four basic pillars of the FIRE movement.

FIRE by the Numbers

I hope you don’t hate numbers, because in a real way, the FIRE movement is all about numbers. Or more particularly, changing your numbers to get them working in your favor.

Rob describes a popular FIRE calculation. He says you’ll reach financial independence when your savings and investments reach 25 times your annual income.

Based on that formula, if your annual income is $100,000, you’ll need $2.5 million. If your annual income is $50,000, you’ll need $1.25 million.

Why 25 times annual income?

It’s not an arbitrary number. It’s based on an annual withdrawal of 4% of your portfolio, often referred to as the safe withdrawal rate.

Various backdated surveys have confirmed that if you withdraw 4% of your portfolio each year, you’ll never outlive your money.

If you earn $100,000 per year currently, and you amass $2.5 million, 4% of $2.5 million works out to be $100,000 per year. Put another way, your portfolio will be large enough to replace your annual earned income.

Now as we all know, it’s not possible to get a completely safe 4% return on your money in today’s interest rate environment. Another important consideration is that you will actually have to earn more than 4% to make the strategy work.

It has to do with inflation. It won’t stop the day you reach financial independence or even when you retire. For that reason, your investment portfolio will have to accommodate the inflation factor.

Investing Your Way to Financial Independence, Retire Early

To do that, your investment portfolio may include a large investment in stocks. That’s because the return on your investment will need to be high enough to support withdrawing 4% per year, as well as growing your portfolio to keep pace with inflation.

Here’s how it works. According to Vanguard, a 70/30 mix of stocks and bonds has had an average annual rate of return of 9.3% since 1926.

If you withdraw 4% each year for living expenses, your portfolio will continue to grow by more than 5% per year. Since inflation has been running between 2% and 3% per year for the past couple of decades, your portfolio would actually grow at a faster rate than inflation, even when taking 4% annual withdrawals for living expenses.

It’s important to understand that this is a long-term investment strategy. There will be years when the stock market is down, and you’ll have to be prepared to hold your positions through the decline. But over time, the market always bounces back, and that’s the angle you’ll be playing.

How to Reach Financial Independence – It All Centers on Saving Money

This is the most critical component of the FIRE movement. You’ll need to be able to accumulate enough savings to enable you to live without needing to work.

But there’s also a sub-part to FIRE, and that’s getting out of debt. In fact, a common thread with FIRE participants is climbing out of debt. Some are even motivated to pursue FIRE because of debt, at least initially.

That’s hardly surprising. Debt has three negative influences on your financial situation:

• Debt payments limit the control you have over your income.


• They reduce the amount of money you have for savings. In extreme cases, they can make it impossible to save money.


• It raises your financial stress level.

It’s easy to see why debt is such a powerful FIRE motivator.

If you have a substantial amount of debt, paying it off will need to be part of your FIRE strategy. It will likely mean your savings process will be slower while you’re paying off debt. But don’t let that slow you down. You’ll see as we go forward, getting out of debt eventually helps with the savings process.

The Mechanics of Saving Money

If you can save 20% of your annual income, there’s a good chance you’ll reach financial independence within 30 years. If you can save 30%, you can probably reach it within 20 to 25 years. And based on the Clark Howard example, it really is possible to live on 50% of your income and save and invest the other half. In fact, the older you are, the higher the percentage will need to be.

To save money in any significant amount, you’ll have to learn to live beneath your means. For example, if you make $100,000 per year, and you can reduce your living expenses by $10,000, you’ll achieve two very important objectives:

1. You’ll make $10,000 available for savings and investing (or debt payment), and


2. You’ll lower the portfolio goal you’ll need to achieve to reach financial independence.

Taking a closer look at the second point, if based on a $100,000 income you need to save $2.5 million to reach financial independence, lowering you’re living expenses by 10% will also lower the amount of money you’ll need to accumulate. You only need to accumulate $2.25 million.

That’s still a lot of money, but I hope you can see where this is going. The arrangement becomes even more pronounced if you’re able to cut your expenses by 20%, 30%, 40%, or 50%. It’s difficult, but it is doable, especially since paying off debt will be a big part of your expense reduction strategy.

Reducing living expenses also has an important intangible benefit. As you begin cutting expenses, you’ll realize you can survive on a lot less. An unexpected benefit is that as you reach FIRE, stuff becomes less important. It’s replaced by FIRE itself.

Is There a Way to Achieve FIRE Without Becoming a Multi-Millionaire?

There are, but having a large investment nest egg is the foundation of the movement. For example, you may find that you are able to live on investment earnings from a $500,000 portfolio if you have other income sources.

To be consistent with the FIRE movement, those other income sources will need to be passive or largely passive in nature.

Some examples include:

Rental Real Estate

This involves purchasing rental property that will generate sufficient rent to at least cover your operating expenses. Overtime, rents will increase, and you’ll begin to turn a profit.

Once your mortgage is paid, most of the rental income will be pure profit. It may take you 15 to 20 yea