The FIRE Movement And Retirement Planning: The Personal Finance Fundamentals - Bitter to Richer (2024)

At a glance, planning for retirement can seem overwhelming and even insurmountable. The retirement landscape has definitely changed since your parents or grandparents retired – even the FIRE movement has been evolving! I didn’t deal with the retirement issues your grandparents did, so I can’t say that they were harder or easier, but it’s definitely a whole new set of issues these days. You likely won’t ever get a pension. Your investments, and retirement accounts, are largely up to you to manage. Whether that’s for better or for worse is up to you.

Does that mean you can’t have the retirement you’ve been envisioning? No! You can still make it, you just need to be proactive and get ahead of the game. The earlier you start, the easier this will be. So, if you’re young, go ahead and start so you don’t have to worry as much later. If you’re older and stressed about retiring, it’s time to kick this into high gear.

What is FIRE?

FIRE stands for Financial Independence, Retire Early. It’s a growing movement these days that seems to never stop astounding with its popularity. At the same time, despite it’s growth, it’s still far away for countless people. There is one main reason why it’s out of reach for most people still – let’s dive into that.

Achieving FIRE Means You Have To Be Aggressive

To adhere to the FIRE movement, you have to be incredibly aggressive. There are tons of ways to achieve FIRE, but each still requires aggressive commitment. Unfortunately, most people want to enjoy the benefits that come with FIRE – like financial freedom – but they don’t want to commit to the great lengths it takes to get there. It’s important to understand what you’re getting into first. If people understood the different approaches to FIRE, they may find the route that works best for them and not get discouraged and quit early.

Types Of FIRE

With all of that said, let’s break down the types of FIRE. They all have their pros and cons, but each one is serviceable. While going over these methods, remember to keep your overarching goals in the back of your mind so that you can figure out which meshes the best with you.

Coast FIRE

To put it simply, your Coast FIRE number is how much you need to invest to not have to contribute anything else until retirement age. In other words, your investments are done and you don’t have to invest anything else for your retirement fund. This is less of a foundational method to achieve FIRE and more of a milestone along your way. At this point you can also decide if you want to make changes to pursue a Lean FIRE, Barista FIRE, or Fat FIRE goal.

You can find tons of calculators online to identify your Coast FIRE number. Here is one of the better Coast Fire calculators available.

Lean FIRE

Lean FIRE is a bit more of a traditional path to retirement. You still retire early, but not exceptionally early. Most people who use Lean FIRE opt to retire in their 50s or 60s. Lean FIRE is basically just about dropping the luxuries. With this method you’re investing enough for what you’ll need to survive during retirement, but with little past the necessities. If you have a simpler lifestyle, this can be a great option for you. However, if you don’t see yourself being able to function with just core necessities, in a smaller house, in a low cost of living area, then this may not be for you.

Assuming “Regular Fire” would be investing at least 25 times your income, a common metric for achieving Lean FIRE is investing 18-25 times your annual income or expenses. A lot of sacrifices must be made to live this lifestyle in retirement, but it’s certainly achievable.

Fat FIRE

Fat FIRE is pretty much exactly like it sounds. You’re likely saving 33 times your annual income or even more. This makes it so that you don’t have to work anymore and you can still enjoy tons of luxuries. In order to achieve this, you need to save a serious portion of your income – investing 50% or more of it can make this much easier. Obviously, Fat FIRE is easier to achieve for those earning a higher income during their working years.

Barista FIRE

Barista FIRE has a lot of overlap with Lean FIRE. Overall, it’s a bit of a hybrid FIRE methodology. You’ve hit your retirement goal, and it may match a Lean FIRE lifestyle. For example, your retirement funds can fuel all of your necessities, but there is nothing left over for luxuries. Barista FIRE is a way to hit that goal, but still find enough money for those luxuries.

In a way, many people consider it to be partial retirement. You can work a part-time job, side hustle, or some passion project, but Barista FIRE requires you bring in extra income. The job should be something a lot more fun though – it only needs to cover the costs of those extra luxuries, after all!

Retirement Accounts

We know that investing is important, we know we need to stay consistent, we know to invest in low-fee index funds and ETFs, but we don’t necessarily know which retirement accounts we should use! The most important part is clearly investing consistently, but investing in the right account can save you a huge amount in taxes. Also, if you want to retire early, you may need to consider investing in an account with no tax benefits, so you can begin withdrawing from it much earlier (with no penalties).

IRA

An IRA is a type of tax-advantaged investment account. There is a cap on how much you can contribute annually for Roth IRAs, for which there is also an income limit.

I’ll go over the two types shortly, but you may only have a traditional IRA available to you depending on your income. That being said, both are valuable and a good investment, so don’t fret if you hit the Roth IRA income limit!

Traditional

In a traditional IRA, your contributions are deducted from your taxable income. Like the traditional 401(k), this means your contributions are made essentially tax-free, however you will have to pay tax when you withdraw them during retirement. This can be a good thing since a lot of people will be in a lower bracket when they retire. However, it is always unknown how policies and taxes will change in the future, so you can never be completely sure what will end up being the better option in the long run.

Roth

Roth IRAs use contributions that have already been taxed. While that seems unfortunate now, it does mean you won’t have to pay taxes on them later on, which could turn out in your favor (but it could also work against you too). The main issue for Roth IRAs is that they have an income cap, so once you make over a certain amount you can’t contribute to it anymore.

Some people like to do a combination of Roth and traditional IRAs, but it is more common to just focus on maxing out a Roth IRA. IRAs, like 401(k)s, have a minimum age of 59.5 years old before you can withdrawal with no penalties. However, there are a few exceptions if you need them – but it’s best to avoid early withdrawals altogether.

401(k)

A 401(k) is a type of tax-advantaged investment account. There is a cap on how much you can contribute annually, but usually your focus is simply on reaching the amount your employer will match.

I’ll cover the two types below, but you may only have a traditional 401(k) available to you. However, if you have the ability to do both, you could always split your contributions between them to hedge your bets to a certain extent.

Traditional

In a traditional 401(k), your contributions are deducted from your taxable income. This means that your contributions are made tax-free, but you will have to pay tax on them when you withdraw them in retirement. In other words, it effectively lowers your total taxable income when you make contributions! This can be a good thing if you’re in a higher tax bracket, as that can lower your current tax burden. However, as I mentioned in the IRA section, it is always unknown how policies and taxes will change in the future, so you can never be completely sure which will end up being the better option in the long run.

Roth

In a Roth 401(k), you make contributions that have already been taxed. That means you won’t have to pay taxes on them later, when you withdraw. This won’t always be offered by your employer, but it has merit if you have the option.

Whatever The Default Rate Is, Invest More

I’m specifically referring to whatever amount of money your employer has you set up to automatically invest. Whether it’s 3% or 1% of your salary, it’s undoubtedly not enough. You should always try your best to invest as much as possible. Even if it’s not in your 401(k), consider ways you can invest more.

For every dollar you save, a 401(k) offers a good buffer from things like taxes. It’s undeniably a good long-term investment option for you. However, not everyone will be able invest an incredible amount of money. Instead, it’s best to focus on what you can invest and make the most of that. Either way, you will probably want to invest more in your 401(k) than whatever the default contributions are.

At Least Meet The Company Match

And that lovely topic leads me to my next point. It’s important to meat the company match. I understand if you can’t max out your 401(k). In fact, most people don’t come close to that! However, meeting your company’s match gives you a huge boost to your investments that you’d be foolish not to take advantage of. If you think about it, your company’s match is almost like free money. So, next time you look at your 401(k), do yourself a favor and make sure you’re meeting the company’s match. In that case, at the very least, you’ll get a boost to your retirement savings that you wouldn’t have seen otherwise.

Know How Long It Takes To Vest

Here is the rough thing about company matches – they take time to vest. What this means is that whatever the company is paying into your account does not become yours until a certain amount of time has passed. A common one is three years of employment. So, until you’ve been employed by the company for three years (in this example), you technically don’t own what the company has paid in. However, after that three year mark, you are set and everything the company has put in is yours too! So, should you choose to leave the company, you get all the funds.

Now, don’t panic. Many companies have short vesting periods. These days, many companies vest from day one. With that said, it’s important to know the vesting period since that can affect your financial decisions.

Maximize Your Tax Breaks – It Makes Any FIRE Goal Easier

One of the nice things about the traditional 401(k) is that it lowers your current taxable income. If you find yourself in a very high tax bracket, it may be best to put the money that is taxed at the highest rate into the 401(k), or as much of it as you can afford to. Of course, that’s just a suggestion and what you find you’ll need to do may vary. Just be on the lookout for ways you can use a 401(k) to your advantage with your taxes. It’s a tax-advantaged retirement account after all, saving more of your money from taxes is part of the point.

Another potential opportunity to mitigate your tax burden comes with bonuses. Bonuses are usually taxed at a separate, flat rate. Depending on how much you make, that could be a good or bad thing. For the average income earner in the USA, that is likely a bad thing. Chances are your bonus will be taxed at a higher rate. If that’s the case, you could always consider dumping most of it, if not all, into your 401(k).

Never Withdraw Money Until You Have To – Wait Until You Reach Retirement Age

Most experts agree that you should avoid withdrawing money from your 401(k) or IRA until you reach retirement age (i.e. 59.5 years old). If you withdraw money prematurely, you are subject to a penalty. Basically, it costs you a significant portion of your investments as you withdraw them. Therein likes the drawback of using a 401(k) or IRA. In my opinion, that is perfectly fine. That just means you need to plan your strategy around not being able to use this money until you’re approaching 60.

When it comes to IRAs, you can withdraw some money with no penalties. However, there are several rules related to it which I won’t get into here. You can research them if you want to, but know that you will also be hindering your retirement efforts if you withdraw money prematurely.

Required Minimum Distributions

Once you reach 72, you may be subject to requirements on how much you withdraw. If you fail to take out the minimum, there will be a significant penalty on the remainder. This is unfortunate, but not a deal-breaker by any means. Simply, once you reach 72, make sure you’re withdrawing the minimum amount required to not get hit with those penalties!

Diversify With Different Types Of 401(k)s And IRAs

As I mentioned earlier, there are two types of 401(k)s and IRAs you can use in combination to hedge your bets to various degrees. I can’t recommend the perfect combination of the types of 401(k)s and IRAs since so much depends on your personal situation. However, I can say that as long as you are consistently investing, you’re doing better than many. As far as traditional vs Roth goes for 401(k)s, it’s usually an easy choice – most people default to traditional and don’t have the option to use a Roth 401(k). At the very least, they don’t know they have the option to use a Roth 401(k) since it’s something they may have to specifically request.

A common tactic I see is to have a traditional 401(k) with a Roth IRA, or vice versa. People who really like to hedge their bets may have a traditional 401(k), a Roth 401(k), a traditional IRA, and a Roth IRA. Do what makes you feel comfortable, and don’t be afraid to contact an advisor for help.

Planning Your Finances For FIRE

The ins and outs of planning your finances for retirement can be a little complicated. Do your best to keep it simple, but also take the time to do the research and legwork to make a great plan. The better you plan now, the easier it will be to reach your retirement or adjust your goals along the way!

How Much Do I Need To Invest For FIRE?

How much you need to invest really depends on how much you plan to spend during your retirement. But, as a general rule of thumb I’ll say the following:

• A common standard (based on a variety of factors) is to save 25-33 (based on Regular or Fat FIRE) times your annual expenses. So, if your expected annual expenses in retirement are $50,000 – that means you’ll need to save at LEAST $1.25 million!
• Withdraw around 4% each year from your retirement accounts. This makes it easier for you to maintain your lifestyle, without rapidly running out of money. Using our previous example, 4% of $1.25 million is $50,000 – what a surprise! Of course, the less you withdraw each year, the longer you can stretch your retirement funds. If you withdraw a smaller portion each year, that also means you’ll have to save more money in order to pull out the same amount of cash (and be closer to 33 times your annual expenses, rather than 25).

That’s Great, But Is There A Simpler Answer?

25% is the ideal spot in my opinion, for the average person’s post-tax investing goal. That means you’d invest at least 25% of your net income. I still recommend investing more if you can, but once you’re saving 25% of your post-tax income, you’re usually in a decent position. If you started investing somewhat early in your career, and you plan on retiring at a normal age, then even 20% can be enough to meet your goals in a lot of situations.

If you aren’t investing 25% of your income already, make that a priority. Follow good budgeting tactics, increase your salary, and do what you need to get there. Once you’re at 25%, invest more as you’re able, but don’t forget to avoid lifestyle creep. As your income increases, simply invest more. Do not increase your expenses simply because your income is increasing. Your expenses generally shouldn’t increase except after major life events like marriage or having a kid.

How Much Should I Expect To Spend During Retirement?

This varies with everyone, but there are several things you can keep in mind. Let’s keep the factors simple:

• Inflation (usually 2-5% annually)
• Housing, including utilities and any additional warranties or insurance you pay for
• Groceries
• Transportation
• Entertainment and travel
• Increased health care costs and optional life insurance

Investments That Are Key For FIRE

There are tons of different investments you can make in order to retire. In fact, they’re practically countless. Let’s break down just a couple common methods that tons of retirees successfully use these days to retire in peace!

Index Funds & ETFs

Index funds are one of the best passive investments. Time and time again, I will always come back to them. They are, without debate, a fantastic option for those opting for a long-term strategy. Find some of the best performers, invest and diversify, then watch as your money grows with the market! This growth is hard to beat, and passive index fund investors beat the majority of day traders over the long run. When in doubt, this is a simple go-to option that everyone can benefit from.

Index funds are straightforward and pretty amazing. By nature they’re diversified (to various extents) and they have a record of producing great long-term results. They’re so easy that if you want to then you can get started today with very little headache.

ETFs are a lot like index funds. I’m not going to get into the nitty gritty here, just know that they’re amazing for long-term growth – again, just like index funds. As long as you pick good performers, with low fees, you’re bound to do fairly well. If you want to start investing in ETFs, index funds, or even individual stocks, then check out my previous article or sign up with M1 Finance. They make the investment process easy. With them, building a portfolio and automating investments has never been simpler!

Real Estate Cash Flow

Cash flow is a simple term, and it sounds like exactly what it is. It’s just how the money is flowing in or out of your household. There couldn’t be anything simpler, right? So, your cash flow strategy in retirement in specifically how you’re planning what is coming in and what is going out. Again, it’s definitely a simple concept, but the details can be rough for those not used to managing their finances. For example, in retirement you may have to be liquidating investments routinely to pay bills, and the goal will likely be to keep those bills as static as possible so that there are no curve balls.

Real estate is a fan favorite when it comes to cash flow, and for good reason. Real estate has made more people millionaires than I can count, and it continues to be a good investment for building wealth. One cash flow strategy, which is becoming increasingly common it seems, is to use rental properties to help with your cash flow in retirement.

Value Increases With Inflation

First off, real estate is great because it increases in value, along with inflation. There are dips in the market, as there are with anything, but over time you see a good trend with this. So, your properties are increasing in value as the years go on – including how much you can charge for rent. As you increase the rent you charge, this can help you keep up with your own increase in expenses caused by inflation.

It Can Keep A Consistent Income

The next thing I love about this is that you can keep a fairly constant stream of income, if you know what you’re doing and are diligent about who you let rent your property. You’ll get monthly rent – and that’s nothing but a massive boon.

You Need To Know What You’re Doing

I will mention one unfortunate caveat that comes with real estate and rental properties – you need to know what you’re doing. It’s not as simple as investing in index funds and ETFs. It’s far less friendly for beginners, so you need to gain some experience with it before you rely on it for your income. In other words, this strategy is best for people who learned the ins and outs of real estate before they retired. While it’s not beginner friendly, that shouldn’t stop you. If you research it or get a mentor, this is still a fantastic option!

Priority FIRE Investments

Below is a list of investments that should probably be your top priority. It varies based on circ*mstance, but most people will find this to be accurate. Use your new investing knowledge to get started with it!

• Your emergency fund, for emergencies of course. Yes, I consider this an important investment.
• Meet your company’s 401(k) match, if they have one.
• At this point, eliminate any high-interest debt if you haven’t already. Paying off high-interest debt is worthwhile and a guaranteed return!
• Max out an IRA. Whether you choose a traditional or Roth IRA depends on the details of your household. However, I think a Roth IRA is generally a good investment. After that, consider contributing more to your 401(k). There is a lot of debate on this, and I think it comes down to when you want to be able to pull money out of your investments. If you want to retire early, you may want to research your retirement account options more or look at other options like contributing to a standard account with no tax perks (but also no early withdrawal penalties).
• If you’re happy with where you’re at and how your investments are going, think about donating more or contributing to some account (like a 529) for your kids.

Again, this isn’t the end-all priority list for everyone. It’s just a place to start to get you thinking about your personal priorities. Yours may look a bit different, especially if you want to use the real estate cash flow method.

Preparing Your Lifestyle For Retirement

Despite the average American having little or no retirement savings, many are still claiming that they plan on retiring in their early-to-mid 60’s. While that isn’t necessarily a particularly hard goal to achieve, it is unrealistic considering so few Americans save for retirement or have a plan for their life once they’ve retired. We’ve covered a lot of the fundamentals behind saving for retirement at this point, but it’s still important to consider the lifestyle you want in retirement. That lifestyle can help you decide which type of FIRE is right for you and how much you actually need to save!

Stay Busy

It can be hard to go from a very routine lifestyle to a completely free one. Retirement may seem like an extended vacation, but you’ll likely get bored sooner rather than later. Once you leave, it can be hard to rejoin the workforce, so try to plan for what you’ll do during retirement. A solution to this issue is negotiating a reduced workload and total work hours with your employer when you’re ready to retire. While it might not be possible for everyone, it is worth an attempt so you can ease into your retired lifestyle.

Many claim that once you’re retired your life is no longer productive and you’re just cruising. If you want that to be true, it can be, but you can also live a more productive and fulfilling life than you did while working full-time. Remember, you are more than just your job. There is far more to life than just a career, and retirement is a great time to expand on that even more.

If you’re concerned about what you’ll do or how you can still bring in extra income – look into business or freelance opportunities. Anything that you were interested in before, you now have the time to put as much energy as you want into it. This opens a lot of doors, and you can make money doing just about anything.

For some, retirement is just the ability to be at a financial state where they can quit their job and pursue everything else that excites them. They technically have the option to do nothing, but you don’t have to stop “working” once you retire and a lot of people don’t want to stop.

Keep Deteriorating Health In Mind

Retiring usually involves leaving your current employer – who you likely get health insurance through. In this case, consider thinking through how you’ll pay for healthcare. There are many options including working part-time with benefits or pursuing options through the Affordable Care Act marketplace. Regardless of your method, make sure you account for health insurance throughout your retirement.

As you get older, health issues will start to creep up. Consequently, you may want health insurance, but it can be far more expensive than what you paid for it through your former employer. Once you’re over 65 you may choose to switch to Medicare, but until then you’re out of luck. While your other expenses may decrease in retirement, expect premiums and fees related to your medical care to skyrocket.

Prepare Your Estate

At the end of the day, estate planning is an absolute must! Making an estate plan sets up your family and is a good way to get your finances in order. On top of that, it gives you a clear insight into the current state of your finances and can give you a good idea about where you need to end up. Do yourself a favor and start making plans for your estate. It’s a good idea to include estate plans with your retirement planning!

Use A Professional

If you have to, don’t be afraid to hire a professional to help you get your estate in order. It’s better to pay a little now so that your wishes can be followed later. It’s usually better to be safe than sorry!

What Legacy Do You Want To Leave Behind?

When you’re trying to build a lasting legacy, there are several important questions to ask yourself. Think about them seriously and use them to help you identify what your priorities are.

How Do You Want To Be Remembered?

First off, how do you want to be remembered? As kind? Generous? A star in your field? All of the above? Better yet, how do you want to be remembered and by whom do you want to be remembered that way? It’s a seemingly simple question, but it can be tough to answer. Think about what you actually want to be remembered for, and who you want to do the remembering. For example, if you want your family to remember you as a loving and attentive parent, you may not care as much about being remembered as a diligent worker by your peers.

What’s Your Purpose?

Which brings me to my next point. What’s your purpose? It’s best to decide if you’re more career or family oriented. Figure out what you’re here to do and why – and that can help you figure out what your legacy will be.

What Are Your Best Skills Or Talents?

It’s useful to lean into what you’re naturally good at. If you have any skills or talents that can lend themselves to helping you build a lasting legacy, be sure to use them. Tons of people get caught up in day to day life and forget all the things they’re amazing at. Likewise, they can tend to forget what their passions are…

Do You Have Any Passions?

Following your passion isn’t always a good thing, but it can be. If you have something which you’re undeniably passionate about, you may want to consider how that would impact your legacy. Instead of being remembered for your career, perhaps you’d prefer to be remembered for something else you did in your free time!

What Sets You Apart?

At the end of the day, all these questions should help you identify what sets you apart from others and makes you unique. Don’t overcomplicate it, but do give them some consideration. If something jumps out at you immediately, that makes the process easier. However, if you need some time to think things over, don’t fret – most people don’t know what they want their legacy to be.

Living On In Memories

Ultimately, whatever legacy you leave will live on in the memories of others. Do your best to have a positive impact on other people and you’re bound to leave a lasting legacy that you can be proud of. At the end of the day, we all want to make the world a better place – so focusing on how you can do that may be the easiest path to build a good, long-lasting legacy.

Conclusion

I hope that helped clear up a lot of confusion! You may hear it all the time, but if you start now and stay consistent you’ll see some great growth. Just remember to not get discouraged. For those just beginning to invest, check out my previous article or get started with M1 Finance. M1 is my favorite brokerage – again, they make investing simple and they have tons of great ETFs and index funds.

If you have any other useful information, I’d love it if you shared it in the comments! For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.