Rather than planning to retire in their 60’s, they turbo-charge savings, pare down spending and optimize investments to become financially independent and retire early – a process known as FIRE.
For Justin McCurry retirement came more than 30 years early. McCurry saved $1.3 million and retired nine years ago when he was 33 so he could spend more time traveling with his wife and three kids. But it took him years of careful planning and saving to get there.
McCurry, who writes about FIRE strategy and offers early retirement consulting on his website Root of Good, focused on reducing his debts and started saving money in college. By attending an affordable state school and graduating early while working at the same time, he was able to leave college with a healthy chunk of savings. He also bought a condo that he rented out and eventually sold for a profit.
“It is a long-term mindset,” McCurry said. “It is going to take a decade or two to reach FIRE.”
While some people use high salaries in technology, finance or medicine to launch them toward financial independence, McCurry, a former civil engineer, said his income topped out at around $70,000 before he retired.
“Financial independence is well within reach of an average college graduate,” he said. “If you’re only making double the minimum wage, it is a lot harder. But for the vast majority of college grads it is in within reach, even for people who earn less than $100,000.”
Being financially independent means that income from your investments alone is enough to cover all your expenses. While there are fundamental principles for getting there, everyone will have their own variables depending on their income, lifestyle and risk tolerance.
“One of the biggest principles is just to start saving. The earlier, the better,” said McCurry. “Even if you don’t have the all math worked out. Start saving now instead of next month or next year.”
Here’s how to start working toward your financial independence.
Find your ‘FIRE number’
The road to early retirement begins with your “FIRE number”– the amount of money you need to have saved up to live the lifestyle you want after you stop working.
To find it, first determine the annual budget you plan to live on in retirement, McCurry said.
“Maybe you want to live on the same amount you live on now,” he said. “Maybe it is more because you’re going to be traveling. Maybe it is less because you plan to move out of an expensive city or even abroad to a cheaper place.”
Next you need to determine your withdrawal rate, or how much you will pull out each year from your portfolio to live on in retirement.
“The 4% rule is great if you’re retiring at age 65,” said McCurry. “But if you’re retiring early you should think about 3.5% and if you’re retiring in your 30s or 40s you may take an even more conservative number.”
Next, he said, take the retirement budget and divide that by your 3% or 4% retirement rate to get your magic number.
“That will tell you what your saving goal should be,” he said.
For example, if you plan to live on $40,000 a year in retirement with a 3.5% withdrawal rate, you’d need to save $1.142 million – that’s your FIRE number. You can explore and tweak all the variables with an online calculator like this one at Networthify.
For those looking to have more income in retirement, the number will be higher. Rita-Soledad Fernandez Paulino, the 35 year-old founder of financial coaching firm Wealth Para Todos, has a magic number of $4 million. That’s enough for her, her husband and children to live on about $120,000 a year when they retire early.
“My number is higher because my husband has this idea that people who are on FIRE, like they only eat frijoles and they don’t eat out,” Paulino said in an interview with Delyanne Barros on CNN’s Diversifying personal finance podcast. “And my husband’s like, we’re not going to retire early if we’re going to have to sacrifice, like no longer eating at restaurants and being foodies.”
The powerful accelerant getting you to your magic number is your savings rate, with most people pursuing FIRE living well below their means and saving more than half their income.
The earlier you start the better, because the sunshine that makes your savings grow is compounding interest.
“Contribute to your 401(k) and push your withholding up to 8% or 10% from 6% or 7%,” said McCurry. “Your paycheck doesn’t go down a lot when you do, but it will add up a lot down the road because of compound interest.”
The first year out of college can be important for setting up your savings habits, McCurry said. Even though you may be at the lower end of your earnings, you may have the most disposable income at that time, before obligations like higher education, car payments, a home or a family take up a larger share of your pay.
“If you focus heavily on saving goals early, you can front load your retirement savings and planning.”
There are decisions to make along the way about what you want to prioritize and also perhaps sacrifice in order to make your savings goals. For example, Paulino and her husband have decided not to put money into a 529 plan to save for their children’s college expenses. Instead, they are investing in real estate that the children will inherit.
“That’s a decision we’ve made that some people would be like, ‘Oh my goodness, you’re not paying for your kid’s college? Instead, you’re focusing on retiring early!?” she told Barros. “Ultimately, kids learn most from our actions. So if they see you being intentional with your dinero, they’re going to learn to be intentional with their dinero, too.”
Eliminate expenses and elevate earnings
Aiming to stash half or more of your salary will often require sacrifices.
“The ideal thing would be for a college graduate to continue to live like a college student for three or four years after graduating,” McCurry said.
But it need not be a life of austerity, he said, just one where you make intentional choices about where your money is going. Live at home or with roommates longer than you’d like, to save on housing costs. Cook instead of order out. Budget your major purchases and vacations. The main thing is to eliminate wasteful expenses and save the rest.
No matter your income, having a high savings rate is going to be possible only for those people with virtually no debts. That’s why many people working toward FIRE start by paying off their debts first, or live a car-free life.
Part of having more money to save is to continue to get pay raises. McCurry said you may even need to earn another degree, certificate, or skill to get to the next pay level.
“The people I’ve seen succeed and hit FIRE at a young age, they are getting raises or they are regularly switching jobs,” said McCurry. “A $50,000 a year job is good to start, but two years in if you’re not getting a pay raise or promotion, look for a new job”
Skipping a few dinners out and notching promotions are not going to get you to FIRE alone. The money you save also needs to grow. By the time you have significant savings, the tweaks you make to your investments will have more impact than any changes to your spending or saving habits.
Investments working toward FIRE should be, frankly, boring, said McCurry. Avoid individual stocks or volatile investments and focus instead on index funds – diversified stock funds that track the major indexes.
“You shouldn’t see your portfolio going wildly up and down. You’re aiming for steady 8% or 10% returns per year, not a risky 50% or 100% returns per year that may disappear the next year.”
The temptation to bet big on potential windfalls – like crypto or real estate investments – may be great. But McCurry said, if something promises to double your money, it has a lot of risk baked into it. Perhaps more than you’d be willing to withstand while working toward your goal.