Financial Independence Basics: Your Path to Early Retirement (FIRE)

Financial Independence, Retire Early (FIRE) isn't just for tech millionaires. It's a mindset and strategy that anyone can use to achieve financial freedom years or decades before traditional retirement age.

What Is Financial Independence?

Financial Independence (FI): When your investments generate enough income to cover your living expenses indefinitely.

You're FI when: Investment returns ≥ Annual expenses

Example:

• Annual expenses: $40,000
• Investment portfolio: $1,000,000
• 4% withdrawal rate: $40,000/year
• You're financially independent!

The 4% Rule

The foundation of FIRE planning:

Withdraw 4% of your portfolio annually, adjusted for inflation. Historically, this allows money to last 30+ years.

Calculate your FI number:
Annual Expenses × 25 = FI Number

Examples:

• $30,000/year expenses: Need $750,000
• $50,000/year expenses: Need $1,250,000
• $80,000/year expenses: Need $2,000,000

Types of FIRE

Lean FIRE

Annual spending: $25,000-$40,000
FI number: $625,000-$1,000,000
Lifestyle: Frugal, minimalist
Timeline: Fastest to achieve

Regular FIRE

Annual spending: $40,000-$70,000
FI number: $1,000,000-$1,750,000
Lifestyle: Comfortable, balanced
Timeline: Moderate

Fat FIRE

Annual spending: $100,000+
FI number: $2,500,000+
Lifestyle: Luxurious, no compromises
Timeline: Longer, requires high income

Barista FIRE

Strategy: Semi-retire, work part-time
Benefits: Health insurance, social interaction
Portfolio: Smaller than full FIRE
Flexibility: Best of both worlds

Coast FIRE

Strategy: Save aggressively early, then coast
Benefit: Stop saving, let compound interest work
Example: Save $500k by 35, let it grow to $2M by 65

The Math of FIRE

Savings Rate Is Everything

Time to FI based on savings rate:

Key insight: Savings rate matters more than income or returns!

Example: $60,000 Income

50% savings rate:

• Save: $30,000/year
• Spend: $30,000/year
• FI number: $750,000
• At 7% return: 17 years to FI

25% savings rate:

• Save: $15,000/year
• Spend: $45,000/year
• FI number: $1,125,000
• At 7% return: 32 years to FI

How to Achieve High Savings Rate

1. Optimize the Big Three

Housing (30-40% of budget):

• House hack (rent rooms)
• Live in LCOL area
• Downsize
• Pay off mortgage early

Transportation (15-20%):

• Buy used cars
• Drive less
• Bike/walk/transit
• One car household

Food (10-15%):

• Meal prep
• Reduce dining out
• Shop sales
• Grow vegetables

2. Increase Income

Career:

• Job hop for raises
• Negotiate salary
• Develop high-value skills
• Side hustle

Example:

• Salary increase: $10,000/year
• Save 100% of raise
• Cuts years off FI timeline

3. Invest Aggressively

Asset allocation:

• Stocks: 80-100% (growth)
• Bonds: 0-20% (stability)
• Real estate (optional)

Tax-advantaged accounts:

• Max 401(k): $23,000 (2026)
• Max IRA: $7,000
• HSA: $4,150
• Total: $34,150/year tax-advantaged

4. Minimize Taxes

Strategies:

• Roth conversion ladder
• Tax-loss harvesting
• Geographic arbitrage
• Capital gains management

Real FIRE Examples

Example 1: Couple Reaches FI in 10 Years

Starting point (Age 30):

• Combined income: $120,000
• Expenses: $40,000/year
• Savings rate: 67%

Strategy:

• Max retirement accounts
• Invest in index funds
• Live in LCOL area
• Side hustles

Result:

• Age 40: $1,000,000 portfolio
• Financially independent!
• Choose to work part-time doing what they love

Example 2: Single Professional, Lean FIRE

Starting point (Age 25):

• Income: $65,000
• Expenses: $25,000/year
• Savings rate: 62%

Strategy:

• Live with roommates
• Bike to work
• Cook all meals
• Invest $40,000/year

Result:

• Age 37: $625,000 portfolio
• Lean FIRE achieved
• Travels world, does passion projects

The FIRE Withdrawal Strategy

The 4% Rule in Practice

Year 1:

• Portfolio: $1,000,000
• Withdraw: $40,000 (4%)

Year 2:

• Adjust for inflation (3%)
• Withdraw: $41,200

Continue: Adjust annually for inflation

Flexibility Is Key

Adjust withdrawals based on:

• Market performance
• Actual expenses
• Part-time income
• Healthcare costs

Variable withdrawal:

• Good market years: 4-5%
• Bad market years: 3-3.5%
• Reduces sequence of returns risk

Common FIRE Mistakes

1. Underestimating Healthcare Costs

Before Medicare (65):

• ACA marketplace insurance
• Budget $500-$1,500/month
• HSA for tax-free healthcare savings

2. Ignoring Inflation

$40,000 today ≠ $40,000 in 20 years

• 3% inflation doubles costs in 24 years
• Plan for increasing expenses

3. Forgetting Taxes

Withdrawals are often taxable:

• Traditional 401(k)/IRA: Ordinary income
• Taxable accounts: Capital gains
• Plan tax-efficient withdrawal strategy

4. Not Having Flexibility

Life happens:

• Market crashes
• Health issues
• Family needs
• Build buffer into plan

Is FIRE Right for You?

FIRE works well if you:

• Value freedom over stuff
• Enjoy optimizing finances
• Can delay gratification
• Have marketable skills
• Are disciplined

FIRE might not fit if you:

• Love your career
• Enjoy luxury lifestyle
• Can't handle market volatility
• Have high fixed costs
• Need social structure of work

Modified FIRE: The Middle Path

You don't have to retire early to benefit from FI:

Financial Independence gives you:

• Career flexibility
• Ability to take risks
• Freedom to say no
• Reduced stress
• More life choices

Many pursue FI but choose to keep working:

• On their terms
• Part-time
• Passion projects
• Entrepreneurship

Calculate Your FIRE Number

Use our Retirement Calculator to:

1. Calculate your FI number
2. See timeline to financial independence
3. Test different savings rates
4. Plan your FIRE strategy
5. Track progress toward FI

Remember: FIRE isn't about hating work or being cheap. It's about designing a life where money doesn't dictate your choices.

Calculate your path to financial independence with our Retirement Calculator