What is FIRE?
FIRE is a term that financial bloggers and the FI community have used to refer to the idea that you can retire early once you have amassed a sufficient amount of financial assets. It stands for Financial Independence Retire Early.
I originally wrote this post while living in Portugal in 2023. A lot has changed for me personally since writing this post, and I’ve updated it accordingly.
The general idea that you need to work for 40+ years to save enough money to retire is a myth that is perpetuated by corporate America and, frankly, previous generations of family and friends.
Ever since you were a child, you were likely told that you needed to work hard, save your money, and one day you would have enough saved so that you could retire.
What if I told you that there was a better way, and that you could actually retire much sooner than your parents told you? This is what FIRE is all about.
So, what is FIRE? It’s an idea and a movement that flips the whole idea that you should “work till you are too old to enjoy your life and then retire” on it’s head.
There is no rule or law that says we have to work for 40 years before we retire and “hope” we have enough money saved away to take care of ourselves in our golden years.
The “Traditional Model” Killed my Mother
My Mom lived by the mantra that you work hard, and then one day, after you have saved enough, you can retire comfortably and do all the things (i.e. take all the trips) that you have wanted to do for your entire life.
Unfortunately for her, she was diagnosed with breast cancer on the day of her retirement party from work. She was 64 years old, excited about how she would be able to travel and enjoy retirement and looking forward to the years to come. Yes, she had a decent pension and a little bit of money saved in a 401(k), but she was excited for what retirement meant and how long she had waited for it.
Unfortunately, her happy years of retirement were never meant to be. The next 4 years were filled with procedures, chemo, rehab, and eventually her passing away from us way too soon at the age of 67.
She never came close to enjoying her “retirement” if you can even call it that.
What is FIRE?
As mentioned before, FIRE stands for Financial Independence Retire Early.
The way most people take advantage of this concept is to live on less while saving the bulk of their income for early retirement.
Many people have done studies on how much money it will take to retire, and it all comes down to how much your expenses are and how much money you have in the bank.
In general, if you are able to save 25 times your annual expenses, you should be able to reach your FIRE number.
So if your annual expenses are $40,000 per year, you should be able to retire once you reach $1,000,000 in assets.
Why is this? Because of the stock market and the power of compound interest. Since I was born in 1975, the stock market has returned 11.84% per year on average.
If you were to than pull our 4% of your investment portfolio per year to live off of, then you should always have enough money left at the end of the year. And in many years, you should have more money at the end of the year than you started with, even after your took out your annual expenses.
Keeping with our example of living off $40,000 per year, if you started with $1,000,000 and pulled out $40,000 (approximately 4%) at the beginning of the year to live on, and then your portfolio earned 11% in the following year, you would have $1,065,600 at the end of the year! That’s over $65,000 more than you started with! This is the power of compound interest.
And then the following year, you would be able to pull another $40,000 for your annual expenses, and by the end of the year you should have $1,138,416.!
This model holds up regardless if you want to live off of $25,000 per year or $250,000 per year.
But in the world of FIRE, most people are seeking to live off of less and save more.
One of the most famous proponents of FIRE, Mr. Money Mustache, famously retired in 2005 at the age of 30 with a mere $600,000 in assets.
A New World of Opportunity
Fortunately for anyone of working age right now, there are abundant opportunities to live life on your terms.
One of the many reasons we moved our family to Lisbon is because of the cost of living here. We are able to live on a lot less per month than we could in the states. (UPDATE: We moved back to the United States in October of 2023 because between city life, and language barriers, our children were having a hard time acclimating.)
As an example, health insurance (and a bad health insurance plan at that) was costing us approximately $800 per month, not counting our huge $10,000 deductible. (Since we have moved back to the states, the cost to cover our kids and myself is about $1,000 per month. Fortunately, my wife’s coverage is paid for by her employer!) That was $9,600 per year not including out of pocket expenses just to have a basic level of coverage for our family.
But in Portugal, we are able to get a great health insurance plan with full benefits for €2,000 per YEAR. That was for our entire family of 5!
And if we run into something not covered by our private health insurance, we could also avail ourselves of the state-run health plan.
And this is just one small part of our overall budget.
The day I originally wrote this post, I had a latte and a cheese croissant for breakfast at a local cafe. In the states this would easily run me $7-8. Here it was only €3. I realize $5 a day doesn’t sound like a lot, and if I was in the states I would probably eat breakfast at home to save money (which is what I did for years – and am back to doing now). But over the course of the year, that $5 per day adds up – $1,825 per year!
Taking Advantage of Geo-Arbitrage for FIRE
What we did in Portugal was take advantage of a concept called “geo-arbitrage”. It essentially means that we were able to live cheaply in one country while earning money based on my work somewhere else (where I could charge more).
I run a law firm and media company in the United States. These two companies provide my main source of income. And with rising inflation and higher cost of living in the United States, I was able to earn more money there, while living on less in Portugal.
What is Your FIRE Number?
Before you can start the process of living a “FIRE” lifestyle, you must decide what your FIRE number is. This is the subject of our next blog post.
