FIRE Strategy: Invest for financial independence and early retirement

20 April 2023 by National Bank Direct Brokerage
Happy man holding money and his computer in his hands

Retiring at the age of 35 or 40 isn't something most of us think is possible, but with hard work and a large dose of financial discipline the dream of quitting your 9 to 5 can be a reality. Putting money aside and thoughtful investing can go a long way to making financial independence and an earlier retirement a viable alternative.

What is FIRE?

FIRE stands for Financial Independence, Retire Early. As much as it is an approach to investing and saving, it is also a lifestyle choice. FIRE is about living within your means and saving for the future. The goal of FIRE retirement is to have a level of financial flexibility that allows you to live on your own terms. 

For people who make the choice early in life and take on the challenge, it is possible to stop working at 35. But FIRE might not be for everyone.

To reach your FIRE goal and FIRE number, an individual has to save an amount equivalent to 25 times their annual expenses. By implementing "the rule of 25," an individual can benefit from compound interest and wise investment decisions, become financially independent, and retire early. 1 

When can you retire with the FIRE strategy? 

If you choose FIRE, you have to think carefully about how much money you plan to save and invest annually to reach your goal. And once you've attained your FIRE number, you have to watch your spending habits to ensure that your retirement savings and investments will last. 1

To answer the 'when can I retire?' question you'll need to consider three important factors:

  1. How much money do you need in an average year to live comfortably once you retire? 
  2. How much can you save every year while you are working?
  3. How long will it take to save enough money to reach your FIRE number (the amount of money you need to save before you leave your 9 to 5 job and retire early)? 

Once you've established these numbers, calculating your FIRE retirement age is straightforward. Remember that no two people are alike. So, the answers to these questions will differ for each one of us. 

Calculating how much you need in retirement 

  • A good point of departure is to work from your existing list of budgetary expenses
  • Include fixed costs such as mortgage payments, property taxes, internet, tv and phone bills, and variable expenses such as groceries, clothing, travel, and entertainment. 
  • Consider changes you might want to make once you start your FIRE journey, for example, using public transit or a car share service instead of owning a car. 
  • The NBC website has some resources that can help you determine this amount. For more information, follow this link: [My retirement]

Calculating how much money you can save in a year

  • Determine how much you are willing to save every month from your paycheck after covering your fixed and variable costs.
  • Remember that the more you save, the sooner you reach your FIRE number!

Calculating the total amount you will need before you retire – your FIRE number

  • Calculate your annual expenses, taking into account fixed and variable expenses. Take this number and multiply by 25. (Annual expenses X 25 = FIRE number) For example, someone who spends $50,000 a year would need to accumulate 25 times this amount or $1.25 million to achieve FIRE. 
  • Remember, you can reach your FIRE number sooner if you save aggressively and cut down on expenses.
  • Establish how many years it will take you. Add that number to your present age to determine when you can start your FIRE retirement.

What are the different types of FIRE strategy?

FIRE is not a one-size-fits-all journey 2. People have different jobs and a variety of salaries, incomes, and lifestyles – some are happy to continue working part-time and others not at all. Making FIRE retirement a reality means implementing a strategy that suits you to reach your FIRE goal and earn the amount you need to make early retirement a viable option. 

Here are some of the possibilities:

  • Fat FIRE: You have a high salary (in the six figures) and save aggressively. You've been able to keep money aside without having to limit your lifestyle choices too significantly. With sound investment decisions and disciplined spending, you won't need to work after early retirement.
  • Coast FIRE: You save aggressively early in life, invest those funds, and let compounding interest do its job to reach your FIRE number. 3  You may still be dependent on paid employment to cover expenses and not dip into your investment income, but you don’t have to worry about making more money to put into a retirement fund.
    Your Coast FIRE number = FIRE number / (1 + Annual Rate of Return)(time in years)
  • Lean FIRE: You prioritize for your financial future, saving and investing a large portion of your income based on the Rule of 25. You adhere to a minimalist and frugal lifestyle. 4 
    Your FIRE number is based on keeping projected annual expenses below $25000.
  • Traditional FIRE: Your monthly expenses are between $3333 and $8000 per month. You have put away enough so that on retirement, you don't have to work part-time. However, once you stop working, you respect the 4% rule and are disciplined about spending your money and liquidating investments.
  • Barista FIRE: Between Fat FIRE and Lean FIRE, Barista FIRE involves ongoing part-time or gig work and saving. The goal is to have enough money put away to live a more-than-minimalist lifestyle while respecting the 4% rule. 2 
    Your Barista Fire number = (Annual Expenses – Annual Residual Income) X 25.

What are the best ways to save for FIRE retirement?

Saving is a challenge for most of us. But for those who want to retire early, we must get started as soon as possible. Here are some ways to increase your savings:

Reduce expenses

  • Beware of taking on too much debt. Avoid carrying a balance on your credit cards, for example.
  • Start saving by building an emergency or rainy-day fund.
  • Invest within your means and don't get debt to invest. If you decide to use margin investment strategies make sure you are aware of the risks.

Boost your income

  • Get a second job or side hustle. 
  • Implement an investment strategy. Consider dividend-paying stocks and ETFs. 
  • Invest as much as possible when the market is low. Think long-term and avoid market volatility.

Save, save, save and invest

  • Reduce expenses and try to save up to 70% of your monthly revenue. 
  • Build a strong investment strategy and place a minimum of 15% of your earning into tax-free registered accounts. 5
  • The more you save, the more you will benefit from the effects of compound interest.
  • When possible, sign up your eligible shares into a dividend reinvestment program (DRIP)
  • Diversification: make sure to manage and reallocate your investments carefully.
  • Whenever possible, direct funds to passive investment opportunities.

Be tax efficient 

  • Use tax optimization strategies and find out about the tax implications of using your money. 
  • Always max out retirement accounts before going into your cash accounts.

Follow the 4% rule

  • Once you reach your FIRE number do not withdraw more than 4% of your global investment portfolio every year.

Does FIRE pose any risks?

  • Outliving your savings is a possibility if you have started the FIRE journey and have not planned well or are spending beyond your means. In such cases, you may not have the financial resources to stay retired. 
  • When making your FIRE plan, it is essential to account for risks such as spikes in the standard rate of inflation. A significant rate change can skew calculations and may require a lifestyle change. 

Can you choose FIRE retirement and still be a self-directed investor? 

Yes. Self-directed investing is a great fit for people interested in FIRE. In fact, for many people, finding the right investment strategy based on growth, dividend paying securities or a value-centred approach is a key part of working toward FIRE retirement. And because self-directed investing always means lower fees, you'll be able to invest more, save more, and retire sooner.

Is the FIRE method right for you?

  • FIRE is for people who want to retire early, not necessarily because they hate their job. 5
  • FIRE is typically more accessible for people making 6 figure salaries, but with strategic planning and discipline, it is possible for those with smaller incomes.
  • FIRE is suited to disciplined investors and savers, willing to carefully plan, manage and reallocate their investments.

Your FIRE journey is unique to you. We all have different commitments and aspirations. Many of us would be quite happy working part-time through our retirement, and others not. Remember that it is possible to strike a balance between financial independence and creating the kind of lifestyle you want. Whatever you choose, define your financial goal, then build your investment strategy around it and stick to it! 

Start investing for your fire strategy now

Key takeaways : 

  • FIRE stands for Financial Independence, Retire Early.

  • Your FIRE goal is to save an amount equivalent to 25 times your annual expenses.

  • FIRE requires hard work, regular saving and a thoughtful investment strategy.

  • There is more than one FIRE strategy. Find the one that suits you and stick to it.

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