Money Girl

5 Steps to Achieve FIRE (Financial Independence Retire Early)

Episode Summary

Laura reviews variations of the FIRE (financial independence, retire early) movement. You'll learn several strategies to become financially free and pursue your unique retirement dreams.

Episode Notes

Laura reviews variations of the FIRE (financial independence, retire early) movement. You'll learn several strategies to become financially free and pursue your unique retirement dreams.

Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.

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Episode Transcription

If you're like many people, you'd jump at the chance to retire early with plenty of time and money to pursue the lifestyle of your dreams. While accumulating enough wealth by 65 or 70 to last your lifetime is challenging, early retirement is an incredibly ambitious goal.

This post will review the FIRE movement, which stands for financial independence, retire early. You'll learn several strategies to become financially free and pursue your unique retirement dreams.

Welcome back, everyone, and thanks for joining me. I'm Laura Adams, an author, financial spokesperson, speaker, founder of The Money Stack newsletter, and host of the Money Girl podcast with 43 million downloads. 

If you're not already subscribed to the podcast, that's the best way to ensure you never miss an episode. There are now two weekly shows that come out on Wednesdays and Fridays. If you have a question you'd like me to cover, please leave it on our voicemail line at 302-364-0308. You can also send an email using my contact page at

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What is FIRE (Financial Independence Retire Early)?

The FIRE movement began with an emphasis on being extremely frugal so you could invest as much as possible and retire as early as possible. But that's just one version of FIRE. The movement has expanded to different strategies based on the type of financial freedom or lifestyle you want. 

Here are several variations of FIRE to consider based on your financial situation and goals.

For instance, you might save 50% of your income in your 20s and 30s and retire by age 40 with a modest income. While you might not be able to enjoy a luxurious retirement, lean FIRE gets you there sooner.

For instance, you might save 20% of your income in your 20s, 30s, 40s, and 50s and retire by age 60. Working longer allows you to grow a larger nest egg that throws off more income for life. Your retirement goal is to enjoy almost any expenses, like luxury travel, shopping, and dining out.

For instance, you might save 30% of your income in your 20s and 30s while working a high-paying job and become a teacher, freelancer, or barista in your 40s. Replacing your day job with a more relaxing career may be your idea of retirement. Depending on when you plan to retire fully, you might continue saving 10% of your income.

For instance, you might save 40% of your income in your 20s, 30% in your 30s, 5% in your 40s, zero in your 50s, and coast into retirement by age 60.

5 Steps to Achieve FIRE

If you think that early retirement sounds nice but you're getting a late start investing or couldn't come close to saving half your income, you're not alone! While the FIRE movement is not for everyone, it can help you see what's possible and forge your own financial path.

Ideally, everyone should aim for early retirement. Then, if you have the inclination and health to continue working into your 60s, 70s, and beyond, you can build even more financial security.

Here are five steps to make your preferred version of early retirement possible.

1. Calculate your savings target.

To know if and when you can retire, first calculate how much savings you'll need. It depends on factors including your:

Start by adding up your living expenses, such as housing, food, insurance, medical bills, and transportation. While some costs end in retirement, such as saving and commuting for work, others, such as travel and health care, may go up. You can't know precisely what you'll spend in the future, but try to calculate a reasonable estimate.

The earliest you can begin collecting Social Security retirement benefits is 62. So, until then, your savings, investments, and any pensions must generate all your income. A good rule of thumb is to have a nest egg equal to 25 to 30 times your annual expenses.

For instance, if you spend $100,000 annually, you'll likely need $2.5 million to provide that much income. A typical retiree can safely withdraw 4% of their investments annually without running out of money. 

However, early retirees may need to withdraw less, such as 3%, to make their money last. Depending on how early you want to retire, having $3 million may be necessary. Of course, whether you want a lean or fat lifestyle is a huge factor! Since retirement planning math can be complicated, working with a financial advisor is the best way to create an early retirement savings plan. 

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2. Invest consistently.

I know accumulating millions may seem daunting, but the trick is investing early and consistently for as long as possible. If you haven't started, please don't wait for the "right" time to invest because it doesn't exist. 

No matter what's happening in the financial markets, your money can't grow if you sit on the sidelines. Every day of investment growth matters, especially when you want an extra-large nest egg to retire early.

Set up an automatic investing schedule, such as daily or monthly. Some investing platforms can even automate your savings increases so they happen on specific dates. Also, invest more for retirement when you earn a raise or bonus or receive a cash gift. 

Early retirement is an aggressive goal you must attack with gusto. It won't be easy—but it's possible.

RELATED: Investing by lump sum versus dollar cost average (DCA)

3. Minimize investment taxes.

As you know, taxes take a big bite out of your income. To keep more money and protect future investment earnings, cut your taxes using tax-advantaged accounts, such as workplace retirement plans, IRAs, and health savings accounts (HSAs). 

Your contributions are tax-deductible with a traditional retirement account (such as a traditional 401(k), IRA, or SEP-IRA) or HSA. If you have access to a Roth 401(k) or IRA, you pay tax upfront on contributions but get tax-free withdrawals in retirement. Having tax-free accounts to withdraw from in early retirement leaves you with more money to ​​spend.

READ ALSO: Is it better to have a traditional or Roth IRA?

4. Know the retirement withdrawal rules.

The only downside of using tax-advantaged accounts is that tapping them before 59.5 typically comes with a 10% early withdrawal penalty. The good news is that there are legit ways to avoid the penalty if you retire early.

The first option is to use a Roth account, which allows you to withdraw your contributions tax and penalty-free, making them excellent options for early retirees. 

However, your investment gains in a Roth would be subject to income tax plus the 10% penalty if you're under 59.5.

Another option applies if you have a workplace retirement plan and decide to retire at age 55 or later. If you are no longer employed, you can use the "rule of 55" to take penalty-free withdrawals from your 401(k) or 403(b).

For specific government workers, this exception can apply as early as age 50. However, note that this rule doesn't apply to IRAs, only to workplace plans and solo 401(k)s.

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5. Use a 72(t) payment plan.

There's also a little-known rule for avoiding the early withdrawal penalty regardless of age called a 72(t) distribution or payment plan. It allows you to distribute equal monthly or annual distributions from your retirement account if you're retired. 

The amount you can withdraw using a 72(t) plan gets calculated using factors such as your account balance, age, and life expectancy. The payment calculation can be based on the amount in a single retirement account or the aggregate of all your accounts.

The problem is that a 72(t) has restrictions and negative consequences if you don't use it correctly. It's important to understand that once you begin taking 72(t) distributions, you can't stop taking them for at least five years or until you turn 59.5, whichever is longer. In other words, if you start a 72(t) at age 50, you'd have to continue payments for 9.5 years.

After you complete a series of five-year distributions or reach age 59.5, you can take retirement distributions any way you like. When properly executed, 72(t) payments can be a smart way to tap your retirement funds early without penalty. However, figuring out the allowable payment schedule is complex, so get help from a qualified tax professional to avoid potential taxes and penalties.

Whether you join the FIRE movement or not, the sooner you start investing, the earlier you can retire and pursue the lifestyle of your dreams.

That's all for now. I'll talk to you soon. Until then, here's to living a richer life!

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