At a glance, planning for retirement can seem overwhelming and even insurmountable. The retirement landscape has definitely changed since your parents or grandparents retired – even the FIRE movement has been evolving! Fortunately, at the end of the day retiring early is simple. The important part is to stay consistent and to avoid overcomplicating your retirement planning process.
You can make it, it just helps to be proactive and get ahead of the game. The earlier you start, the easier this will be. So, if you’re young, go ahead and start so you don’t have to worry as much later. If you’re older and stressed about retiring, it’s time to kick this into high gear.
Simple, But Not Easy
While I say retiring early is simply, it’s certainly not easy. However, if you approach it withing a solid head on your shoulders, it’s definitely achievable!
Fire
With all of that said, let’s break down a few key components of FIRE. Different types of FIRE have their pros and cons, which you can read more about here. In this article I’ll just be going over some of the essentials.
Coast Fire
To put it simply, your Coast FIRE number is how much you need to invest to not have to contribute anything else until retirement age. In other words, your investments are done and you don’t have to invest anything else for your retirement fund. This is less of a foundational method to achieve FIRE and more of a milestone along your way. At this point you can also decide if you want to make changes to pursue a Lean FIRE, Barista FIRE, or Fat FIRE goal.
You can find tons of calculators online to identify your Coast FIRE number. Here is one of the better Coast Fire calculators available. (https://walletburst.com/tools/coast-fire-calc/)
Lean FIRE
Lean FIRE is a bit more of a traditional path to retirement. You still retire early, but not exceptionally early. Most people who use Lean FIRE opt to retire in their 50s or 60s. Lean FIRE is basically just about dropping the luxuries. With this method you’re investing enough for what you’ll need to survive during retirement, but with little past the necessities. If you have a simpler lifestyle, this can be a great option for you. However, if you don’t see yourself being able to function with just core necessities, in a smaller house, in a low cost of living area, then this may not be for you.
Assuming “Regular Fire” would be investing at least 25 times your income, a common metric for achieving Lean FIRE is investing 18-25 times your annual income or expenses. A lot of sacrifices must be made to live this lifestyle in retirement, but it’s certainly achievable.
Fat FIRE
Fat FIRE is pretty much exactly like it sounds. You’re likely saving 33 times your annual income or even more. This makes it so that you don’t have to work anymore and you can still enjoy tons of luxuries. In order to achieve this, you need to save a serious portion of your income – investing 50% or more of it can make this much easier. Obviously, Fat FIRE is easier to achieve for those earning a higher income during their working years.
The 4% Rule
During retirement, the 4% requires that you withdraw around 4% of your funds each year from your retirement accounts. This makes it easier for you to maintain your lifestyle, without rapidly running out of money. Using one previous example, 4% of a $1.25 million retirement fund is $50,000. Of course, the less you withdraw each year, the longer you can stretch your retirement funds. If you withdraw a smaller portion each year, that also means you’ll have to save more money in order to pull out the same amount of cash (and be closer to 33 times your annual expenses, rather than 25).
Retirement Accounts
We know that investing is important, we know we need to stay consistent, we know to invest in low-fee index funds and ETFs, but we don’t necessarily know which retirement accounts we should use! The most important part is clearly investing consistently, but investing in the right account can save you a huge amount in taxes. Also, if you want to retire early, you may need to consider investing in an account with no tax benefits, so you can begin withdrawing from it much earlier (with no penalties).
Roth IRAs
Roth IRAs use contributions that have already been taxed. While that seems unfortunate now, it does mean you won’t have to pay taxes on them later on, which could turn out in your favor (but it could also work against you too). The main issue for Roth IRAs is that they have an income cap, so once you make over a certain amount you can’t contribute to it anymore.
Some people like to do a combination of Roth and traditional IRAs, but it is more common to just focus on maxing out a Roth IRA. IRAs, like 401(k)s, have a minimum age of 59.5 years old before you can withdrawal with no penalties. However, there are a few exceptions if you need them – but it’s best to avoid early withdrawals altogether.
Traditional 401(k)s
In a traditional 401(k), your contributions are deducted from your taxable income. This means that your contributions are made tax-free, but you will have to pay tax on them when you withdraw them in retirement. In other words, it effectively lowers your total taxable income when you make contributions! This can be a good thing if you’re in a higher tax bracket, as that can lower your current tax burden. However, as I mentioned in the IRA section, it is always unknown how policies and taxes will change in the future, so you can never be completely sure which will end up being the better option in the long run.
Conclusion
I hope that helped simplify things for you! You may hear it all the time, but if you start now and stay consistent you’ll see some great growth. Just remember to not get discouraged. For those just beginning to invest, get started with M1 Finance. M1 is my favorite brokerage – again, they make investing simple and they have tons of great ETFs and index funds.
If you have any other useful information, I’d love it if you shared it in the comments! For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.
