Financially Independent, Retire Early (FIRE) and the 4% Rule
FIRE stands for “financially independent, retire early.”
Some people get an ick feeling about the word retire. If you’re like me, maybe you envision yourself working/creating to some extent forever, but on your own terms. You can think of FIRE as the pivot point to when you can do whatever you want because income is flowing to you effortlessly whether you work or not.
With FIRE, you can’t “run out of money.” Your wealth becomes self-regenerating.
There are many ways to achieve FIRE.
Here’s one tangible example. Let’s say you decide to achieve FIRE through real estate. Over the course of your career, you purchase 10 condos that are each worth around $100k. Let’s assume you paid for these in cash. And each $100k condo generates $10k in passive income per year (rent price of $834 per month).
Your total passive income from real estate would equal $100k per year. And meanwhile, your wealth is stored as equity in those properties.
This is just one of many ways that you can create a wealth portfolio:
Stores your wealth in assets (real estate)
Generates passive income (rent money)
If you instead, saved $1 million dollars, retired at age 60, and spent $100k per year, then you’d be able to live off of the money for 10 years before you arrive at having $0.
The 4% rule
The 4% rule is a guideline for how much you can take out of your retirement funds each year without depleting it. 4% was calculated as the average return a portfolio should get over time.
So if you have $4 million saved at retirement, you can withdraw $160,000 per year without it draining the investment. Because ideally, you’ll get a net return of 4% over time so your money keeps regenerating itself.
FIRE requires a plan
I’ve had two moments in my financial life where I’ve realized: wow no one is talking about this.
The first was when I graduated college and started making a salary. I realized I needed a money system where I auto-deposited money into retirement accounts and the stock market to kickstart some wealth growth. And it worked!
The second realization was much more recent. I realized that not a lot of people my age are talking about retirement beyond their 401ks and Roth IRAs. I see my money grow there but I don’t really see those accounts as a “retirement plan.” I’m type A and I like something a bit more concrete.
When I learned about FIRE, I started to see a tangible plan for retirement. And it unlocked what I needed to focus on next: purchasing (and building) assets that generate income.
Two core questions to ask yourself
How much income do you need each month/year to live without “regular” employment?
How can you slowly purchase or build assets that generate passive income so you eventually replace your regular income and can “retire”?
For the first question, a lot of people confuse money and income. I didn’t ask how much money you need to live because most people assume the answer to that question is “I would need millions!” In that perspective, retirement feels really hard to accomplish and intangible.
But if you focus on income, you likely need to generate somewhere around $100k/year in income to live a great life.
It feels much more actionable to find ways to purchase your first $100k condo that will make you $10k per year in passive income, then it does to somehow find a way to save millions of dollars.
FIRE unlocks the idea of what is “enough”
With FIRE, there’s a clear calculation you need to make for your idea of “enough.”
How much passive income are you working toward creating?
You’ll need a number in mind in order to achieve it. And when you’ve found your number, you’ve found your idea of “enough.”
Next steps
The main questions to ask yourself are: How much passive income do you want to be making each year? And how can you achieve it?
Notes
100k and $10k are clean numbers, but for the sake of clarity, a condo in Evanston IL selling at a $99k list price is currently renting for $1k per month. So a $100k purchase can likely yield you around $12k per year in passive income rather than 10k.
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