August 1, 2022
Q: When someone says they want to achieve FIRE, what does that mean?
A: First, let’s start with what the acronym means: FIRE stands for Financial Independence, Retire Early.
Everyone has a different vision for what FIRE means to them.
Some people truly want to retire the moment they are financially able to do so and never work again
Others would like the ability to do what they want, when they want. This could be taking a long sabbatical, working part time, or changing careers to a more fulfilling career even if it involves a pay cut.
How do you become financially independent?
You have to save a very large portion of your income while you are working. The savings rate we often see with people working to achieve financial independence is upwards of 70% of their income.
Some people have side hustles while they are working to create an additional income stream to allow an increased savings rate.
When do you know that you are financially independent?
This is a tough question because it really comes down to your living expenses and being able to maintain a budget.
A general rule of thumb is that you need at least 30 times your annual expenses saved before you can be financially independent.
How do I create an income stream if I retire early?
You will be living off your savings so you will need to take distributions from your investment accounts and/or savings accounts.
To make your money last you will need to monitor your withdrawal rate, which we typically like to keep to 3% - 4% of your balance.
What if I thought I achieved financial independence but now my expenses are exceeding my withdrawal rate?
You can re-evaluate your expenses to see if you can live off less.
Or you can always resume working at any point in time and target the traditional retirement age instead.
Do your friends ask you financial questions?
Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters.