Early retirement and the FIRE movement

Early retirement is a dream for many people, but is it financially possible to accomplish this goal? Building a retirement plan and financial habits around this idea can allow a person to gain greater financial independence and head into retirement early. One way to save for the future and make the transition from work life to retirement is the Financial Independence, Retire Early (FIRE) method that encourages certain saving and planning strategies to help make early retirement a reality.

What is the FIRE movement?

The FIRE movement originated from the 1992 book, Your Money or Your Life¹, and gained popularity in 2010. This lifestyle strategy focuses on frugality, investing, and saving to achieve financial independence. The core idea is to save and invest a significant portion of one’s income, in order to accumulate enough wealth to support oneself and enjoy their desired retirement lifestyle. The key principles of the FIRE movement include:

Retire early

"Early retirement" doesn't necessarily mean never working again. Instead, it can mean having the freedom to choose how you spend your time, whether it's pursuing hobbies, traveling, volunteering, or working on passion projects.

Saving and investing

Making saving and investing a top priority plays a crucial role in achieving the goal. The movement typically advocates investing in low-cost index funds and retirement savings accounts and creating a diversified financial plan that offers growth potential and guaranteed retirement income.

Frugality

Keeping expenses low and avoiding overspending are fundamental aspects of the movement. This involves cutting unnecessary expenses, minimizing debt, and prioritizing spending on what truly adds value to your life.

Side hustles

Many pursue additional sources of income through side hustles or entrepreneurial ventures to accelerate their journey toward greater financial freedom.

Financial independence

This is achieved when investments, savings, and retirement income generate enough money to cover living expenses. Once this point is reached, it may no longer be needed to rely on a traditional job for income.

How the FIRE movement can support early retirement

Habits that are part of a FIRE movement1 might make early retirement possible and support long-term financial well-being. To help you on the journey toward retiring early, it can be helpful to:

Review current financial situation

Take stock of current income, expenses, assets, and liabilities. Then calculate net worth and understand your current savings rate. This helps provide a baseline to work from and can help reveal any areas for improvement.

Set a number goal

Set a specific number goal regarding how much money you should save to feasibly retire. It can also be helpful to set smaller goals that support achieving the larger goal in the desired timeframe.

Prioritize savings and investing

The FIRE1 strategy encourages a person to save and invest a significant portion of their income, typically 50% or more. This can include maximizing contributions to tax-advantaged retirement accounts such as 401(k)s and Individual Retirement Accounts (IRAs), purchasing an annuity, and depositing a certain amount into savings every month.

Stay flexible

Life is unpredictable, so it’s good to be prepared to adapt a plan as circumstances change. It’s helpful to maintain flexibility and be willing to adjust goals, timelines, and strategies to accommodate changes in your life situation or financial markets.

Manage debt wisely

A key part of reaching an early retirement is to keep debt to a minimum, especially debt with high-interest rates that could be going toward retirement savings instead.

Create a diversified plan

Diversifying investments can help a person take advantage of different investment and growth opportunities, protect a portion of assets from market volatility, and provide multiple sources of income.

Incorporate multiple income sources

To aid in early retirement and FIRE¹ goals, having various income sources can help make sure ensure there is enough money to last as long as you do. This may include Social Security, pensions, investments, personal savings, cash value life insurance, and annuities.

How annuities can support early retirement

Annuities are often used to round out a diversified retirement plan by providing guaranteed income for the future. Depending on the type of annuity, they can offer additional benefits as well. Some can provide a mix of growth potential and protection for retirement assets, as well as liquidity and legacy options. Most importantly, an annuity can protect a retiree from outliving their money, and with payments they can count on, it may be possible to rely less on savings leading up to or during retirement.

In exchange for a lump sum payment, single premium immediate annuities (SPIA) can provide a guaranteed stream of income that will last for a retiree’s lifetime. Certain fixed index annuities (FIA) can also offer growth potential and the option for guaranteed income for the rest of a retiree’s life. Annuities can help generate income during an early retirement without a retiree needing to withdraw from low interest bearing accounts or retirement accounts which may provide sustainable source of income while a person waits to collect on Social Security so they can maximize their benefits.

Planning for early retirement

To discover ways to reach early retirement and the solutions that can help, meeting with a financial professional can help devise a personalized strategy and determine if the FIRE method is a good match. Together, you can build a plan around this goal and determine which money habits would be helpful in supporting the retirement timeline. This can also be a good time to explore how an annuity can bring more financial security to a retirement income plan and help you retire at a time that is right for you.

1. Dominguez, J., & Robin, V. (1992). Your money or your life.

Neither North American Company for Life and Health Insurance®, nor any financial professionals acting on its behalf, should be viewed as providing legal, tax or investment advice. Please rely on your own qualified tax professional.

Fixed index annuities are not a direct investment in the stock market. They are long term insurance products with guarantees backed by the issuing company. They provide the potential for interest to be credited based in part on the performance of specific indices, without the risk of loss of premium due to market downturns or fluctuation. Although fixed index annuities guarantee no loss of premium due to market downturns, deductions from the accumulation value for optional benefit riders or strategy fees or charges associated with allocations to enhanced crediting methods could exceed interest credited to the accumulation value, which would result in loss of premium. They may not be appropriate for all clients. Interest credits to a fixed index annuity will not mirror the actual performance of the relevant index.

B2-NA-7-24