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Understanding FIRE: Financial Independence, Retire Early

5 min read

30 sec brief

Working longer is fast becoming the go-to retirement strategy for aging baby boomers who have landed in their 50s and 60s without enough saved up to stop working around the classic retirement age of 65 or so.

Working longer is fast becoming the go-to retirement strategy for aging baby boomers who have landed in their 50s and 60s without enough saved up to stop working around the classic retirement age of 65 or so.

Plenty of their kids have the opposite idea. The FIRE movement – Financial Independence, Retire Early – is catching on with 20 and 30 somethings who want to live life more on their terms. Not some day long in the future. But ASAP. The Reddit FIRE community has more than 440,000 subscribers.

FIRE Up

At its heart, the FIRE movement is about aggressively saving today so you can sock away enough money sooner than later so you don’t have to work if you don’t want to. Or you can choose to work on your own terms.

How much do you need to save to achieve full FIRE? The core advice is to build a stash that is at least 25 times your annual spending needs.

Can you get by on $40K a year? That’s going to require saving up at least $1 million.

Need $100,000 a year? Okay, the FIRE method would suggest you save up $2.5 million.

The math behind the 25x guidance is based on research that has shown in any 30-year period withdrawing 4% a year (and adjusting annually for inflation) from a well-diversified portfolio of stocks and bonds was “sustainable” in more than 95% of the rolling time periods. Sustainable here is code for: you don’t run out of money. That’s a decent guide, but just keep in mind that the academic research stuck to 30 years, because that’s what traditional retirees need to worry about. We’ve yet to see research on the “sustainability” over say 50 years. Worried ‘bout that? Boost your savings goal above 25x.

Getting to your 25x (or more) level is obviously going to require some extreme cost cutting to live way below your means. But it’s not just about being frugal, it’s also about being extra strategic in spending and investing your money wisely.

HSAs: Made for the FIRE generation

A health savings account (HSA) is uniquely built to offer FIRE followers all sorts of upside. An HSA is an investment account you are allowed to contribute to when you sign up for a High Deductible Health Plan (HDHP) either through work -most employers love offering ‘em – or purchasing your own plan through the ACA-program. In 2019 that will mean an individual policy with a deductible of at least $1,350 and family coverage with a deductible of at least $2,700

The high deductible means your monthly premiums will be lower. That’s the first FIRE advantage of the HDHP/HSA.

The HDHP/HSA becomes extra important if you do quit your mainstream job. If you need to buy your own health insurance through the ACA exchange, and you’re not earning much, a HDHP health plan will typically have lower premiums.

Perhaps the biggest payoff for FIRE enthusiasts is the triple-tax break you get on money you contribute to an HSA account. Money you contribute to your HSA account is tax deductible, and the money grows tax-deferred while it is invested. When you make a withdrawal from your HSA to pay for qualified medical expenses, there will be no tax bill. That’s a lot better than saving in a Traditional IRA or 401(k), where every penny you withdraw is taxed. And it beats a Roth IRA too: Roth contributions aren’t eligible for a tax deduction.

You can make withdrawals at any time. This year, if you want, or decades from now. That makes an HSA an incredibly valuable stealth retirement account,  especially if you’re motivated to join the FIRE movement.

If you need more help with health account decisions, check out our blog. We will make you a healthcare benefits expert in no time, without any extra work or effort on your end.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author

Carla Fried

Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

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