Six steps to achieve financial independence and retire early (FIRE)

In recent years, the financial independence and retire early (FIRE) movement has gained a notable level of traction, especially among millennials and younger members of Generation X. Generally, the goal for FIRE enthusiasts is to curb expenses, save aggressively, and ultimately amass enough investable assets and budget flexibility to gain financial independence.

The meaning of financial independence varies. To some, it means fully retiring at an early age and never working again. To others, it means never fully retiring but foregoing the stress and time commitment of a typical nine-to-five job in exchange for work that ignites their passion or affords them greater control of their schedule and paycheck (commonly referred to as “Barista” FIRE). Some want to save aggressively now so that they can spend more later (aka “Fat” FIRE), while others want to save aggressively now and always live frugally, spending at the same lower levels to which they’ve now grown accustomed (aka “Lean” FIRE).

Despite their differences, successful early financial independence seekers share several common characteristics. They’re personally committed to saving a significant portion of their income and have therefore trained themselves to live on less. Regardless of enjoyment, they tend to view their careers as fluid resources for generating income, wealth, and financial autonomy. Because they see work as a means to a happier and less stressful lifestyle, they’re generally open to the idea of “unretiring” (i.e., picking up work in retirement)—whether to reduce financial strain, increase personal fulfillment, or both.

That said, for a variety of reasons, many investors who want to retire earlier than age 65 may feel it’s unrealistic to achieve that goal in their 40s or early 50s. And in many cases, they are correct. Therefore, in this article, we will focus on the less extreme (and more attainable) objective of reaching financial independence by age 55—the age at which some workers can gain penalty‑free access to employer plan retirement savings. Though these steps can be applied to any early retirement plan, the age 55 milestone can serve as a reasonable target for a wide range of individuals.

Regardless of how you define financial independence, retiring at age 55 or earlier will involve some planning complexity, and standard rules of thumb, often, will either not apply or should be viewed in a different light.

Before determining whether to further explore early retirement, make sure your essentials are covered. You should:

If you placed a check mark next to each of the above, you’re likely in a position to explore the further actions needed to attain financial independence by age 55.

The following steps can help you assess your current plan and understand what changes may be needed to improve your likelihood of early retirement.

By entering basic information such as your current age, savings rate, account balances, target retirement age, and annual living expenses (in today’s dollars), you can get a sense of your likelihood to successfully retire early based on your current planning.

The tool runs a Monte Carlo analysis that tests your inputs against 1,000 randomized market outcomes to estimate your “confidence score.” The longer the time frame under consideration (and the younger the investor), the lower the confidence score will generally skew, because there’s simply more time for things to go awry. Therefore, for clients who are age 44 or younger to be in the “confidence zone,” 70% to 99% of the simulations must result in dollars remaining at the end of retirement. For investors age 45 and older, with a shorter time horizon, the confidence zone is 80% to 95%.¹

Once you’ve obtained your preliminary confidence score, you can manipulate the various inputs to better understand which levers you may need to pull (such as savings rate, spending goal, investment mix, retirement age, etc.) to improve your likelihood of success. This could help motivate you to make the necessary upward adjustments to your savings rate and/or downward adjustments to your spending to meet your early retirement goal with some level of confidence.

Depending on your situation and goals, you may need to save anywhere from 30% to 60% of your annual earnings (including all employer contributions) to retire early. Let’s consider an example (see “Confidence score based on age and savings rate”). Each of these investors earns $100,000 per year, has an annual retirement spending goal of $50,000 in today’s dollars, and would like to retire at age 55. Note that all four investors have current balances that would result in a confidence score over 90% based on a 15% savings rate and a retirement age of 65. But to retire earlier, additional savings are required.

Since one of the prerequisites for targeting early retirement is the willingness and capacity to sustain an increased savings rate, it means you’ll also need to grow accustomed to spending less of your income. If you’re currently saving 30% to 60% of what you earn, you’re probably already minimizing spending and training yourself to live on less, which is a healthy habit if you plan to retire early.

If you’re saving 15% but spending the remainder of your income, you may need to examine your spending outlay to look for ways to cut expenses so you can direct more of your paycheck to savings.

If you find that you regularly have money left over at the end of the month, you should increase the amount you’re automatically investing toward retirement.