What is the FIRE movement and how does it work?

Many individuals have come to accept the idea that they will need to work for several decades before they can retire and enjoy their leisure time. However, since the early 1990s, a group of people known as adherents of the Financial Independence, Retire Early (FIRE) movement have aimed to free themselves from the burdens of work before reaching old age.

The basic principle of FIRE is to embrace a frugal lifestyle and maximize savings in order to retire earlier. However, FIRE is not just about cutting back on small expenses like food delivery or coffee runs. CNBC Select provides an overview of how FIRE works so that individuals can decide if they are willing to make the necessary sacrifices for a potential early retirement.

FIRE involves extreme saving and investing, allowing individuals to quit full-time work earlier than they would with traditional retirement planning. However, achieving FIRE requires dedicating a significant portion of income towards retirement savings, often resulting in a reduction of spending to the essentials.

Followers of the FIRE movement typically save between 50% to 75% of their annual income until they have accumulated enough money to retire early. The "25 rule" is often used as a guideline to determine how much money needs to be saved before retirement. This rule states that individuals should have saved 25 times their annual expenses before considering retirement.

Another important aspect of FIRE is withdrawing 4% or less from investments and savings each year during retirement. However, the percentage of savings withdrawn each year may vary depending on an individual's financial needs. For example, individuals with children may need to withdraw more money than those without.

To achieve ambitious savings and investment goals, individuals need to take advantage of opportunities to grow their savings. High-yield savings accounts and robo-advisors can help individuals maximize their savings and invest in retirement portfolios that align with their needs.

Different types of FIRE strategies exist depending on an individual's lifestyle goals. These include Lean FIRE, Coast FIRE, Fat FIRE, and Barista FIRE. Each strategy has its own approach to retirement planning and spending.

While reaching financial independence and early retirement is challenging, it is not impossible. However, the FIRE movement has faced criticism for having unrealistic requirements that may not be achievable for many workers. Factors such as income level and financial support can greatly impact an individual's ability to achieve FIRE.

Ultimately, deciding whether early retirement is feasible and desirable requires careful consideration and consultation with financial professionals. It is important to recognize that achieving FIRE may require significant sacrifices and can have an impact on mental health and social dynamics.