Financial Independence Plan: FIRE Strategy

Your FI number is based on real spending, not guesswork. Track every dollar for 3-6 months including rent, food, insurance, transport, and discretionary spending. The average American household spends about $72,000 per year. Your number may be higher or lower.

The 25x rule comes from the 4% safe withdrawal rate. If you spend $50,000/year, your FI number is $1,250,000. If you spend $70,000/year, it's $1,750,000. This is the investment portfolio needed to sustain your spending indefinitely based on historical stock market returns.

Some costs drop in retirement (commuting, work clothes, payroll taxes) while others rise (healthcare, travel, hobbies). Healthcare before age 65 costs $500-$1,500/month for marketplace insurance. Factor in these changes when calculating your true annual need.

If your FI number is $1.5 million and you currently have $200,000 invested, your gap is $1.3 million. At a 50% savings rate on a $100,000 income with 7% annual returns, you'd reach FI in about 14 years. The savings rate is the most powerful variable.

Savings rate = (income - spending) / income x 100. The average American saves about 5%. FIRE followers typically save 30-70%. At a 50% savings rate, you can retire in about 17 years. At 70%, it drops to about 8.5 years. Even going from 20% to 30% cuts years off your timeline.

A 50% savings rate is the benchmark for most FIRE plans. If your take-home is $6,000/month, aim to save $3,000. Start where you are and increase by 1-2% each month. A 50% rate means every year of work funds a year of retirement.

Housing, transportation, and food typically account for 60-70% of spending. Reducing housing costs by $500/month adds $6,000/year to savings. Consider house hacking, downsizing, biking to work, or meal prepping. Focus on the big categories first before cutting small expenses.

Set up automatic transfers to investment accounts on the day you get paid. If you save what's left after spending, you'll save less. If you spend what's left after saving, your savings rate stays consistent. Treat savings as a non-negotiable bill.

Fill accounts in this order: 401(k) up to employer match (free money), HSA if eligible ($4,150 individual / $8,300 family in 2024), Roth IRA ($7,000 limit), then max out 401(k) ($23,000 in 2024). After maxing these, use a taxable brokerage account.

A total US stock market index fund plus an international stock fund covers global equities at expense ratios of 0.03-0.10%. A 90/10 or 80/20 stock/bond split works for timelines over 10 years. Keep total investment fees under 0.15% to maximize compounding.

If FI is 15+ years away, 90-100% stocks maximizes growth. If FI is 5-10 years away, shift to 75-85% stocks. Under 5 years, consider 60-70% stocks. After reaching FI, a 60/40 or 70/30 portfolio reduces volatility while maintaining growth above the 4% withdrawal rate.

Housing is usually the largest expense at 30-40% of income. Getting it under 25% frees up significant savings. Options include house hacking (renting rooms or units in a multi-family), relocating to a lower cost area, or downsizing. A $300/month reduction in rent saves $3,600/year.

The average car costs $12,000-$15,000 per year when including payments, insurance, gas, and maintenance. Going from two cars to one saves $6,000-$7,500 annually. Using public transit, biking, or working from home can eliminate car costs entirely.

The average American pays $219/month in subscriptions. Review bank and credit card statements for recurring charges. Cancel anything you haven't used in 30 days. Even cutting $100/month in subscriptions adds $1,200/year to your investment portfolio.

A 10% raise on a $80,000 salary adds $8,000/year. If you save all of it, that's $8,000 more invested annually. Research salary benchmarks on sites with salary data for your role and location. Most people who ask for a raise receive one.

Freelancing, consulting, tutoring, or contract work using your professional skills can add $500-$2,000/month. Side income devoted entirely to investing accelerates your FI timeline by 2-5 years. Even $500/month invested at 7% grows to $100,000 in about 11 years.

Switching jobs typically yields a 10-20% salary increase versus the 3-5% annual raises at your current company. Over a 10-year career, strategic job moves every 2-3 years can double your earnings. Factor in benefits, retirement matching, and healthcare costs when comparing total compensation.

The 4% rule says you can withdraw 4% of your portfolio in year one, then adjust for inflation annually, with a high probability of lasting 30 years. Based on the Trinity Study, a 75/25 stock/bond portfolio had a 96% success rate over 30 years. For 40+ year retirements, consider a 3.5% withdrawal rate.

Without employer insurance, marketplace plans cost $400-$1,500/month depending on age and location. Keeping income under 400% of the federal poverty level ($60,240 for a single person in 2024) qualifies you for premium subsidies. This is the biggest expense gap in early retirement.

Roth IRA contributions (not earnings) can be withdrawn tax and penalty-free at any time. The Roth conversion ladder lets you access traditional IRA money after a 5-year waiting period. Rule 72(t) allows penalty-free early withdrawals through substantially equal periodic payments.

A market crash in the first 3-5 years of retirement is the biggest threat to a FIRE plan. Having 2-3 years of expenses in cash or bonds cushions against selling stocks at a loss. Flexible spending (reducing withdrawals by 10-20% in down markets) dramatically improves portfolio survival rates.