Four Key Steps to the Financial Independence, Retire Early (FIRE) Movement

The Financial Independence, Retire Early (FIRE) movement is a hot trend among Millennials. The idea is to make money fast, save it and grow it quickly to retire as early as possible.

This approach requires sacrifices. FIRE advocates recommend living a minimalist lifestyle so they can save up to three-quarters of their regular income. Even if that’s unrealistic for your current situation, you may draw on the FIRE concept, perhaps to a lesser extent, as time goes on. Here are four steps to putting the FIRE approach to work for you.

1. Play by the Rules

With FIRE, there are two key rules to retiring early. First, follow the rule of 25 — that is, aim to save 25 times your annual expenses. Start by estimating your monthly expenses, then multiply that amount by 12 to annualize it. Next, multiply your annual expenses by 25 to arrive at your retirement savings goal. For example, if your monthly expenses are $7,500, your savings goal would be $2.25 million ($7,500 times 12 times 25).

The second premise is the 4% rule: When you retire, you withdraw only up to 4% of your savings each year (adjusted for inflation after the first year). Following this rule is expected to preserve your retirement savings for roughly 30 years. Of course, you may need your savings to last longer than 30 years, especially if you plan to retire in your 30s or 40s. If so, adjust your goal accordingly.

Important: If you plan to retire before Medicare kicks in at age 65, factor health insurance costs into your monthly budget. Top-quality coverage can be expensive.

2. Devise Your Savings Strategy

It’s critical to save at a rate you can afford and that will quickly grow your nest egg. This requires discipline and astute investing.

The sooner you plan to retire, the more you’ll need to save. For instance, if you plan to work for only 10 more years, you might have to save as much as 70% or more of your current income. And don’t forget to factor inflation into the equation. To illustrate, a cup of coffee that cost a quarter in 1970 runs about $1.75 in 2025.

Fortunately, the power of compounding works in your favor. For example, suppose you contribute $25,000 annually to a 401(k) for 25 years, starting in January 2025. Your total 401(k) contributions would be $625,000 ($25,000 times 25). However, if your account earns an average annual return of 10% over 25 years, your account will accumulate more than $2.7 million by 2050, assuming monthly compounding.

3. Invest Wisely

Another key element of FIRE is optimizing returns on your savings. Learn about investment strategies from reputable sources, including your financial advisor, well-reviewed investment books and trusted online courses. Understanding key concepts — like compounding, asset allocation and risk management — helps ensure your investment strategy aligns with your goals and risk tolerance.

Diversifying your portfolio across different asset classes helps minimize risk and increase the likelihood of stable returns. Key asset classes to consider include:

Equities (stocks). Broad-based index funds and exchange-traded funds (ETFs) are particularly popular in FIRE circles due to their simplicity, low cost and long-term growth potential.

Bonds. Fixed-income investments provide stability and income, particularly during economic downturns.

Real estate. Rental properties or real estate investment trusts (REITs) can generate passive income and provide diversification outside traditional securities.

Precious metals. Gold and silver may act as hedges against inflation and market volatility.

Cryptocurrency. While highly volatile, Bitcoin and other cryptocurrencies may appeal to those with a higher risk tolerance looking for outsized returns.

Alternative investments. Options like peer-to-peer lending, private equity or commodities might provide additional diversification. But beware: These options may expose you to significant risk, so take a cautious approach.

Employer-sponsored plans, such as 401(k)s or 403(b)s, offer excellent opportunities to grow savings due to tax advantages and potential employer matching contributions. Although these plans often limit investment options, contributing enough to secure the full employer match is a no-brainer — it’s essentially free money.

Regularly review and rebalance your portfolio to make sure it aligns with your target allocation. For example, if stocks outperform bonds in a given year, rebalancing might involve selling some stocks and purchasing bonds to maintain your desired risk level.

Important: Consider maintaining an emergency fund equivalent to three to six months of living expenses. This fund may help avoid the need to liquidate investments during market downturns or to cover unexpected costs, such as job loss, major home improvements or medical emergencies.

4. Optimize Tax Outcomes

Taxes can have a significant impact on your retirement savings. Maximize tax breaks by contributing to an employer-sponsored qualified retirement plan. Qualified plan contributions are typically pretax, reducing your taxable income for the year, and plan assets grow tax-deferred — meaning you pay no income tax until you take distributions.

Here are the contribution limits for qualified plans for 2025:

Qualified Plan Limits 2025

401(k), SARSEP, 403(b) Deferrals (Section 402(g)), & 457 deferrals (Section 457(b)(2))-$23,500

401(k), 403(b), 457 & SARSEP additional “catch-up” contributions for employees ages 50 and older-$7,500

Catch-up contributions to 401(k), 403(b) and 457 plans for those age 60, 61, 62 or 63*-$11,250

SIMPLE deferrals (Section 408(p)(2)(A))**-$16,500

SIMPLE additional “catch-up” contributions for employees ages 50 and older-$3,500

Catch-up contributions to SIMPLE plans for those age 60, 61, 62 or 63*-$5,250

* A change that takes effect in 2025 under SECURE 2.0

** $17,600 for certain plans

Also, consider supplementing tax-deferred contributions to qualified plans with contributions to traditional or Roth IRAs. Annual contributions to traditional IRAs may be wholly or partially tax-deductible, but the deductions are phased out for qualified plan participants based on income. Distributions from traditional IRAs are generally taxed at ordinary income rates. Contributions to Roth IRAs aren’t deductible, but distributions from a Roth in existence for at least five years are 100% tax-free.

For 2025, the annual contribution limit for traditional and Roth IRAs is $7,000 ($8,000 if you’re age 50 or older). You can split your maximum annual contribution between traditional and Roth IRAs. For instance, a 40-year-old can contribute $2,000 to a traditional IRA and $5,000 to a Roth for 2025. In addition, you might consider converting a traditional IRA to a Roth IRA. The conversion is treated as a taxable event, so you might want to avoid a conversion in a high-tax year.

Brokerage account transactions and sales of real estate, precious metals and other investment assets usually result in taxable income before retirement. However, investments are sheltered from any current tax if the assets are parked in a tax-deferred account like securities in a 401(k) plan.

Generally, you should withdraw from taxable brokerage accounts before tax-deferred retirement accounts. The longer you can preserve the tax benefits of tax-deferred accounts, the better. However, your personal circumstances will determine what’s right for your situation.

Important: Qualified plan and retired IRA participants must take required minimum distributions (RMDs) after reaching age 73 (scheduled to increase to age 75 in 2033). RMDs are based on life expectancy tables and the amount in your account as of December 31 of the prior year. This will erode some of your retirement savings later in life.

What’s Right for Your Situation?

The FIRE approach requires financial discipline. It calls for you to sacrifice short-term luxuries for long-term financial security. It may also be unrealistic if you’re currently raising a family or supporting other family members. If you’re unwilling (or unable) to make these sacrifices but still find the approach appealing, your financial advisors can help you devise a version that suits your lifestyle.

Copyright 2025

This article appeared in Walz Group’s February 3, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.