2 Phases to FIRE

Many people are critical (Suze Orman said she hates it) or suspicious of FIRE (Financial Independence Retire Early) but I’m not one of them. I believe that it is possible as long you do a great job of planning and of execution. By the way, here’s how I define FIRE. FI means having enough money to live the lifestyle you choose with the option to retire. You’ll need enough money to cover your expenses until the end of your retirement which could span decades. I don’t see RE as a requirement to achieve FIRE. I think it’s possible to retire virtually, i.e. work becomes a choice and not a necessity.

Phase 1

FIREThis phase is about figuring out how much money it will take to attain financial independence (FI) and how to amass it.

Setting your Phase 1 goal can be done with the aid of a rule of thumb such as 25 Times  and/or through the use of a basic retirement calculator such as Vanguard’s Retirement Nest Egg. The resulting number is your goal. It gives you a target to aim for and a frame of reference for setting objectives.

Once you calculate your goal number, it’s time to break it down into objectives and tasks which collectively form your action plan. Let’s say that you want to increase your income to help achieve your goal. You turn this into an objective by framing it in terms of quantity and time. For example, “increase income by 10% by the end of the year”. Next you need to identify ways of making it happen such as asking for a raise, coming up with a side hustle, making a career change or taking on more investment risk. From that list select the ones that are feasible and that you want to pursue. For each objective, list the sequence of tasks needed to achieve it. And then work your plan!

Additional planning objectives may include how much you want to save; how to optimize taxes; how to adopt a frugal lifestyle (e.g. manage spending, limit debt and avoid lifestyle creep); family planning; taking advantage of employer plans such as a Roth IRA, 401k, Health Care Savings Account and Employee Stock Purchase Plan; establishing asset allocation targets; meeting regularly with a financial advisor; and improving time management skills.

You should compare your actual results to your plan at least once a year and make updates as needed.

Phase 2

FIREPhase 2 involves creating a new plan with the aid of a more robust retirement calculator (we use Fidelity’s). The purpose of your detailed retirement plan is to determine, with a high level of confidence, if you really can afford to retire.

Phase 2 planning is characterized by customization of your plan. For example, the Vanguard Retirement Nest Egg calculator asks you to enter your annual expenses. A robust retirement calculator will have you enter your expenses by line item such as rent/mortgage, utilities, groceries, insurance, etc. The calculator should also allow you to enter future changes to your expenses and one-time expenses such as a new car or home repair. And it should adjust for inflation. This process repeats for income, savings, taxes, investments and personal information.

The output of your detailed plan should show cash flow and investment balances for every year through the end of your retirement. Ideally it should calculate results based on average market performance and below average market performance (for risk management). You can also personalize your plan by coming up with scenarios. For example, I created a scenario where Social Security benefits were cut drastically. I created another scenario where I entered extra expense data as a form of contingency planning. I even performed regression testing to calculate the minimum amount I needed to cover my retirement expenses. My point is that you can customize your plan to fit your circumstances and tolerance for risk. This should increase your confidence level in any decisions you make based on your plan.

A logical question is when does Phase 2 planning begin? It depends on the rate at which you’re making progress towards achieving your Phase 1 goal. At a minimum, you should start Phase 2 planning no later than one year prior to your projected goal attainment. However, I recommend starting earlier because if your plan identifies shortfalls or issues, you’ll need time to rectify them.

Closing Thoughts

There’s evidence that people who have a plan have better money habits. That may be because people who have good money habits are predisposed to plan. However, I believe that even if you don’t have the best money habits, creating a plan will improve the chances that you will develop them.

I know that for many people, FIRE is a daunting undertaking. However, if you decide to go down that path, keep in mind that you don’t have to go it alone. Many financial institutions will connect you with an advisor who can assist with your planning. And there is tremendous support available from the FIRE community. The most important step is taking the first step!


My Video “How to Create a Financial Plan”

My Video “Financial Scenarios”

May 2018 Charles Schwab Study “Most Americans Don’t Have a Financial Plan”

From Retire Hoppy “Can You Afford to Retire”

From Retire Hoppy “How to Get Your Retirement Savings on Track”




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