Conventional wisdom states you should retire in your 60s or 70s, after having saved carefully for decades. But a growing group of people, connected by blogs and online communities, is attempting to "hack" retirement and exit the workforce decades earlier than everyone else. Some have retired or semiretired in their 40s, or even their 30s. This movement has many names and permutations, but many members of this community have adopted the name financially independent/retire early, or FIRE.
Many adherents to the FIRE movement believe they have figured out a way to survive in retirement for two or three times as long as the average American by practicing frugality, saving more than half their income, engaging in passive investing, and using the right tax strategies. FIRE community members tend to be high-earning do-it-yourselfers who are more familiar with the tax code than the average person, but they still are willing to work with CPAs who can advise them about how to pursue their dream. By learning more about the movement and becoming familiar with its goals and practices, CPAs can position themselves to help this community.
"Members of the FIRE community typically have a curious nature and self-discipline," said David Oransky, CPA/PFS, owner of Laminar Wealth, "which is what leads them to be financially responsible and knowledgeable about the factors affecting their wealth, including tax laws."
However, he noted, "This doesn't mean that they don't value professional advice. In fact, my experience has been quite the opposite." Though FIRE adherents have taken some important steps toward financial independence, he said, "they know there is room for improvement and are looking for a professional to guide them, present additional opportunities, and perhaps even challenge some of their assumptions."
PROFILE OF THE FIRE MOVEMENT
FIRE community members view retirement in a dramatically different way than most people. As James Dahle, who writes about early retirement for high-income physicians using the pen name The White Coat Investor, put it, "Financial independence isn't about time or age. It's about a dollar figure you need to sustain you for the rest of your life."
They are also redefining the concept of what it means to be rich. Jonathan Mendonsa of the FIRE podcast ChooseFI calls them the "stealthy rich." Or, as Mendonsa's co-host Brad Barrett observed, "FI is not about deprivation. It's quite the opposite. It's about buying the ultimate luxury, which is decades of your time."
The FIRE community attracts many full-time professionals who earn higher-than-average salaries, as well as early high earners such as software engineers and physicians. They typically learn about the principles and financial strategies behind the movement from bloggers and thought leaders, and share tips and experiences with fellow aspiring retirees in online groups and on message boards.
The present popularity of the movement is largely due to the blog Mr. Money Mustache, run by former software engineer Peter Adeney, who lives in Longmont, Colo. Adeney retired from the traditional workforce at 30. "My wife and I just saved about 66% of our pay without really noticing it, and in under 10 years we woke up and realized we didn't have to work for a living anymore," Adeney wrote in a blog post in 2013. His example has inspired thousands of people to ride their bikes to work instead of driving, buy smaller homes that can be fixed up, and slash their grocery bills.
Though it's difficult to estimate the size of the FIRE movement, tens of thousands of people have found it intriguing enough to join informal FIRE communities online.
FIRE bloggers such as Mr. Money Mustache, the Mad Fientist, and Jacob Lund Fisker of the Early Retirement Extreme blog are typically not finance professionals, though they are well-versed in financial topics. Their blogs provide inspirational step-by-step, dollar-by-dollar accounts of how they achieved their goals. They offer tools such as retirement calculators, planning projections, and tax strategies.
HOW FIRE COMMUNITY MEMBERS ARE ABLE TO RETIRE EARLY
The basic approach to FIRE is relatively straightforward: Save 50% or more of net income, make maximum contributions to retirement accounts (usually through regular 401(k) contributions, Roth IRAs, health savings accounts (HSAs), and a side business's self-funded retirement account), live an extremely frugal lifestyle, and typically invest in either index funds, real estate, or dividend stocks.
Those who adhere to FIRE principles attempt to achieve what's called a "FI number": the amount of money they will need to exit the traditional workforce and live off the dividends, interest, and capital appreciation of their investments for the rest of their lives. Different bloggers argue over how to arrive at the number, but most calculate the FI number as 25 times one's annual expenses, assuming a 4% withdrawal rate in retirement. (Adeney details his rationale for a 4% withdrawal rate at www.mrmoneymustache.com.)
FIRE members also presume that their living expenses will be lower than the average person's, as they practice frugality. The FIRE movement as a whole disavows materialism and advocates living below one's means, buying inexpensive used cars, choosing smaller homes in affordable cities, and shopping at discount supermarkets.
Because their savings rates are so high, individuals are able to max out tax-advantaged retirement accounts as well as contribute a significant amount each year to regular taxable accounts. FIRE community members also use HSAs as retirement vehicles, said Liz Adams, a Colorado-based CPA who retired at age 51.
HOW THE FINANCIALLY INDEPENDENT SPEND THEIR TIME
People outside the FIRE movement often wonder how people who exit the full-time workforce in their 30s and 40s spend all their free time, and whether they become bored. One answer is that not all their time is "free": Many FIRE members work part time or on a freelance basis. In fact, part-time work is a critical element of some FIRE members' strategies. Due to the tax advantages of self-employment, high earners can save up to three times as much in tax-deferred accounts by contributing to both their solo 401(k)s and simplified employee pension (SEP) IRAs. In 2018, for instance, a self-employed individual could make a solo 401(k) contribution of $55,000 (subject to income limitations) as both the employee and employer versus the maximum contribution of $18,500 an employee at a company with a 401(k) program would be able to make.
Also, once they've left the traditional workforce, early retirees often choose to travel the world (on a tight budget, of course). (See the sidebar "Retired at 33: How One FIRE Member Pulled It Off.") Members use a set of strategies called "travel hacks" to travel cheaply. Some FIRE bloggers who have used travel rewards programs and credit card bonus signups to save money on travel provide detailed accounts of international trips paid for entirely with earned miles.
HOW CPAs CAN HELP MEMBERS OF THE FIRE COMMUNITY
Though FIRE members tend to be do-it-yourselfers, there are still opportunities for CPAs to assist them.
Adams said that the most important value a CPA can bring to a FIRE movement member is to "run the numbers." She said CPAs can help FIRE adherents "forecast their income sources, long-term spending needs, and likely tax impact, and help them develop their long-term plan either through [their] own proprietary tools or a commercial retirement calculator." CPAs can also stress-test the outcomes of different saving plans with different investment returns, inflation rates, Social Security-claiming scenarios, and the like, Adams said.
Early retirees are diligently frugal and independent types who will need to be convinced of the added value an accountant can provide. Comprehensive tax planning is one way to help: CPAs can encourage maximum contributions to tax-deferred retirement accounts and assist with strategies for avoiding heavy tax penalties. Oransky provided one example: FIRE movement members typically accrue significant tax-deferred retirement assets. However, as Oransky noted, "if they intend to retire early and start drawing upon these accounts before age 59½, they'll quickly be confronted with an extra 10% penalty from the IRS."
CPAs can recommend strategies to fund early retirement while avoiding the 10% additional tax, such as taking advantage of the substantially equal periodic payments exception in Sec. 72(t) or using what is known as the Roth conversion ladder strategy. This tactic involves converting 401(k) money into a traditional IRA and then to a Roth IRA once a person has retired and entered a lower tax bracket. After five years, early retirees can withdraw converted amounts from the Roth IRA tax- and penalty-free, even if they are under age 59½, Oransky said.
Because many early retirees will have low income in certain years, creating a long-term plan for disbursements and maintaining a safe withdrawal rate are key. In general, FIRE members presume they'll need a 4% safe withdrawal rate in retirement, but CPAs can test clients' plans, adjusting for factors such as inflation and rising health care costs, to ensure that rate makes sense.
CPAs CAN HELP PLAN FOR THE POTENTIAL PITFALLS OF FIRE
CPAs can also help clients who want to retire early plan for problems that may arise down the road. For instance, early retirees and semiretirees need to have a plan in place if the stock market sours. Adams said that CPAs need to "talk to [these clients] about risk and flexibility. If they are retiring before their 60s, this is especially important. If their investments take a hit, what would the impact be on their lifestyle?"
Another situation early retirees need to plan for is having higher-than-expected health care costs in the future. "Health care is our biggest concern as early retirees," said Adams. "It is the one thing that may push me out of retirement."
Adams observed, "Most early retirees I've come to know have a bunch of fallback plans they'll deploy if markets crash or their health goes bad. They'll reduce their spending, get a part-time job, or move overseas. The more flexibility someone has, the more likely they are to successfully retire."
She added that CPAs have an opportunity to help steer their clients toward a better early retirement. "Make sure they are retiring to something," she advised. "Too many people retire without enough thought to how they will spend their time. If the CPA has a long-term relationship with their client, they can refer them to resources that will help them to identify what a day in their retired life will look like."
Retired at 33: How one FIRE member pulled it off
By Eddie Huffman
One FIRE movement follower who managed to retire decades sooner than most is Justin McCurry of Raleigh, N.C. McCurry, a former engineer, retired in 2013 at age 33, and his wife followed three years later.
After studying engineering at North Carolina State University, McCurry worked for a small engineering consulting firm and then for the North Carolina Turnpike Authority. "I started out the first year or two just saving money and investing it and not really having any big plan other than just building wealth in general," McCurry said via video chat from Berlin during a summer-long family vacation in Europe. He came across the FIRE movement by accident: He was researching a tax question online around 2005 when he first stumbled across information about early retirement.
Once McCurry set his sights on early retirement, he decided to retire by 40. But he gradually realized he was on track to accumulate enough assets to leave the workforce much earlier than that — even with a wife and three children.
McCurry writes a blog called Root of Good about his experiences leading the FIRE lifestyle. His posts detail the steps he and his wife took to reach early retirement. They live frugally, opting for a "permanent starter home" in a modest neighborhood and driving basic used vehicles. Their children attend public schools. Grandparents provide free day care and babysitting. They rarely eat out, mostly opting to cook and eat at home. They watch for travel deals and make the most of frequent flier miles and credit card reward points. They obtain subsidized health insurance through the exchanges created by the Patient Protection and Affordable Care Act, P.L. 111-148. The family's premiums have been $30 to $125 per month on average after the premium tax credit, McCurry said.
"With around $1.7 million in investments, and only spending $30,000 to $40,000 per year, we typically spend around 2.5% of our investment portfolio or less," he noted.
Before retirement, McCurry and his wife took advantage of job perks such as health insurance and 401(k) plans with 6% matching contributions from their employers, maxing out their 401(k) and IRA contributions. Next came contributions to health savings accounts, a childcare flexible spending account, and 529 college savings plans. Finally, they invested in after-tax investment accounts. McCurry uses finance software to track spending and investments.
— Eddie Huffman is a freelance writer based in North Carolina.
About the author
Ally-Jane Grossan is a freelance writer based in New York City.
To comment on this article or to suggest an idea for another article, contact Courtney Vien, a JofA senior editor, at Courtney.Vien@aicpa-cima.com or 919-402-4125.
- Retirement Planning Certificate Program (#166400, online access; #166480, online access with certificate exam; #166470, exam only)
For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077.
PFP Member Section and PFS credential
Membership in the Personal Financial Planning (PFP) Section provides access to specialized resources in the area of personal financial planning, including complimentary access to Broadridge Advisor. Visit the PFP Center at aicpa.org/PFP. Members with a specialization in personal financial planning may be interested in applying for the Personal Financial Specialist (PFS) credential. Information about the PFS credential is available at aicpa.org/PFS.