Lighting the FIRE: What Does It Take to Be Financially Independent?

We focus on different areas of wellbeing at different times in our lives depending on our priorities.

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by Grace Kim, DVM

Have you ever envisioned life without needing to earn further income? This is typically referred to as retirement, but there is a growing community of people who align with the idea of FIRE, or financial independence, retire early.

The math behind FIRE is based on the Trinity Study. This study, using a 60/40 allocation of stocks and bonds, concluded that 4% is considered a safe annual withdrawal rate for a 30-year retirement based on the historical performance of the stock market. In order to calculate your financial independence (FI) number, you would multiply your expected annual expenses by 25, which is equivalent to a 4% withdrawal rate.

This is based on historical data, and as we all know, past performance does not indicate future results. As noted, this was also calculated for a typical 30-year retirement. For those who are retiring much earlier, you are looking at 40-plus years of retirement, which requires adequate savings. Regardless, 4% is still used as a general guideline when determining how much you can safely withdraw from your portfolio.

Veterinarians do not typically choose this field and dream of early retirement. This is a profession full of passionate people who have been willing to go through many extra years of schooling and training to do what they do. However, I think that understanding the framework of FI is still worthwhile, even if you’re not interested in the RE portion of FIRE.

FI is about living a very intentional, purposeful life. Since the emphasis is on your savings rate, by default, you have to be very mindful of your expenses. You quickly prioritize your spending in order to avoid “wasteful” spending that would delay your ability to reach financial independence. You are willing to make certain sacrifices now for a financially free future. Although the path may not be easy, knowing that you are using your money as a tool to live an intentional life makes the journey rewarding and satisfying.

Reining in your spending naturally leads to a lower number to reach financial independence. For example, if you were spending $100,000 per year, your FI number would be $2.5 million. If you found a way to cut your spending to $80,000 a year, your FI number would be $2 million. Based on your current earnings and savings, you just shaved years off your required working years.

Reaching FI means that your work becomes optional. Many people don’t even consider that work can become optional until they reach traditional retirement age, but in fact, the math shows that it can be done sooner.

FI is much more about the journey than the actual destination. “Reaching FI” does not mean that life will be perfect. There are always new challenges and unplanned events, no matter where you are on your path. However, encouraging the discipline of saving and investing for your future self while also being very intentional with your current spending to align with your values is a worthy cause for anyone who wishes to live more financially free.

Grace Kim, DVM, is the founder of Richer Life DVM, a website that helps fellow veterinarians improve their financial health and wellness.

Photo credits: ©iStock.com/Pacharada17