The FIRE (Financial Independence, Retire Early) movement sounds appealing, especially if you want more freedom and flexibility to live life on your terms later.
But this movement often comes with strict financial guidelines that focus on short-term sacrifices to achieve long-term gains. Fortunately, you can customize your FIRE journey in a way that best fits your and your family’s needs. Your FIRE experience doesn’t have to be extreme if you know your numbers and are willing to step outside the box to make your goals a reality.
If you’re thinking about diving into the world of FIRE, we’ve put together a few questions to help you create your financial plan.
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1. How much do you need to reach FIRE?
Before you dive into the FIRE movement, you need to understand your goals inside and out. This will help you develop your freedom numbers and determine what you need to do right now to get to the finish line.
Here are some questions to get you started:
When do you want to retire?
How much does it cost to live your desired lifestyle every year?
Do you or your family have any health challenges that may boost your savings requirement?
Do you plan to make any big-ticket purchases in the near future, such as for a new home or car?
This is a good list of questions to get you started in the right direction. It’s important to know where you want to go so you can create an intentional plan for success. Doing what everyone else is doing may not work for you. This questionnaire will help you fill in the blanks with numbers that can help you quantify what you need to do to reach your FIRE goals.
2. What type of lifestyle do you want after you retire?
Let’s imagine you have a crystal ball and can see into your life after retirement. What does that look like? If you want to switch up your lifestyle after you retire, you need to consider that when developing your financial plan.
Here are some questions you need to consider to plan for your future:
Where do you want to live, and what is your estimated cost of living?
Do you plan to increase travel activities or pick up any new hobbies?
Will you be responsible for anyone else, and how much time and money will that require?
Don’t get so caught up in managing your current lifestyle that you fail to fast-forward to life after FIRE. These questions will let you know if you’re saving enough money or if you need to step up your game. Sometimes we underestimate how much we need, because we haven’t factored in our future expenses. You want to make sure you are saving for the life you want later.
3. When will you tap into your retirement accounts?
Let’s say you tuck away the maximum amount in your 401(k) and Roth IRA every year. You can start taking penalty-free withdrawals from your employer-sponsored 401(k) plan after you turn 59 1/2. You can withdraw Roth IRA contributions anytime you want, but you can’t touch any earnings without penalties and taxes until you’ve reached 59 1/2. If you’re in your 20s, 30s, or 40s and want to retire early, that probably doesn’t sound like an attractive offer for you right now.
This is when a taxable brokerage account can step in and fill in the gaps. This account can grant you access to monthly or quarterly dividends without your fretting over penalties. Your cash is available on demand, and you can use the money to fund your lifestyle if needed.
You may even qualify for tax-free dividends if your total income doesn’t exceed the annual threshold. If you can hang on tight and reinvest your dividends through a DRIP (dividend reinvestment plan), you’ll have a chance to multiply your income over time.
Prepare for FIRE and the life you’ve always wanted
If you’re thinking about FIRE, you should imagine your life under different scenarios and plan accordingly. Knowing how to respond to the unexpected will help make your FIRE plan more effective.
It’s also important to create a customized financial plan for your specific situation. There is no one-size-fits-all FIRE number or strategy, so you want to consider your unique needs and desires. By planning ahead and answering key questions now, you won’t have to worry about regrets on your FIRE journey.
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