designer491/iStock via Getty Images

designer491/iStock via Getty Images

FIRE is an investing and lifestyle philosophy that stands for "Financial Independence Retire Early." Lately, the FIRE movement has become increasingly popular, even though its core principles have actually existed for a while.

Essentially, FIRE practitioners embrace a simple lifestyle and prioritize their time above their money in order to retire early in life. One of the most popular books to bring this lifestyle into the limelight is Joe Dominguez and Vicki Robin's book Your Money Or Your Life, published in 1992.

The book explains how Dominguez was able to retire in his early 30s in 1969 with a rather modest sum of capital: a ~$70,000 portfolio. This would equate to over half a million in ever-inflating 2021 dollars.

Many investors will also be familiar with the 1996 book The Millionaire Next Door, which similarly advocates adopting a simpler life in order to grow one's wealth more quickly.

However, Dominguez and Robin's book is unique because it also details how early retirees can continue to find meaning and purpose in their lives after FIRE.

But before we get into all that, let's take a closer look at the foundational principles of FIRE. I'll then lay out five key steps for those who want to begin investing for the FIRE lifestyle. Along the way, you'll see why real assets such as REITs (VNQ) and MLPs (AMLP) have played an important part in my investing journey and how they can be a strategic part of your FIRE portfolio.

FIRE runs contrary to a world that very much still prioritizes consumerism, careerism, and materialism. FIRE followers are not afraid to go against the grain. They are passionate about minimalism, and prioritize their time above money and possessions, in the belief that time is the ultimate asset.

FIRE investors aim to build enough wealth and passive income in order to retire early and achieve financial independence. One who has achieved FIRE doesn't need to work again. In order to accomplish this, a core tenet of FIRE is aggressive saving. Most FIRE investors like Mr. Money Mustache advise saving at least 30-50% of one's income.

To save so much money, FIRE investors usually embrace a simpler lifestyle, and eschew trappings of wealth.

In this sense, financial independence can be thought of as more than just the freedom not to work. It is a complete reassessment of what is "enough," what to prioritize in life, and what individual happiness looks like.

FIRE investors often put up with the rate race for no longer than they must. In Mr. Money Mustache's popular article The Shockingly Simple Math Behind Early Retirement, he even goes so far as to say that most people can retire from full time work within 10 years if they live simply and save aggressively.

Investors from many different walks of life and levels of comfort are drawn to the FIRE movement. Thus, it should be no surprise that everyone's version of FIRE looks a little bit different. There are even two different schools of thought within the FIRE movement: LeanFIRE and FatFIRE.

LeanFIRE investors maintain a simple lifestyle into their retirement years. FatFIRE investors prioritize a higher standard of living, and often plan to upgrade their lifestyle in retirement.

LeanFIRE advocates often devote themselves to inner contentment and emotionally enriching pursuits, such as:

Having time allows them to enjoy such things on a very deep level. For LeanFIRE advocates, frugality is not necessarily being cheap, but having a high "joy-to-stuff ratio" and prioritizing people, experiences, and time over material things.

FatFIRE advocates still value time and freedom, but they are also willing to sacrifice a bit more upfront in order to enjoy the fruits of one's labor in retirement. FatFIRE practitioners will often still embrace frugality as part of their FIRE journey, but only temporarily. In retirement, they want to have a high standard of living.

FIRE is an exciting concept but it can also be overwhelming. Where does one even begin? And is such a thing really even possible for most people? Below I break down FIRE into 5 simple steps in order to make it a more comprehensible goal:

It doesn't matter how much money you're making if you don't save any of it. In fact, one of the most powerful ratios for FIRE is your earnings to savings ratio. Most people who have achieved FIRE advocate saving at least 30% of your earnings, and many advise saving upwards of 50%.

In The Millionaire Next Door, the authors actually argue that blue collar workers have an advantage in this arena. Consider: if one is a doctor, lawyer, or wealth manager, one is expected to "look the part." This often means fancy clothes, new cars, a nice house and expensive office, etc.

Blue collar workers don't face this same pressure to look the part, though no one will deny there is still a major consumer culture in most countries. In the vast majority of cases, those who embrace FIRE will have to be independent-minded enough to go their own way, and forgo some materialistic pleasures in favor of a higher savings rate.

If you're going to walk away from your career, you need to be confident that your financial house is in order beforehand. That's why it's very important to figure out the actual numbers that will make you financially independent.

These numbers will be different for everyone.

In terms of income, several studies have found $60-70,000 seems to be the sweet spot for a good quality of life. For North America specifically other studies have placed the average closer to $105,000.

Of course, these ballpark figures can still vary drastically based on your situation. Do you have kids you still need to support? Do you want to own a boat and take several vacations a year? Or do you want to live in a simple cottage in the countryside? And of course: do you want to LeanFIRE or FatFIRE?

Everyone's lifestyle and desires are unique, so you need to be realistic about your expectations before arriving at a figure that will allow you to be independent and comfortable.

Just as there are many different lifestyle options, there are also many investing options. If you're pursuing passive income and retirement, the most important thing to keep in mind is that you don't want to just create another job for yourself.

For example, one strategy I know is all the rage today is the idea of earning passive income as a landlord with rental property. A lot of people will tell you that this is a great passive income stream. However, if you actually talk to someone who owns a lot of properties, you'll quickly learn there is nothing passive about it.

No matter how you slice it, you're the one who's ultimately responsible for each property you own, and that's a lot of responsibility. The more properties, the more work this becomes. Not just in terms of maintenance, but things like: calls from tenants and property managers, loans to refinance, tax appraisals to review and protest, etc.

Even if you use a property manager, complications arise. Property managers have no "skin in the game" since they don't own the property. As such, their interests aren't actually aligned with yours as the property owner, and you'll find yourself constantly checking up on them to make sure they aren't cutting corners.

In short, owning multiple rental properties quickly becomes a second job. That's why I advocate REITs as an actual source of passive income.

In addition to being truly passive, REITs have many other benefits:

Easy, instant exposure to high quality property

Diversification across multiple real estate subsectors

4-6% income growth through high dividend growth

Skilled managers with skin in the game (via stake in the company)

One of our favorite REIT is W.P Carey (WPC). It pays a 5.5% yield and has a clear path to 5% annual growth. This is a truly passive way to achieve consistent double digit returns from real estate.

There is still some diligence involved in investing in REITs, but it is far less work than what you would face as a rental property owner.

Rather than calling it quits as soon as you can, it's often a better idea to build up a bit of a cushion when walking away from your job. This is because you can never be sure what's going to happen in the market at any given time.

For example, what if you had retired in:

2000, right before tech and growth stocks (SPY) crashed?

Or 2008, right before a lot of dividend stocks slashed their payments?

For these reasons, it's actually a good idea to overshoot your liquid asset goal and passive income goal before walking away from your job. An extra 10% buffer is a good starting point.

Also, remember that recessions are actually a regular occurrence, with one happening every decade or so. So your planning must account for one happening at some point. This way, you're prepared even if things take a turn for the worse temporarily.

We all know those people who retire only to shortly become incredibly bored, oftentimes even to the point where they return to work in some capacity.

It's normal to derive a sense of meaning and purpose from our work. Many of us find it rewarding to contribute to our local community, our family, or to some other personal mission. Other people find themselves feeling listless or lonely if they retire completely.

I'm not trying to say nobody should ever fully retire, or that you need to be employed for your whole life. But it's important to maintain a sense of purpose and meaning after retirement. This can be through part time work, volunteering, or even through meaningful hobbies or other activities that give you a sense of fulfillment.

There is even a subschool of LeanFIRE known whimsically as "BaristaFIRE" which is entirely centered around maintaining part time work in retirement.

While FIRE is a fascinating concept, it requires a great deal of sacrifice and isn't for everybody.

However, if you wish to achieve FIRE, it's certainly possible as long as you're determined and take consistent action. The five steps above are a great starting point and show you what to expect from your FIRE journey.

Two of the biggest takeaways are to prioritize truly passive income with your investments, and to continue to find meaning and purpose even after achieving financial independence.

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This article was written by

Disclosure: I/we have a beneficial long position in the shares of WPC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.