The Evolution of Retirement

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When the Social Security Act was passed in 1935, retirement was officially set at age 65. At that time, the average life expectancy was just 58 years, meaning the concept of "retirement" was not designed for everyone. However, over the last century, as life expectancies have increased, retirement has come to symbolize the final chapter in a person's life.

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In the 1990s, a groundbreaking book, Your Money or Your Life by Vicki Robin, introduced a radical idea: by practicing extreme frugality, younger people could achieve financial independence long before reaching old age. Robin herself claimed to have achieved financial independence in her twenties. Today, this idea is known by the acronym FIRE, which stands for "Financial Independence; Retire Early."

The FIRE movement has gained significant traction, covered by major media outlets like The New York Times, MarketWatch, and Forbes. It has sparked the imagination of many millennials, leading them to wonder, "Could I quit my day job too?" But FIRE isn't about dropping out of society or living in a cave—at least, not necessarily. Practitioners of FIRE work hard, live far below their means for years, and eventually amass enough savings to leave the workforce. For many, early retirement doesn't mean stopping work altogether but rather focusing on projects they are truly passionate about.

But is it possible to achieve early retirement through savings alone? Peter Adeney, also known as "Mr. Money Mustache," is often regarded as the modern-day founder of the FIRE movement. While working as a software engineer, Adeney lived well below his means in his twenties. He used his savings to pay off debt and invested in stock-index funds. By 2005, in his early thirties, he and his wife had amassed around $600,000 and owned a paid-for home, allowing him to leave the workforce permanently.

Adeney suggests that early retirement is possible through three fundamental concepts: frugality, investing, and the "4% Rule" of withdrawals. To achieve financial independence, you'll need to save aggressively. Most early retirees adopt a savings rate of 50% to 75% of their income, far higher than the 10-15% rate recommended for traditional retirement at age 65. This often involves cutting back on restaurants, driving inexpensive cars, biking to work, living in smaller homes, and avoiding luxuries like fancy vacations.

While simply stashing cash into a bank account is a good start, FIRE proponents rely on the power of the markets to grow their savings. Historical averages suggest a 7-10% return on investments in general stock-market index funds. However, the third rule comes into play to mitigate market volatility. A 1998 study by Trinity University concluded that a 4% annual withdrawal rate of your retirement savings should allow you to live off your money indefinitely, even during economic downturns. Essentially, if you multiply your annual spending needs by 25, you’ll know how much you need to become financially independent.

So, what does it take to retire early? Let’s run the numbers. Imagine you have a household income of $85,000 but live frugally, requiring only $35,000 per year. According to the 4% rule, you’ll need $875,000 saved to be financially independent. If you save $50,000 annually (about 59% of your income), and your stock-index funds earn an average return of 7%, you could reach your goal in approximately 12 years.

You might wonder, "What if I don’t make a ton of money? Is this realistic?" A common critique of the FIRE movement is that its leaders had high-paying jobs. However, making big bucks isn't a requirement. Take Jillian Johnsrud, who began working towards financial independence at age 19 with her husband, who served in the armed forces, while she worked in customer service and sales. Despite an average household income of $60,000 over 13 years, they achieved financial independence by age 32, all while raising children and paying off $52,000 of debt.

Johnsrud uses her newfound freedom to travel, write, and raise her children. She still works as a writer and coach, but on her own terms. If you think early retirement is all about avoiding work, you’ve missed the point. It's about replacing a job you dislike with work you love. As Adeney says, "Early retirement means quitting any job you wouldn’t do for free – but then continuing with work in something that works for you, even when you don’t need the money."

So, whether or not you aim to retire early, the FIRE mindset of reducing your lifestyle, living simply, and building a more rewarding work-life balance is something we can all strive for. If you were to retire today, what would you do with your newfound freedom? Let us know in the comments.