You might be able to retire earlier than you think. Here’s how

Retiring early might seem like an impossible financial goal. But with the right plan in place, it can be done.

Financial Independence Retire Early – or FIRE – is a method of living below your means to obtain financial independence and security as early as possible.

“The mentality behind the movement is where one strives to live life on their own terms and to get off the proverbial hamster wheel where you are dependent on your employer and have the freedom and security to do so,” said Danielle R. Harrison, founder and president at Harrison Financial Planning.

That could mean having the financial freedom to change careers, work less or travel the world.

So what exactly does the FIRE movement entail? Here’s everything you need to know.

What is FIRE?

The concept of FIRE is based on the notion that retirement is determined by a financial number and not by a person’s age. It focuses on keeping expenses low and savings high. That means usually saving anywhere between 50% to 75% of your annual income to retire well before the age of 65 and usually without any debt.

“FIRE involves a shift in perspective regarding money and work, prioritizing what is most important to your work-life balance, and making decisions not dictated by the need to earn money but the ultimate goal of financial freedom,” said AnnaMarie Mock, a certified financial planner and wealth adviser for Highland Financial Advisors.

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People looking to pursue FIRE typically start by picking what’s called a FIRE number, which is the amount of money you’d need to have saved to generate enough income to cover your expenses without having to work.

To determine your FIRE number, start off by figuring out your yearly expenses, excluding savings and taxes.

From there, calculate how much savings you’ll need to generate that much income without having a paycheck.

One rule of thumb, known as the 4% rule, says that retirees can safely withdraw about 4% of their savings ayear without running out of money That means saving 25 times your current annual expenses could last indefinitely with regular 4% yearly withdrawals.

For example, if your annual expenses are $50,000 per year, you would need at least$1,250,000 ($50,000 x 25) saved when you retire.

You can also take a more conservative approach by saving 28 to 33 times your current expenses, and take only 3% to 3.5% withdrawals.

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From there, try an online calculator to determine how much to save and when you can reach that early nest egg number.

Starting as early as possible comes with many advantages. After all, getting a head start on your savings and investments gives your money more time to compound. But even though retiring early requires various sacrifices when it comes to saving and spending, the perks can be rewarding.

“The biggest perk of FIRE is independence,” said Kevin Chancellor, a certified Social Security claiming strategist and financial adviser. “If your budget is still sustainable then you have the freedom to travel, be involved in your kid’s school activities, start a side business or hobby, and spend more time doing what you want to do rather than what you need to do.”

Reaching the magic number

Many people think they don’t earn enough to be able to retire early. But there are several methods of reaching FIRE that could help them retire faster than they think.

When making the decision to retire early, you should expect to make some significant lifestyle changes. Those changes could be as big as increasing your streams of income or as small as cutting your own hair. It all comes down to either reducing how much you spend or boosting how much you save – or both.

“Those looking to retire early need to widen the gap between what they earn and what they spend,” said Harrison.

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One way to do that is to drastically slash expenses and live a more frugal and lean lifestyle, which is often the quickest way to FIRE. Known as “Lean FIRE,” this typically means having a lower target number for your nest egg and living more modestly in retirement.

Those who aren’t interested in pinching pennies and have higher-than-average expenses can still retire by increasing their income.

Some ways to achieve “Fat FIRE,” as it’s known, could involve negotiating a higher salary, finding a higher paying job, accumulating sought-after skills, working a side-hustle or owning rental properties. Often, those pursuing Fat FIRE will either choose to work in higher paying professions or take longer to reach their larger savings goal.

Some people who want to retire sooner can pursue another method often called “Barista FIRE.” In this scenario, you can quit your full-time day job once you’ve stashed away enough retirement savings to grow into a nice nest egg in a few more years without having to add funds. But rather than ceasing work altogether, you work a part-time job, pursue a less lucrative dream career or take on freelance projects in order to cover basic living expenses, all the while allowing your long-term retirement savings to grow until a more traditional retirement age.

Is FIRE right for me?

Another thing to consider is how you’ll spend your time without filling your days with a paid job.

An elderly couple walk hand-in-hand in San Antonio, Texas. (Photo by Robert Alexander/Getty Images)

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For example, will you pursue hobbies, volunteer or travel more? Without a plan in place, you might find that FIRE isn’t all you’d hoped it would be.

“For anyone retiring, it is important to know what you are retiring to. This is even more important for those looking to retire early,” said Harrison. “Figure out what is going to give your life meaning and purpose, so your retirement years can bring you joy.”