Financial Independence (FI / FIRE)
Definition
The state of having enough investment income and savings to cover living expenses indefinitely without relying on active employment. FIRE adds 'Retire Early' to the concept.
Financial independence means your investments generate enough passive income to cover all your living expenses. At this point, work becomes optional — you can choose to work because you want to, not because you need the paycheck. The FIRE (Financial Independence, Retire Early) movement focuses on reaching this milestone decades before traditional retirement age.
The math is straightforward: the "4% rule" (based on the Trinity Study) suggests you can withdraw 4% of your portfolio annually with a high probability of not running out of money over 30 years. This means you need approximately 25 times your annual expenses saved. If you spend $40,000/year, you need $1 million ($40,000 x 25).
There are several FIRE variations: Lean FIRE (achieving FI with minimal expenses, typically under $40,000/year), Fat FIRE (FI with a luxurious lifestyle, typically $100,000+/year), Barista FIRE (partially FI, working part-time to cover the gap), and Coast FIRE (having enough invested that compound growth will cover retirement at a normal age without additional savings).
The key variables are savings rate and investment returns. Someone saving 50% of their income can reach FI in roughly 17 years (assuming 7% real returns), regardless of income level. Someone saving 20% takes about 37 years. The savings rate is the dominant factor because it both increases assets and demonstrates the ability to live on less.
Tracking progress toward FI requires monitoring your net worth, investment returns, passive income, and expense trends over time. Knowing your "FI number" (25x expenses) and tracking your progress toward it provides motivation and clarity on when work becomes optional.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
How much money do I need to be financially independent?
Approximately 25 times your annual expenses (using the 4% rule). If you spend $50,000/year, you need about $1.25 million. If you spend $80,000/year, you need about $2 million. Reducing your annual expenses is as powerful as increasing your savings for reaching FI sooner.
Is the 4% rule still valid?
The 4% rule was designed for a 30-year retirement. For early retirees with 40-50+ year horizons, some researchers suggest 3.5% or 3.25% is safer. Others argue that flexibility (reducing spending during downturns) makes even 4% conservative. Having income sources beyond investments adds security.