Comparison of The Two Retirements: FIRE and Traditional Retirement

Retirement is a phase when you intend to lead a comfortable and peaceful life after working hard for many years. To have a comfortable retired life when you no longer receive a regular salary or earn a fixed income, it is important to plan appropriately and save consistently.

But with changing times, the idea of retirement has also changed. A large section of the working-class today thinks that the traditional retirement age of 60 or 65 is too old. To effectively enjoy retirement, one needs to retire early, and to do so they are willing to sacrifice a large part of their comfort today. They believe that by planning smartly, practicing frugality, and dedicating a substantial portion of their earnings towards savings, they can retire much earlier than the traditional age. This school of thought has given rise to a new movement, which has been termed as Financial Independence, Retire Early (FIRE).

Here’s an in-depth analysis of the difference between FIRE and traditional retirement.

What is traditional retirement?

Traditional retirement means that you stop working owing to your physical incapability to work or once you have reached the ripe old age of 60 or 65. After leaving your job, you live your golden days with your savings. In the case of traditional retirement, during the initial working years, you tend to save less as your salary is low, and the commitments are high. But after the initial phase of 5 to 10 years, savings take the upper hand, and you compound your investments at a much faster rate. In a traditional retirement plan, the working and earning period for an individual is expected to last 30 to 45 years.    

What is FIRE?

Originating from the 1992 best-selling book ‘Your Money or Your Life’, FIRE is a movement that is gaining popularity with each passing day. FIRE is meant for people who believe that you should be retiring much before your 60s. The movement revolves around the idea of giving up the comforts of your present life while saving aggressively for your tomorrow. By dedicating nearly 50% to 70% of your income towards savings and investments, the preachers of FIRE intend to retire sooner. The retirement age for FIRE is at least 10 to 15 years less than the traditional age.

Here are the key differentiators between the two:

Time horizon

When opting for traditional retirement, you have a greater time horizon at your disposal to prepare for it. With nearly 35 to 45 years in hand, you can easily modulate your savings rate depending on the situation and requirement. With more time, you can also concentrate on accomplishing your short-term and mid-term goals, such as an international vacation or buying a new home or car. Therefore, with traditional retirement planning, you can enjoy various significant life events while gradually building up a retirement fund. 

On the other hand, with the FIRE strategy, the primary focus is to build a huge savings corpus within a short time. Hence, it requires aggressive savings plus extreme management to build the expected retirement fund in just 15 to 25 years. In a traditional plan, you would have 35 to 45 years to build the same corpus. As a result, with the FIRE strategy, one has to sacrifice several daily comforts, cut down on routine expenses, and plan more meticulously to achieve the desired savings goal.

Risk and uncertainty

When you are investing in different financial assets to create a retirement fund, you are exposed to several risks and uncertainties of the financial market and the economy. With a traditional retirement, you have a better opportunity to successfully mitigate these risks as your investments have more time to absorb the uncertainties. For instance, Social Security benefits help you with a regular income flow. You can also annuitize a portion of it or consider a reverse mortgage. 

In the case of FIRE, a decreased time frame and early retirement amplify the extent of risk and uncertainties. By retiring early, you have more time to enjoy what you love doing while you are relatively younger, fitter, and healthier. But the downside is that you need to have a greater appetite for the associated risk and uncertainties and be flexible and extremely accurate in your planning.

Financial independence

Financial independence is one such area where FIRE scores more over traditional retirement. In the case of traditional retirement, your funds are built at a slow pace spread over a time frame of 35 to 45 years. Therefore, it takes a significant amount of time to yield the right fruit, which can help you attain financial independence. You tend to have a greater spending power during your working years with little or no worry about budgeting and cutting unnecessary costs.

For FIRE, the principal focus is to attain financial independence at least 10 to 15 years earlier than the traditional age. Financial independence in your early 40s means you have an enormous portfolio that would allow you to sustain for at least the next two decades. To accomplish the desired portfolio, you need to follow an extremely conservative path, plan meticulously, cut down on necessities, refrain from any kind of luxury, start accumulating from the initial working years, and save the lion share of your income.

To sum it up

Whether you wish to attain financial independence at an early age while being still young or continue with the traditional retirement till the age of 65, the choice is completely yours. But before picking a path, you must perform a SWOT analysis (strengths, weaknesses, opportunities, threats) of both the options to choose a suitable one. 

It is always advisable to seek professional help when it comes to making crucial financial decisions. You can consult financial advisors to understand your risk-taking capability and secure your retirement according to your needs.