January 31 2021

The Ultimate FIRE Guide

Choose Beta Financial Independence (Freedom) 1

Some of the feedback I have been getting on this blog and in the Facebook group is that terminology is often taken for granted. I have tried to link terms as I go and I have even gone back and added links if I find ones that were missed or taken for granted. For that reason, I will utilize this Ultimate Guide to FIRE post as an evergreen board for terminology and helpful resources. In the future, we will link back to this and have one single repository that can be updated overtime.

Is this list complete? At this moment definitely not, but that is not the intent either. We will use this as an evergreen landing ground to be updated over time. As we get input on Choose Beta and the Let’s Talk FIRE group, we will continue to update this post so that it truly becomes the Ultimate FIRE Guide.

NOTE: My goal in this is not to come off as an expert on these topics. I want to give a quick description but then provide the links to the locations where I have found the most relevant information. There is a ton of content out there that covers these topics way better than I can.

Finally, I know many people in FIRE are anti-Dave Ramsey. I am not. I have received a lot of value from his teachings over the years around debt payoff and budgeting. For this reason, I have referenced his work in applicable sections.

Ultimate Glossary of FIRE Terms

1% Rule (Real-Estate)
This is a rule of thumb that states if a property can rent for 1% of its value per month, then it could be a good investment.

If (Monthly Rent)/(Home Value) > 1% , it could be a good investment.

The 1% rule is for quick estimation and it does not account for specific costs associated with the property, (ie upkeep, insurance, taxes, etc)

Other Resources:

4% Rule
Synonyms:
- 4% Safe Withdrawal Rate
- SWR – Safe Withdrawal Rate
- 25x Rule
This is a rule of thumb for the amount of money that can be safely withdrawn from one’s portfolio over the course of a 30 year timeline with very low chances of depleting the nest egg. The rule assumes a 50% stock and 50% bond allocation. It is based on taking out 4% of the nest egg during the first year of retirement for living expenses and adjusting subsequent years for inflation. This rule was developed as part of the trinity study and has been reviewed and updated in years since. There is some debate that the rule needs to be closer to a 3.5% safe withdrawal rate based on recent data. One major assumption in the rule is that 100% of retirement expenses will be covered by the nest egg. Any additional sources of passive income will further reduce risk to the portfolio’s life.

Other Resources:
- MMM
- Wiki – Because this isn’t a college course and I can reference it if I want lol

401k
The name for the 401K actually comes from the section of the IRS code that permits it’s existence. It was added into the tax code in 1978 but was largely disregarded until the 80’s. 401k’s are now one of the most prominent retirement vehicles offered by employers. 401k’s are tax deferred, meaning that they are funded with pretax dollars and contributions/growth are not taxed until they are withdrawn. Withdrawals are also penalized at 10% if taken out before age 59.5 yrs of age. There are methods in the FIRE community for accessing these funds through conversion ladders without penalty due to loopholes in the tax code.

Other Resources:
- IRS – Because they make the rules
- Investopedia

403b
Also known as TSA (Tax Sheltered Annuity) plan. Another tax-advantaged retirement savings plan available for many public education organizations and some non-profit employers in the United States. 403b’s are similar in many ways to a 401k.

Other Resources:
- IRS – they make the rules on these too
- Millionaire Educator – the FIRE 403b Expert

457
Another tax-advantaged retirement savings plan. 457’s are generally for government workers. Unlike 401k, 403b, or IRA accounts, 457 plans do not impose a 10% penalty on withdrawals taken prior to age 59 and a half.

Other Resources:
- Investopedia
- The Millionaire Educator

Budget
Budgets are a system of allocating where one’s income will go before it is actually spent. This provides a plan to ensure that all expenses and investments are covered ahead of time. Generally, budgets are done on a monthly basis due to the fact that many recurring bills are due monthly.

A budget is people telling their money what to do instead of wondering where it went – John Maxwell

Other Resources:
- Dave Ramsey
- YNAB – You Need a Budget

Debt Avalanche
This plan focuses on repaying debt based on interest rates. The debt account with the highest interest rate, receives the largest repayment possible while maintaining minimum payments on the others. Once that account has been paid off in full, the next highest account become the priority. This optimizes the process by reducing the total amount of money paid in interest.

Other Resources:
- ChooseFI
- Nerd Wallet

Debt Snowball
This plan focuses on repaying debts from smallest to largest in terms of the size of the actual debt while paying minimum payments on the rest. In this scenario, interest rates are largely disregarded. The argument for the debt snowball is that the psychology of knocking out the small debts early builds momentum and motivation that will keep one on the path and stay focused.

Other Resources:
- Dave Ramsey – Because he developed this process as part of his baby steps

Drawdown Strategy
The plan for how to withdraw from one’s savings in retirement. These strategies are normally designed to allow the nest egg to last the retiree for the rest of their lives. They can often include optimized plans on when to withdraw from taxable/pre-tax accounts and Social Security.

Other Resources:
- The Retirement Manifesto

Expense Ratio
The expense ratio (ER), also sometimes known as the management expense ratio (MER), measures how much of a fund’s assets are used for administrative and other operating expenses. An expense ratio is determined by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). Operating expenses reduce the fund’s assets, thereby reducing the return to investors. – Investopedia

The FIRE community has a heavy focus on seeking out funds that have extremely low expense ratios due to the significant impact to one’s portfolio over time.

Other Resources:
- JL Collins
- Physician on FIRE

FIRE
Financially Independent Retired Early (FIRE)
- FI – Financially Independent
- RE – Retired Early
FIRE is a lifestyle movement with the goal of gaining financial independence and retiring early. Those seeking to attain FIRE, maximize their savings rate by finding ways to increase income and or decrease expenses. The objective is to accumulate assets until the resulting passive income provides enough money to cover living expenses throughout one’s life. Upon reaching financial independence, paid work becomes optional. This allows for retirement from traditional work decades earlier than the standard retirement age.

Other Resources:

GEOFire (Geographic Arbitrage)
GEOFire (Geographic Arbitrage)

Geographic arbitrage means taking advantage of the differences in prices between various locations. You earn money in a stronger economy (San Francisco, maybe, or the U.S. in general) and spend it in a weaker economy (South Dakota or Ecuador, for instance). Geographic arbitrage is a powerful tactic worth considering if you want to increase your saving rate so that you can better pursue your financial goals. Several times over the course of our lives together so far, my wife and I have managed to unwittingly stumble upon the benefits of geographic arbitrage. – Get Rich Slowly

Other Resources:
- Physician on FIRE
- Go Curry Cracker

HSA
HSA – Health Savings Account

A Health Savings Account is a tax-sheltered account that can be used to save up for and pay medical expenses. HSA’s are like a personal savings account, but they can only be used for qualified healthcare expenses. To be eligible, you must be enrolled in a High-Deductible Health Plan (HDHP). There are some FIRE strategies that allow this account to be used in unique ways.

Other Resources:

Index Funds
I am going to cheat and use Investopedia for now:
- An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.
- Index funds have lower expenses and fees than actively managed funds.
- They follow a passive investment strategy.
- Index funds seek to match the risk and return of the market, on the theory that in the long-term, the market will outperform any single investment.
Other Resources:

Roth IRA
A Roth IRA is a retirement account that is funded with post-tax dollars but then grows tax free. There are a few other advantages that include:
- Direct contributions to a Roth IRA can be withdrawn tax and penalty-free at any time
- Rollover contributions in a Roth IRA can be withdrawn tax and penalty-free after 5 years
- Distributions from a Roth IRA do not increase your Adjusted Gross Income
- The Roth IRA does not require distributions based on age
Other Resources:
- IRS
- Mad FIentist

Roth Conversion Ladder
This is a process that is based on a loophole in the tax code that allows 401k’s and 403b’s to be accessed without penalties before reaching 59.5 yrs of age. It is accomplished by rolling the accounts into a Roth IRA. This money is taxed during the conversion, but once it is in the Roth it grows tax free. On top of that, after 5 yrs that money can be accessed, free of any penalties.

There are various strategies that are built off this structure including doing the conversion in retirement when an the individual’s tax bracket is extremely low to minimize tax implications. We have a post that dives into a Mega Backdoor Roth Conversion which can be done at a 0% tax rate.

Other Resources:
- Mad FIentist

Savings Rate
Savings Rate – Savings rate could potentially be calculated two different ways (Gross and Net). Generally the FIRE community uses Net Income which is after tax. The higher the savings rate the faster one is able to achieve FI. This is pretty common sense from the fact that more money is going to savings but it is also due to the fact that the more one save, the less money they have proven they need to live off of. For this reason less money is needed in retirement.

Other Resources:
- MMM
- ChooseFI

Ultimate List of Resources & Links (FIRE and Beyond):

Podcasts

Blogs
- 1500 Days
- Afford Anything
- Bigger Pockets
- ChooseBeta – Because this is my blog and why not shamelessly self-promote 😉
- ChooseFI
- Coach Carson
- Early Retirement Extreme
- Early Retirement Now
- ESI Money
- Get Rich Slowly
- Go Curry Cracker
- JL Collins
- Mad FIentist
- Military Guide
- Millennial Money
- Millennial Revolution
- Mr Money Mustache
- Our Next Life
- Physician on FIRE
- Retire by 40
- Root of Good
- Smart Passive Income
- Tic Toc Life
- The Retirement Manifesto

Books

What are we Missing???

Help us make this the Ultimate FIRE Guide by leaving feedback on what needs to be added!!!

Until next time – continue to Choose Beta,

– Chris

The Ultimate FIRE Guide

Ultimate Glossary of FIRE Terms

Ultimate List of Resources & Links (FIRE and Beyond):

What are we Missing???

Help us make this the Ultimate FIRE Guide by leaving feedback on what needs to be added!!!

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Overview:

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The Ultimate FIRE Guide

Ultimate Glossary of FIRE Terms

Ultimate List of Resources & Links (FIRE and Beyond):

What are we Missing???

Help us make this the Ultimate FIRE Guide by leaving feedback on what needs to be added!!!

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