Your Path to Financial Independence
Your complete guide to Financial Independence and Retirement terminology. Learn the key terms you need to understand on your journey to early retirement.
The strategy of dividing your investment portfolio among different asset categories such as stocks, bonds, and cash. Your asset allocation should match your risk tolerance, time horizon, and financial goals.
A variation of FIRE where you achieve partial financial independence and work part-time (often for benefits like health insurance) while your investments continue growing. The term comes from working as a "barista" for benefits while living off investment income.
Reaching a point where you've saved enough that you no longer need to contribute to retirement accounts. Your existing investments will grow to support retirement at traditional retirement age. You can "coast" in a lower-stress job or work part-time.
Interest calculated on the initial principal and accumulated interest from previous periods. Often called "interest on interest," it causes wealth to grow exponentially over time.
A debt repayment strategy where you pay off debts in order of highest to lowest interest rate, regardless of balance. This method saves the most money in interest over time.
A debt repayment strategy where you pay off debts from smallest to largest balance, regardless of interest rate. Quick wins provide psychological motivation to continue.
Free money your employer contributes to your 401k based on your contributions. Common formulas include dollar-for-dollar match up to 3% or 50 cents per dollar up to 6% of salary.
The annual fee charged by mutual funds or ETFs, expressed as a percentage of your investment. Lower expense ratios mean more of your money stays invested and compounds.
Financial Independence Retire Early with a high standard of living. Typically requires $100,000+ in annual spending and a retirement nest egg of $2.5 million or more.
Having enough passive income or invested assets to cover your living expenses without needing to work. You have the freedom to work because you want to, not because you have to.
Financial Independence, Retire Early. A movement focused on extreme saving and investing to achieve financial freedom decades before traditional retirement age.
The total amount of money you need to achieve Financial Independence. Calculated using the 4% rule: Annual Expenses × 25 = FIRE Number.
A retirement withdrawal strategy suggesting you can safely withdraw 4% of your portfolio in the first year of retirement, then adjust for inflation each year, with high probability your money will last 30+ years.
A tax-advantaged retirement account offered by employers. Contributions are made pre-tax (reducing current taxable income), and investments grow tax-deferred until withdrawal in retirement. 2025 contribution limit is $23,500 ($31,000 if age 50+).
A triple tax-advantaged account for healthcare expenses. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. Can be used as retirement account after age 65.
A mutual fund or ETF designed to track a market index like the S&P 500. Offers broad diversification, low fees, and historically strong returns. Passive investing strategy favored by FIRE community.
Achieving Financial Independence with a minimalist lifestyle, typically spending $25,000-40,000 per year. Requires smaller nest egg but more frugal living.
The tendency to increase spending as income rises. Also called "lifestyle creep." The enemy of FIRE, as it prevents savings rate from increasing with income.
An advanced strategy to contribute up to $46,000 additional after-tax dollars to a 401k, then convert to Roth. Requires employer plan that allows after-tax contributions and in-service conversions.
Money earned with minimal ongoing effort. Sources include investment dividends, rental property income, royalties, or business income from automated systems.
A retirement account where contributions are made with after-tax dollars, but withdrawals in retirement are completely tax-free. 2025 contribution limit is $7,000 ($8,000 if age 50+). Income limits apply.
The percentage of your portfolio you can withdraw annually with low risk of running out of money. The 4% rule is the most famous SWR, based on historical data and the Trinity Study.
The percentage of your after-tax income that you save and invest. The most important factor determining how quickly you reach FIRE. Higher savings rate = faster path to financial independence.
The risk that poor investment returns early in retirement can significantly reduce portfolio longevity, even if average returns are good over time. A major concern for early retirees.
A retirement account where contributions may be tax-deductible (reducing current taxable income), investments grow tax-deferred, but withdrawals in retirement are taxed as ordinary income. 2025 contribution limit is $7,000 ($8,000 if age 50+).
A landmark 1998 study that analyzed historical portfolio success rates for various withdrawal rates and asset allocations. The foundation for the 4% rule.
The percentage of your investment portfolio you withdraw each year to fund living expenses in retirement. The 4% withdrawal rate is most commonly used in FIRE planning.