A Muslim's Guide to Becoming Financially Independent and Retiring Early (FIRE)
How do you spend your time? For most of us, this usually involves some combination of sleep, work, sustenance, education, prayer, exercise, and leisure. Balancing all of these activities is one of life’s great struggles. Work is perhaps the area we have the least control over, as the majority of us need to earn in order to provide. Work also takes a disproportionately large amount of our waking hours. In the West, people typically work 8 hour days. Assuming you sleep for another 8 hours, now that’s 50% of your total waking hours. This is fine if you enjoy the work you do. However, research tells us this is not the case for the majority. In fact, a Gallup survey in 2019 found that globally only 15% of full-time workers felt engaged at work.
The traditional solutions are to retire once you've earned enough money, have someone who can financially support you (e.g., kids/spouses), or become eligible to use your pension. However, for many, this dream is never realized. In fact, in 2021, according to the Natixis Global Retirement Index, 36% of Americans believe that they will never be able to retire. With the current backdrop of rising inflation, it has never been more important for people to take control of their retirement.
Enter the FIRE movement. This movement claims to have found the blueprint to becoming financially independent and retiring early. This article will explain the FIRE movement, why it matters, and how Muslims can implement this philosophy according to their religious values.
What is the FIRE movement?
The acronym FIRE stands for Financial Independence, Retire Early. It represents a movement that directly challenges the typical norm of working until your 60s and then relying on a pension for your retirement. That is, if you are blessed enough to have a large enough pension.
Instead, FIRE advocates believe that they can retire decades earlier by saving diligently and investing in low-risk investments (more on this later). The idea is simple and involves two key steps:
- Save a large chunk of your income (25-75%) by cutting unnecessary expenses.
- Invest your savings in low-risk investments such as property or index funds.
Saving enough money is crucial to achieving FIRE. Typically FIRE followers will save between 25% to 75% of their income. The more you save, the sooner you can retire. The goal is to eventually amass a large enough investment pot where the returns can cover your living expenses. A rule of thumb is to accumulate total investments of approximately 25 times your expected expenses.
This threshold works by assuming a 4% safe withdrawal rate. The safe withdrawal rate is the maximum amount you can withdraw from your savings so that you don't run out in your lifetime. Let's unpack this number. There are two key assumptions that underpin this:
- Your investments make a return of 7% per year before inflation.
- On average, the inflation rate each year will be 3%.
Therefore, if your investments appreciate by 7% each year minus 3% inflation, you are left with a 4% investment gain. You can use this 4% gain for your yearly expenses without diminishing your investment pot. In practice, the annual gain and inflation figures will vary significantly over time, so do keep this in mind. This rule also doesn't account for any extra income you may earn or changes in your expenditure (people tend to spend less as they age). However, in general, the 4% threshold is considered a good rule of thumb.
The different types of FIRE strategies
There are many different FIRE strategies available. Here are the most common FIRE variations:
- Lean FIRE: This version of FIRE is where you commit to a simple standard of living. This option is for those who are content with filling their basic needs and don't have a desire to spend lavishly. Instead, their priority is the time freedom that comes with independence. Lean FIRE enables people to retire earlier as they can save more and have a smaller retirement goal.
- Fat FIRE: As the name suggests, this is for individuals who want a more luxurious standard of living. This would require you to save more money and work longer to achieve your retirement goal. If this option suits you, consider ways to acquire a higher salary and also consider more aggressive investment options to help you reach your goal.
- Barista FIRE: This is the hybrid choice. Barista FIRE is for individuals who cease full-time working but instead shift to working part-time. If you enjoy working but want to do less of it so you can pursue other interests, this option would be for you. Similarly, if attaining full retirement is out of your reach, this could be a good compromise. You will still have an income to rely on, so you won't need to save as much as you would for the other options.
Why is this important?
The FIRE community articulates retiring in a profound way. They don’t see retirement as if you are retiring from something. Instead, you are actively choosing to retire to something.
The scarcest resource we humans have is time. Achieving financial independence can enable you to spend time on the things that matter most to you. This could include:
- Spending time with your family and loved ones.
- Doing work that you enjoy instead of work that merely pays your bills.
- Traveling and broadening your horizons.
- Volunteering and using your skills to help others.
- Spending more time on your personal development, be that exercising more or educating yourself on your deen.
Another important aspect of pursuing financial independence is that the pursuit will prompt you to think deeply about your core values and understand what is truly important to you. It will point you toward taking action according to those values by only spending on what brings you genuine joy and on what you actually need to survive.
As Muslims, our ultimate objective is to please Allah SWT and attain paradise. One of the barriers people face is being overly consumed by the dunyā. One of the key contributors to this is being distracted by work and the need to provide. While there is great barakah in earning an honest living to provide for your families, it is easy to be wholly consumed by the pursuit of wealth in this day and age. Setting a goal of financial independence is a great way to reclaim your time and be purposeful about your actions.
How Muslims can implement FIRE
The mainstream FIRE approaches have several key issues that Muslims need to be aware of before adopting them.
1. Invest in halal investments only
While FIRE as a philosophy is investment-agnostic, most online FIRE guides advise people to invest their money in impermissible investments such as the S&P 500 index or bonds that payout interest. For reference, the S&P 500 tracks the 500 largest public companies in the US, not all of which are permissible for Muslims. In short, you need to ensure that the company's primary activities are halal and their financial behaviour is also within permissible limits.
Therefore make sure you engage only in halal investments to ensure there is barakah in your money. You can do this by using Zoya’s app to screen both stocks and funds. If investing in property, make sure to use halal sources of financing. There are also other asset classes such as commodities (most famously gold) or more high-risk options such as start-up funding or cryptocurrency which could also form part of your investments. Ideally, you want a well-diversified investment portfolio comprising various asset classes to protect yourself from overexposure to one asset class.
2. Balance post-retirement goals with trying to implement some of them now
One of the potential pitfalls of planning for retirement is when people delay goals that should still be a priority in the near term. See the following famous hadith with advice from the Prophet PBUH.
Take advantage of five before five: your youth before your old age, your health before your illness, your riches before your poverty, your free time before your work, and your life before your death. (Shu’ab al-Imān 9767)
This hadith highlights the importance of making the most out of your youth. Therefore we should strive to balance our post-retirement goals with achieving them now. For example, you may have a goal of spending more time in the mosque post-retirement. You should try to incorporate this into your current schedule as much as possible and then ramp it up in retirement when naturally you will have more time. None of us know the time we have left in this life, so make sure you maximize the time you do have and don’t completely delay your goals for a time that isn’t promised.
3. Don't save by being stingy
Saving enough money is crucial to achieving financial independence. However, be wary of becoming stingy with your money. In the Quran, we learn that being moderate with your spending is one of the attributes of the true servants of the most compassionate.
They are those who spend neither wastefully nor stingily, but moderately in between. (Quran 25:67)
As Muslims, we have been told to be generous with our money as we will be held accountable for what we did with it. So go ahead and set budgets but include a provision for charity and continue to be generous. The key is just reaching the right balance.
Step by step guide to practice FIRE
If this article has sold you on the benefits of FIRE, here's some practical advice on how to go about implementing FIRE.
- Begin by reviewing your current expenses and identifying the expenses that you can reasonably live without but don't go overboard. You don't want to overdo it and become miserable and thus less likely to stick to your budget.
- Create a basic projection of what your future expenses are likely to be upon retirement.
- Take this expense figure and multiply it by 25 to get your retirement goal. This is the pot you need to accumulate.
- If you already have savings, first ensure that you have an emergency fund. An emergency fund is typically between 3 to 6 months of expenses that act as your safety net and are money you shouldn’t invest.
- If you have surplus savings and never invested before, you need to create an investment plan and start investing. This will require research into halal investment options and also an understanding of your personal risk tolerance. You need to understand whether you are the type of person who prefers steady low-risk investments or whether you have the appetite for more aggressive, higher-risk strategies.
- For those who already have an investment plan, continue as you are.
- Use a retirement calculator to work out how long it will take you to reach your investment goal at your current savings rate. If your projected retirement date isn't as soon as you'd like it to be, look for ways to increase your salary or consider diversifying a portion of your investments into more high-risk- high-reward options if you are comfortable with the increased risk.
In summary, achieving financial independence to retire early and make the best use of your time is a worthwhile pursuit. Just remember to make sure that you stick to halal investments, avoid stinginess, and don't neglect goals that are achievable now.
Remember, rizq ultimately comes from Allah SWT. All that we can do is put our best foot forward. So just focus on the process and put your trust in Allah SWT.