If you want to retire early, a potential option is the Financial Independence, Retire Early (FIRE) movement.
Here’s everything you need to know about it, including the pros and cons.
What is the FIRE movement?
The inspiration for the FIRE movement dates back to the 1992 release of ‘Your Money or Your Life’ by Vicki Robin and Joseph Dominguez but the idea remains popular today.
The FIRE movement has recently been gaining traction in the UK, but what are the principles?
Put simply, FIRE is a radical savings movement that encourages followers to clear their debts early, including student loans and mortgages, and then live frugally by saving around 50% of their income.
The amount followers need to accumulate, which is then saved or invested, might be closer to 75% or as low as 25%, depending on how much they earn.
Passively managed funds that track the stock market are particularly popular with FIRE followers, who aim to earn enough to attain financial freedom and retire early.
This attractive goal might mean you aim to retire at 38 and stop work altogether or retire in your 40s and work part-time for the next two decades.
Alternatively, you may aim to stop work earlier than usual at 55, when you can access your private pensions (the age you can access these will rise in the future).
Some of the common routes a FIRE saver might go down are as follows:
The traditional route: They follow the 4% and 25x rules, which will be explored below.
The lean route: Lean FIRE savers are happy to live frugally and achieve their goals with less money in their pot.
The fat FIRE route: Fat FIRE savers want to live their best lives in retirement by making passive income through investments to fund expenditures.
The barista route: Barista FIRE savers don’t want to retire fully, and instead want to work part-time while their savings support their lifestyle.
How much do people aim to save before retiring early?
With the state pension age set to reach 67 by 2028 and access to private pensions allowed from the age of 55, FIRE followers must account for how they’ll manage before withdrawing from these funds.
The amount you’ll need to save to retire early depends significantly on the amount you want to be able to grant yourself as a yearly retirement income and the age at which you want to stop working.
The traditional FIRE formula should help you determine how much you need to save and how feasible your goals are.
There are two rules you should consider.
The 25x rule: You save a pot of money worth 25 times your estimated annual expenses to help you achieve financial independence.
The 4% rule: You should withdraw no more than 4% from your funds each year.
For example, if you hope to retire at 45 and expect your annual expenses to be around £30,000, you’ll need a £750,000 pot, at a minimum.
You currently need a yearly income of at least £23,300 to enjoy a moderate standard of living in retirement, according to the Pensions and Lifetime Savings Association (PLSA).
But this figure doesn’t account for how things might change over the years if you retire early, so don’t forget to evaluate your plan regularly and adjust your contributions if needed.
The pros and cons of FIRE
While the FIRE movement can offer an attractive lifestyle by helping to attain financial freedom, it has a few advantages and disadvantages to consider.
The benefits of the FIRE movement
It can help you achieve greater control over your life.
You can use the principles to plan for the lifestyle you want.
You can increase your savings and investments even if you only follow the FIRE rules for a short period.
There are no hard and fast rules, so you can change your mind if necessary.
The downsides of the FIRE movement
If you’re unhappy with the outcome, you might spend a lot of time living frugally and saving - and regret not having enjoyed yourself.
FIRE principles can be hard for those on lower incomes to follow.
Investments are vital and they can perform poorly, putting your plans in jeopardy.
If you leave the workforce for a while but then have to return, you may need to refresh your skills.
6 tips to help you achieve your FIRE goals
If you’re considering using the FIRE principles to push forward your retirement, these tips may help.
Never neglect your emergency fund
If you want to retire early and be financially independent, you should have an easily accessible emergency savings pot.
This fund should cover at least three to six months of expenses.
Be realistic about your expected income in retirement
Many people underestimate how much income they’ll need as a retiree, especially if they have no mortgage, commuting costs or children at home.
It’s worth doing your research so you can make an accurate estimate.
Pension funds and ISAs are important
Pensions offer tax relief and are worth building up, while ISAs are tax-free and can accessed whenever you want.
Maximise your income when you’re working
If FIRE is your priority, focus on your income. The more you earn, the quicker you can grow your savings pot. This might mean taking on a second job or choosing a higher-paid career.
Spend wisely and keep your long-term goals in mind
It can be tempting to spend on luxury items, but frugality is a critical part of the FIRE movement. So, you should avoid spending unnecessarily and focus on the lifestyle you’re aiming for.
Make sure you keep your costs low
It might be worth spending extra time to get the best deals on essentials like groceries. Little cost-cutting measures can add up to considerable savings over time.
The importance of having a backup plan
Whether you plan to pursue the FIRE lifestyle or not, don’t underestimate the importance of having a backup plan.
So, for example, ensure you have a healthy emergency fund and diversify your investments.
It’s also a good idea to plan for several different ages and scenarios, as well as accounting for variables you can’t control.
For support with your financial independence journey, from retirement planning to investment strategies, find an adviser through Unbiased.