What age do you want to retire?
Given that the state pension age for men and women is currently 66 and expected to rise to 67 by 2028, most of us probably expect to retire in our sixties at the earliest.
But what if you could shut down your laptop, put away your kitchen office, hand in your key cards and say goodbye to your nine-to-five decades earlier? What if someone told you that you could retire in your thirties or forties?
Well, that’s exactly what followers of the FIRE movement suggest can be done.
FIRE stands for ‘financial independence, retire early’ and espouses a belief in saving hard whilst you’re younger so you can leave the workforce far earlier.
In many ways, FIRE is the ultimate thrifter’s guide to saving. It encourages a mixture of extreme saving, frugal living and smart investment. It claims that you don’t need a six-figure salary to achieve early retirement. It promises that it’s something anyone could do, if only they have the determination.
Alan Donegan, founder of the PopUp Business School, says he achieved his financial independence before turning forty, alongside Katie, his partner, who was just 35.
“Today I am a semi-retired, 40-year-old millionaire,” he says. “I am a screen writer, podcaster, traveller and pizza maker. I wouldn’t have had the time to do any of these things if I had a job and had not taken control of my finances.”
And he credits the FIRE movement for his success and financial freedom.
At a time where so many of us are increasingly conscious of our finances because of the pandemic, no wonder it’s gaining attention and traction. We all want to feel secure in our futures, to know that we’re in control of our money and futures. FIRE suggests that anything is possible, as long as you do the work.
It sounds too good to be true. But is it?
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The FIRE movement in a nutshell
The FIRE movement traces back to the 1990s, and the best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez. As Investopedia says, “FIRE came to embody a core premise of the book: juxtaposing expenses and time spent at work against hours of your life. Every expense is compared to the time spent at work in order to earn the purchase”.
The movement grew through a number of well-known bloggers and websites that position it as both a financial strategy and a way of life. It saw another boom after the dotcom bubble burst and then again in the wake of the global financial crisis in 2008. These days, millions of people follow the principles, looking to various success cases for inspiration and joining forums like Reddit’s r/financialindependence.
The definitions of ‘financial independence’ and ‘retire early’ are also interesting. Whilst the end goal might be to quit your job, in many cases this doesn’t just mean holidaying for the rest of your days. Financial independence for FIRE followers is all about having enough passive income such that your job is not there to pay for your day-to-day living. Instead, your job becomes something that’s there to enhance your life, giving time to your passions or allowing you to take risks.
Seeking financial independence feels powerful and exciting and achievable (some call it Barista FIRE). It also may feel more appealing – especially against the more extreme ambition of retiring in your forties.
FIRE in practice
Rather than following recommendations like the 50/30/20 budget, which sees just 20% of your money put towards saving or paying off debt, FIRE followers target savings between 50% to 75% of their annual income.
They invest that money to (hopefully) help it grow, aiming to end up with a retirement pot worth at least 25 times their current annual expenses. For someone able to maintain their lifestyle on £10,000 per year, this would mean they need a pot of £250,000 before retiring, whereas someone on £45,000 would want to have a little over £1.1 million.
When early retirees do take the plunge, there are yet more formulas to help keep on track. The FIRE recommendation is to move your money into low-cost tracker funds, only withdrawing a max of 4% per year from this in order to stay financially secure long into the future. This percentage is based on the assumption that an average investment return of 7% per year and an inflation rate of 3% should allow retirees to withdraw 4% each year and still feel more than comfortable.
The level of saving required in the early years of following FIRE and the stringency of the 4% rule (which also relies on assumptions based on historic stock market performance and is not a guarantee) can seem extreme. It’s a huge set of asks for any saver.
But for FIRE followers, it’s simply part of taking control over your resources.
“The three main resources you have to manage in life are time, energy and money. Learning how to use them, invest them and work with them is one of the most important things you can do in life,” says Alan, “Katie and I were able to retire early because we learnt about finance and money. We became geeky about understanding investments, planning out our future and enjoying money as a tool.”
There are four key FIRE takeaways – many of which will sound familiar.
Limit your outgoings
Cycling to work. Making lunch at home. Cancelling all subscriptions. Downsizing your rental. Like with most saving advice, a lot of the FIRE recommendations mean cutting back on your outgoings so that you can save more. Clearing debt is also key, particularly debt with high-interest like a credit card. FIRE takes it a step further and encourages you to cut all non-essentials. Ultimately, it’s up to you to work out how much you can really save and how much you actually want to save – perhaps your gym membership is more than just an exercise class but central to your social life, or you create a special budget for frivolities – but FIRE encourages you to strip out everything you can from your day-to-day spending in order to boost what you can put away.
Maximise your incomings
Whether it’s a side hustle or a second-job, aiming for pay rises or promotions, or simply making the most of employee benefits like your employer contributions to your pension, there are several ways that FIRE followers suggest you maximise your income. Given that many people who write about FIRE end up as multihyphenates, this approach may also appeal to anyone who has a creative dream or desire to build a business from a secure financial position.
And the interesting thing that also comes up is financial education. If you’re not yet ready to have a side hustle or to apply for a promotion, the FIRE movement emphasises the benefits of investing in your education and upskilling. In particular, as Alan notes, FIRE recognises how invaluable a financial education can be. He says, “We learn how to do our jobs; we study at university; why aren’t we studying how to invest and manage our money properly?”
Invest for the long term
Investing is at the heart of FIRE, with the emphasis being on not just saving but making your money work for you in an investment portfolio. One of the genuinely powerful components of the movement is the fact that they emphasise investing for the long-term. This isn’t a ‘get rich overnight’ plan, it’s a ‘double down for ten years and grow your wealth’ plan. On the surface, this might look like overnight success. But when you look at the people who have successfully followed the rules to financial freedom and early retirement, they all talk about a long road of frugal living, focused saving and smart investing. Even if you (like me) remain a little dubious of some of what FIRE recommends, having long-term investments is a lesson all of us can learn the value of – and which has been widely discussed everywhere from Investopedia to The Balance.
Get financially literate
As we know, formulas like the 4% rule are imperfect. They rely on historic stock market data and don’t account for predictions like Schroders’ analysis that suggests the next decade will see lower average annual returns than the previous one. In order to make your FIRE lifestyle possible, it’s essential to ‘get geeky’ with your finances like Alan Donehan, to do your own research and work out when (or if) you really can retire and what you really can afford to spend.
“Financial education is a lifelong process and something that people should commit to continuing throughout their adult life,” says Alan. “When I was 20 years old my Dad persuaded me to invest in a high-tech managed fund right before the dotcom bubble! I lost nearly all my money and the fund never recovered. This scared me off investing for nearly 15 years as I just didn’t understand it. I buried my head in the sand. By 34, I knew I had to buy assets to create the financial future I wanted but I was scared and uneducated. It took learning from people who had been successful in the market, reading lots of books and starting to invest small that allowed me to be comfortable investing.”
It sounds so simple – but FIRE has plenty of critics
It’s brilliant to read and hear so much about people engaging with their money – not to mention starting a saving and investing habit early. You could even say it’s kind of exciting to break down the numbers and demonstrate how we all can proactively save towards the future we want.
But there’s a cult-like quality to it all – hidden behind its inspirational buzzwords that lure people in and the deceptively simple premise at its core. Many have also been quick to point out that the maths doesn’t always add up.
Research from William Bengen suggests that following the 4% rule could be a recipe for disaster, with a fifth of retirement periods failing to last fifty years and many also not lasting 40 years. This is quite the risk if someone wants to retire in their thirties or forties. For some experts, it relies too much on luck – and as times are changing, that luck may be running out. As Katie Binns at the Times wrote, “The movement’s rise in popularity coincided with a sustained bull run on the stock market, which has boosted the investments of FIRE fans. The pandemic brought that big uplift in share prices to an end.”
Many of us cannot afford the high levels of saving too.
As much as the movement tries to suggest that anyone can chase FIRE, the reality is that it’s far easier for someone with a well-paid job, as long as their lifestyle doesn’t inflate with their salary.
For example, someone on the average London salary earns £37,000 a year. This person would have, roughly, £2,391 per month to spend after tax. According to property website Home.co.uk’s research, the average cost for a room in London is £747 per month, with a one-bed averaging around £1,934 per month, and a two-bed at £2700. On top of this comes living expenses, with Numbeo reporting that the average monthly spend for a single person living in London is £842.
If we assume that this person, therefore has combined monthly expenses of at least £1589 per month, this leaves around £802 or 33% of their salary left to save. It’s by no means an insignificant amount, but it does assume that there are no additional costs – no emergencies, no special occasions, no holidays or other obligations.
On the other hand, if you’re earning above average but maintaining a similar level of outgoings, you’re obviously going to be able to save much more of your salary.
The fact is that FIRE isn’t accessible to everyone in the same way. Whilst anyone could aspire towards its financial advice, it’s far easier if you’re earning well first – and even then, it requires serious lifestyle management.
And that’s the big question: is the frugality worth it?
Claer Barret, Consumer Editor at the FT, remains sceptical. She notes that for many of us, even if we could afford to live as frugally as FIRE require, many of us probably don’t want to. FIRE’s focus on saving for retirement doesn’t leave room for things like buying your own property or growing your family.
“If you take money-saving to the extremes that some FIRE devotees claim to, then the whole thing becomes self-defeating,” says Claer. “The money-saving tactics they employ are often extremely time-consuming — walking everywhere, timing a “yellow sticker strike” on a range of different food shops just before they close, making their own clothes and boiling up endless pots of low-cost pulses. They might have “retired” in their 30s — but it sounds like they’ve just swapped one form of drudgery for another.”
And that’s the rub. If we recall, Alan emphasises that managing your resources is key to FIRE success – time and money being two of them. But dig down and in many ways, this means we need to sacrifice things like convenience or comfort in order to save. There are things that we value that go beyond money – the sense of confidence that buying our first coffee of the week gives us, the ease of having your groceries delivered rather than going to a shop, the comfort and achievement of moving out of your shared rental and into your first home.
At ikigai, we’re always talking about how important it is to be mindful with your money. To align your spending, saving and investing with your values and goals. For some, this may look a lot like FIRE. For others, FIRE sacrifices too much that they enjoy and value. It’s not the right choice for them. And that’s okay. After all, your money should work to create the life you want, both now and in the future.
FIRE is definitely driving the saving conversation forwards and bolstering interest in investing. Its principles certainly mean that retirement is a far greater likelihood for its followers.
As Stephen Lowe, communications director at retirement advisers Just Group told the Guardian – even now, the vast majority of people are not saving enough to retire at 65, let alone 45. “For most, FIRE is little more than an abstract idea but if it captures people’s imagination, that’s got to be a good thing.”
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