13 July 2022
‘Financial Independence, Retire Early’ (FIRE) – is a movement where people save aggressively with the aim of retiring decades earlier than the traditional retirement age. Quitting work at age 40 might seem like the dream, but it’s a tough goal that might not be right for everyone.
According to most FIRE how-to guides, you need to save up around 25 times your annual expenses to achieve financial independence. This is known as your ‘FIRE number’. So, if you expect to spend £20,000 a year when you retire, you’d need to save around £500,000. This calculation is based on the assumption that you withdraw 4%1 of your savings each year in retirement – a withdrawal rate that the FIRE method believes is sustainable if you invest.
To build up a large savings pot quickly, FIRE followers will often save 50% to 75% of their income, drastically cutting their expenses in order to do so. The FIRE movement also encourages people to build up emergency savings to cover three to six months’ worth of essential expenditure; grow their savings by investing; increase their income through freelance work or a side hustle; and pay off their mortgage.
Richard Harwood, financial planner at wealth manager Brewin Dolphin shares his thoughts on the movement:
“Whilst it’s great to have an early plan in place to take control of your financial future, selling an unrealistic dream of financial independence at the expense of your younger years is ill-conceived and one way to work yourself into loneliness. Would you really like to look back on your life and see that you’d spent your 20s and 30s sacrificing valuable experiences? You may have money later, but the time is probably lost forever, for the sake of £20k a year- if you’re lucky”.
“Making and sticking to a retirement plan is fantastic, and something we help our clients with, however, it’s important to be realistic. The biggest risk is that you retire and discover your retirement pot isn’t sufficient to fund what could be an extremely long retirement2 if your calculations fall short. It’s worth noting that it will be hard to go back into the workplace 10 or 20 years after that early retirement, bearing in mind that you can’t access money inside personal pensions until age 55 – rising to 57 from April 2028. If you’re planning to retire at 40, you would need to have saved a large chunk of money in ISAs or other vehicles”.
“Whilst ISAs are a tax-efficient way of saving and investing, they don’t have as many tax saving benefits as pensions. Without a workplace pension, individuals will miss out on employer contributions and tax relief on personal contributions, both of which can supercharge retirement funds. In the more immediate term, it’s crucial to consider the sacrifices involved to achieve a very aggressive savings rate, and to work out what’s realistic, particularly if children could be on the horizon or are already in the picture. The FIRE movement may not be for everyone, but the planning aspects of the movement certainly could prove beneficial to all investors, without necessarily compromising on their quality of life.”
The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
PRESS INFORMATION
For further information, please contact:
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: +44 (0) 20 3201 3026
Chloe McFarlane: chloe.mcfarlane@brewin.co.uk / Tel: +44 020 3201 3490
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £56.3* billion in total funds, we offer award-winning, personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £49.4* billion on a discretionary basis.
Our intermediary business manages £18.3* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service, the MI Brewin Dolphin Voyager fund range and Sustainable MPS.
In line with the premium we place on personal relationships, we’ve built a network of 33 offices across the UK, Jersey and Republic of Ireland, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
For more information on the recommended cash acquisition of Brewin Dolphin by RBC Wealth Management announced on 31 March 2022, visit: https://www.brewin.co.uk/group/investor-relations
*as at 31st March 2022.
Brewin Dolphin is authorised and regulated by the FCA (Financial Services Register reference number 124444)
1 It’s worth noting that the 4% withdrawal rule was developed using US market performance data from 1926 to 1992 and targeted at retirees with a 30-year time horizon. For a UK investor in the 2020s, with a 50-year time horizon, there’s a real risk that relying on the 4% rule results in savings being depleted too quickly.
2 Official figures show a 40-year-old UK woman has an average life expectancy of 87 and has a one in four chance of living to 96. If you retire at age 40, your money might need to last for another 50 years.https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07