FIRE method: could it help you retire early?

FIRE – ‘Financial Independence, Retire Early’ – is a movement where people save aggressively with the aim of retiring decades earlier than 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.

Here, we explain what FIRE is, what you can learn from it, and some of the potential pitfalls to be aware of. 

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What is FIRE?

The FIRE movement was inspired by the book Your Money or Your Life, written by Vicki Robin and Joe Dominguez in the early 1990s, which aims to help people gain control of their money and “make a life, rather than just make a living”¹. The book contains a nine-step programme to achieving financial independence, which is defined as having an income sufficient for your basic needs and comforts from a source other than paid employment². It has since spawned a multitude of websites, blogs and books focusing on how people can reach financial independence and retire early. 

Financial independence doesn’t necessarily mean giving up work entirely. While many FIRE followers have quit the nine-to-five, they have then gone on to earn money in other ways. 

As the website Playing With Fire states³: “When we say that someone is retired, what we are really saying is that they have the option to not work. Instead of retiring FROM something, many people within the FIRE community choose to retire TO something.”

How does FIRE work?

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% 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. 

What are the benefits of the FIRE method?

The FIRE method encourages people to fully engage with their money and their goals. So, if you’re someone who has historically taken a ‘head in the sand’ approach to saving and investing, it may be worth trying to learn from the movement’s principles. 

Some of the steps involved in working towards financial independence could also help you to improve your financial wellbeing. For example, holding six months’ worth of essential expenditure in an easy-access savings account is one of the cornerstones of financial planning. It could help you pay for unexpected emergencies, such as your boiler or car breaking down, without having to resort to loans or overdrafts.

Saving for your future is also wise, as you might not be able to entirely rely on the state to fund your desired retirement. Meanwhile, investing helps to mitigate the impact of inflation on your long-term savings, giving your money the opportunity for real growth over time and helping you reach your goals more quickly.

What are the potential pitfalls?

The FIRE method does come with some potential pitfalls. The biggest risk is that you retire early and discover your savings pot isn’t sufficient to fund what could be an extremely long retirement. 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 96⁴. If you retire at age 40, your money might need to last for another 50 years. 

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.

Bear 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. While ISAs are a really tax-efficient way of saving and investing, they don’t have quite as many perks as pensions. Without a pension, you’ll miss out on employer pension contributions and tax relief on personal pension contributions, both of which can supercharge how much money you have in retirement.

In the more immediate term, it’s important to consider the sacrifices you might have to make in order to achieve what is a very aggressive savings rate. Treating yourself occasionally, whether that’s through eating out, going on holiday or heading to the spa, is by no means a bad thing. After all, life is for living and the FIRE method could make for a rather dull decade or so. It’s also worth thinking about the impact it could have on your other goals; if you have or are planning to have children, for example, it might not be possible to achieve financial independence while also saving for their future.

Next steps

If retiring early is an important goal for you, your best bet is to speak to a financial adviser. By understanding your financial circumstances and commitments, and taking into account expected investment returns and inflation, they’ll be able to determine whether your target retirement date is achievable. They’ll also be able to advise on whether it makes sense to pay off your mortgage or invest, how much investment risk you should be taking on, and how to balance your dreams of an early retirement with your other goals.

For advice that’s tailored to you, speak to one of our advisers today.

¹ https://vickirobin.com/books/your-money-or-your-life/
² https://yourmoneyoryourlife.com/book-summary/
³ https://www.playingwithfire.co/whatisfire
⁴ https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare…
 

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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.