What is the FIRE movement? Is it a way to early retirement?

15 Jul

Introduction.

The FIRE movement, an acronym for Financial Independence, Retire Early, has gained substantial traction recently. Advocates of the FIRE movement aim to achieve financial independence and retire much earlier than the traditional retirement age. This article will cover everything you need to know about FIRE, including its principles, methods, benefits, and challenges, to help you decide whether it can be a viable path to early retirement.

What are the origins of the FIRE movement?

The FIRE movement began to take shape in the early 1990s, influenced by books like ”Your Money or Your Life" by Vicki Robin and Joe Dominguez and ”Early Retirement Extreme” by Jacob Lund Fisker.

These books emphasised the importance of financial independence through aggressive saving and investment strategies. The movement gained momentum with the rise of personal finance blogs and online communities, notably those led by figures like Mr. Money Moustache (Pete Adeney), who retired at 30 and shared his journey towards financial independence.

What are the core principles of the FIRE movement?

The core principles of the FIRE movement revolve around achieving financial independence and retiring early by saving and investing aggressively. Financial independence involves reaching a state where your investments and savings generate sufficient income to cover your living expenses, thus eliminating the need for traditional employment.

To be clear, 'early retirement' typically means leaving the workforce significantly earlier than the conventional retirement age, often in one's 30s or 40s (rather than one’s 60s).

To achieve these goals, FIRE proponents prioritise a high savings rate and make wise investment choices to build wealth quickly.

How does FIRE work?

The process of achieving FIRE is relatively straightforward. The first step is to calculate your FIRE number, which is the amount of money you need to achieve financial independence.

Your FIRE number is typically 25 times your annual expenses and is based on the 4% rule, which suggests you can withdraw 4% of your portfolio annually without depleting your capital. This rule is a widely accepted guideline in retirement planning, as it provides a balance between aiming for your savings to last throughout your retirement and allowing for a comfortable lifestyle.

For example, if your housing costs are £1,250 each month and your other expenses are another £1,000 each month, your total annual expenses are £27,000 after tax. With this in mind, you may decide that a gross income of £35,000 each year is sufficient to provide the NET income you need to live, with a small margin for holidays and extras. Multiplied by 25, this would put your FIRE number at £875,000.

That's the easy part! The next step is to maintain a strict budget and meticulously track your expenses to maximise your monthly savings. Many FIRE adopters save a significant portion of their income, often 50% or more, to accelerate wealth accumulation.

What is the best way to achieve FIRE?

To achieve FIRE, a high savings rate is essential, which involves prioritising investing a substantial portion of your income each month by cutting discretionary spending and adopting a frugal lifestyle.

Your investment strategies are crucial. Investing in low-cost funds, property, or assets may grow your wealth faster over time than simply setting cash aside in a savings account, although it will expose you to more risk. You should discuss this with your financial adviser.

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Secondly, reducing your living expenses through frugality, downsizing, and eliminating debt can increase your savings and help you reach your financial goals faster. There are a lot of fun ways to do this, and the internet is full of great ideas.

Finally, increasing your income via a promotion, a new job, new skills, side hustles, second jobs, or social media are all ways that you can increase your savings rate.

Ultimately, FIRE means:

Setting a target number that is 25x your income requirements.
Reducing your living expenses as far as possible.
Increasing your income as far as possible.
Avoid lifestyle creep to maximise your savings.
Saving and investing the most money possible each month.
Making sensible investment decisions to make your money grow and last.
Using your investment fund to generate passive income and retire early!

What are the pros and cons of the FIRE movement?

The FIRE movement is drastic and involves doing something different from what society says you should do. On the positive side, achieving FIRE provides financial security and independence, allowing you more time to pursue personal interests and passions.

Having a substantial financial buffer and passive income may reduce stress and improve your mental health by escaping the traditional work grind.

However, the path to FIRE requires significant lifestyle adjustments and sacrifices, and there is the potential for unforeseen expenses and market volatility. Additionally, early retirement can have social and psychological impacts, such as feeling disconnected from peers who are still working. It's important to consider how you will maintain social connections and a sense of purpose in retirement.

Furthermore, if you have underestimated the amount you need, you may draw down more than 4% each year and your investment fund may run out of money. This may force you back into work later in life, which you may find difficult if you haven't worked for an extended period.

Has anyone actually achieved FIRE?

There are numerous real-life examples of individuals and families who have successfully achieved FIRE. Pete Adeney, known as Mr. Money Moustache, retired at 30 and now lives a fulfilling life focusing on personal projects and hobbies.

Other examples include numerous bloggers and influencers who share their journeys and strategies online, creating a strong community and offering insights and inspiration to those on the same path. These stories provide practical advice and a sense of camaraderie for anyone considering the FIRE movement.

What are some common misconceptions about the FIRE movement?

There are several misconceptions surround the FIRE movement. One common myth is that FIRE is only for high-income earners. In reality, while higher incomes can accelerate the process, anyone can pursue FIRE through disciplined saving and spending.

Another misconception is that FIRE requires extreme frugality. While frugality helps, balanced and mindful spending is critical to achieving financial independence.

Lastly, some believe that FIRE means never working again. In truth, many individuals pursue passion projects or part-time work post-FIRE, finding fulfilment in activities they enjoy.

Is FIRE right for you?

Determining if the FIRE movement is right for you involves assessing your personal goals, financial situation, and willingness to make significant lifestyle changes.

You will need to consider factors such as your current income, expenses, and savings, as well as your long-term aspirations (and those of your partner and family). You will need to reflect on whether you are prepared to adopt a frugal lifestyle and commit to aggressive saving and investing. Ultimately, pursuing FIRE should align with your individual circumstances, personality and financial goals.

However, even if you don't achieve FIRE and only manage to go all in for a few years, that's hardly a bad thing. You will have likely accumulated significant savings by that point and got into a life rhythm of living frugally. You may not be able to achieve early retirement as soon as you initially wanted, but the exercise will have set you in good stead for the rest of your career and into retirement.

Conclusion.

The FIRE movement offers an intriguing alternative to the traditional pattern of life by focusing on financial independence and early retirement through disciplined saving and investing. While it presents numerous benefits, it also comes with challenges that require careful consideration.

Whether FIRE is the right path for you depends on your personal circumstances and financial goals. By understanding the principles and strategies of the FIRE movement, you can make informed decisions about whether this path to early retirement aligns with your lifestyle preferences.

Where to find out more about the FIRE movement.

If you think the FIRE movement may be for you, it may be worth exploring the following:

The books "Your Money or Your Life" by Vicki Robin and Joe Dominguez and "Early Retirement Extreme" by Jacob Lund Fisker.
Blogs like Mr. Money Moustache, The Mad Fientist, and ChooseFI offer practical advice and community support.
Podcasts such as ChooseFI provide valuable insights and inspiration.
Online communities like Reddit's r/financialindependence are excellent places to connect with others on the FIRE journey.

What's next?

To make the most out of planning for early retirement, here are a few steps you can take to help you plan and decide if it is right for you or not:

Read the article ‘How much do I need in my pension pots to retire’ to get a better idea of your income needs in retirement.
Use our Pension Pot Calculator to model your own retirement plan.
Speak to an expert, independent financial adviser about retirement planning. Part of our advice includes retirement cashflow modelling that looks at your specific financial needs, covering a range of scenarios. Based in Tunbridge Wells, we serve clients across the UK and are authorised and regulated by the Financial Conduct Authority (FCA).