The FIRE Movement (Financial Independence, Retire Early): A Guide
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by Property Investments UK
The Property Investments UK editorial team have been researching and writing about the UK's property market for more than a decade.
The FIRE movement offers its followers a pathway towards financial independence and the opportunity to retire early. But what is the FIRE movement and how is it supposed to work?
Contents
- What the FIRE Movement Is
- Who Started the FIRE Movement?
- How Does the 'Financial Independence – Retire Early' Movement Work?
- Different Types
- Key Principles
- An Example of How FIRE Should Work
- How to Join the FIRE Movement
- But Does This All Work?
- What Are the Problems with Financial Independence – Retire Early?
What the FIRE Movement Is
FIRE is short for Financial Independence – Retire Early. It is sometimes written as FiRe or Fi–Re.
The FIRE movement is a philosophy that advocates spending as little as possible alongside saving and investing as much as possible. Supporters of the FIRE movement say that doing this will allow you to become financially independent and so retire much earlier than you normally could.
Some proponents of the movement claim that FIRE can allow followers to be financially secure and retire in their early 50s, or potentially even earlier.
Who Started the FIRE Movement?
It’s not known where the FIRE movement originated. However, Your Money or Your Life by Vicki Robin and Joe Dominguez, published in 1992, outlines some of the concepts that are part of FIRE.
FIRE has been around for some time. However, it has found some popularity with millennials who are looking to have a better work-life balance than their parents did.
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How Does the 'Financial Independence – Retire Early' Movement Work?
FIRE is very different to the model which most people follow today, whether by choice or otherwise: This is to spend most of their income and save little or nothing. This makes it difficult or impossible to achieve financial independence or retire early.
FIRE is about doing the opposite: Spending as little as possible and then saving or investing the rest.
But there is more to it than that. FIRE follows a fairly rigid model: Followers of the FIRE movement aim to keep living costs to a small, fixed proportion of their annual income allowing them to save or invest a high proportion of it. When their savings reach a certain multiple of their annual budget they believe they can retire from work. They then aim to meet their living costs by withdrawing a fixed amount from their savings pot annually.
One version of FIRE provided by Nerdwallet outlines the Rule of 25 and the 4% Rule. This suggests that followers should aim to save more than they spend. When their savings pot reaches 25 times their annual living expenses they can retire. They can then withdraw 4% of their savings each year to cover their living expenses.
Some followers believe that, depending on their income, particular strategy, and when they adopt the FIRE philosophy it is possible to retire in their 50s – and potentially in their 40s or 30s in extreme cases.
Different Types
There are a number of different variations on the Financial Independence – Retire Early concept. For example, Investopedia suggests there are lean, fat and barista versions of FIRE.
Lean FIRE: Lean FIRE is for those who are able to live on a shoestring budget and perhaps save well over 50% of their income. This allows them to retire sooner.
Fat FIRE: Fat FIRE is for those who are able to save 50% or perhaps slightly less of their annual income – but are able to save for a longer period of time. Ultimately they will wait longer to retire but will have a larger income.
Barista FIRE: Barista FIRE is for those who don’t want to retire, but just want to work less – perhaps part time. They need only save perhaps 30% of their income in order to make this possible.
Key Principles
Financial Independence – Retire Early involves following a few key fundamentals:
- Don’t buy anything you don’t need. Followers aim to reject traditional consumerism.
- Don’t take on expensive debt, such as credit cards for example. If you already have expensive debt pay it off ASAP.
- While a mortgage is a more acceptable and normally cheaper type of debt you should still aim to pay it off as soon as you can. Consider making overpayments on your mortgage, or downsizing your home.
- Make sure you are in the highest paying employment you can possibly be in. Apply for a new job, retrain or try to negotiate a pay rise.
- Operate a side hustle as well as your day job.
- Save or invest as high a proportion of your income as you can. This generally needs to be at least 50%. 70% would be better.
- Save or invest your savings pot in the most efficient ways you can. These should be ways that are either tax efficient or which help hedge them against inflation or both.
ISAs and pension schemes can be tax efficient ways of saving.
Low cost funds that track the stock market are also suggested by some followers of FIRE as they can help hedge against inflation over time.
Investing in property may also prove to be a very good hedge against inflation.
- Always have an emergency savings pot that you can access easily – don’t invest all your savings for the long term. An amount of 3-6 times your monthly income is suggested. This will help protect you against emergencies and unforeseen events.
An Example of How FIRE Should Work
Let’s assume you have an annual net income of £50,000.
You commit to having a maximum annual budget of 40% of your income (£20,000) saving 60% (£30,000).
By following the Rule of 25 you would accumulate approximately 25 times your annual living expenses after 16 years and 6 months – a total savings pot of £500,000.
You could then retire and withdraw 4% of your savings pot or £20,000 each year as living expenses. (The FIRE model allows an annual adjustment for inflation.)
If you started FIRE at 25 you could retire at 41, compared to a likely state pension age of 68 at that point.
If you started FIRE at 35 you could retire at 51, again well before the state pension age.
If you started FIRE at 45 you could retire at 61, still some time before the state pension age.
The Retirement Living Standards website says that a single person needs £23,400 a year to live a moderate lifestyle in retirement, or £34,000 for a couple.
The Pension Calculator from Money Helper will help you determine how much income you need in retirement.
How to Join the FIRE Movement
The Financial Independence – Retire Early movement is not an organisation. There is no organisation to join, no application form to fill in and no membership fee to pay.
If you wish to join the FIRE movement you will need to plan, organise and commit to following its principles yourself.
But Does This All Work?
In theory, the Financial Independence – Retire Early model is sound enough. If you save more than you spend to a fixed proportion for several years then, ultimately, you will reach an equilibrium point where what you have saved will cover what you are going to spend in future.
Several reports in the press claim people have successfully followed the Financial independence - Retire early model or are on track with it.
What Are the Problems with Financial Independence – Retire Early?
As many people will have spotted, there are a lot of holes in the FIRE theory.
Firstly, FIRE relies on the numbers being consistent and consistently in your favour. But this is not always the case by any means.
FIRE relies on inflation, the cost of living, interest rates and so on being consistent. Although this was the case for many years it has not been the case of late.
FIRE relies on investment returns being consistent. The stock market has historically produced good returns but can be quite volatile. Property investments have always tended to rise in value long term.
FIRE doesn’t take into account the fact that government policies can change. Taxes and tax allowances for savings and pensions can and do change.
It doesn’t take account of the fact that if you retire contributions to a personal pension will stop, as will National Insurance contributions to your state pension.
FIRE doesn’t take into account differences in the ages of its participants very well, nor different (and unknown) lifespans. For example someone starting in their 30s has longer to save their savings pot, but may be on a lower income and is likely to be drawing from it longer too. Someone starting in their 50s may have a high income and will be withdrawing from it for less time, but has less time to accumulate it.
A big criticism of FIRE is that it is a ‘jam tomorrow’ strategy. You could spend years scrimping and saving but never actually receive the benefits.
It’s probably fair to say that Financial Independence – Retire Early only has a chance of working in practice if you have a high income and spend very little, and if you start on your FIRE journey in middle age. In short, however, the numbers are unlikely to add up for most people.