FIRE is not just an acronym but a way of life for thousands of savers who decide to retire early.
FIRE comes from the 1992 book Your Money or Your Life, which explains the idea of Financial Independence, Retire Early (FIRE) and about living frugally and saving as much as possible and growing wealth by making intelligent investments.
Despite what FIRE preaches, people have long failed to save enough money for a comfortable retirement.
In recent years it’s been a big focus for the government, leading to the introduction of auto-enrolment pensions at work to ensure we don’t forget our responsibility to save for the future.
However, a whole new wave of savers is turning that on its head, looking at the opposite strategy to retire years before State Pension age.
The FIRE Concept And Extreme Savings
In short, if you adopt a FIRE lifestyle, you need to analyse how many hours you have worked to justify every expense and outgoing from your budget.
Then most of your income goes towards your retirement fund.
The basic FIRE principles are:
- Up to around 70 per cent of your income goes into savings or investments.
- When you’ve saved enough, you can retire regardless of age and won’t work again.
- Once retired, you can live off your pension fund, making limited small withdrawals.
- You are ready to retire when your savings are around 30 times your annual expenses. Alternatively, retirement is possible once you have about $1 million (£733,000) in savings.
FIRE is increasingly prevalent with Millenials, who aren’t keen on working a full-time job until 65 or 70 years old.
Living On An Early Retirement Budget
The retirement issue, of course, is that you need to have saved or invested enough to cover your living expenses for the rest of your life – which means retaining a massive proportion of your income.
Most FIRE advocates believe that they can live on just three to four per cent of their savings, depending on the amount invested and lifestyle aspirations.
Therefore, FIRE needs extreme care and attention to monitor every outgoing and be diligent about revising investment risk and returns.
There are also several alternatives across the FIRE movement, with different levels of savings commitment required:
- Lean FIRE means living in a very minimalist way, with a restricted lifestyle.
- Barista FIRE applies to people who have left a regular full-time job but work part-time to sustain health insurance or supplement their income. FIRE means you cut back on spending to be able to work less.
- Fat FIRE is perhaps the most accessible for individuals who save significantly more than average but won’t go to excessive lengths. It’s a more laid back approach, where you save more than the typical worker but make fewer sacrifices to do so.
As a concept introduced in the book, FIRE isn’t designed as one single pathway to early retirement but is more about consuming less and living well in a sustainable way.
Therefore, devotees take a different view about how far they’re willing to go to quit the rat race and retire decades earlier than average.
As the movement grows, financial advisers and wealth planners have started developing their FIRE strategies, helping individuals retire earlier than expected, often using high return investment products rather than severely cutting back on expenses.
How To Retire Early – The FIRE Method
Let’s take an example to see how FIRE could work in principle.
If you wanted to retire at, say 40, and earn £20,000 a year, you’d need to have 25-30 times that in savings.
That means a pension (or mixture of savings, pension funds and investments) of at least £500,000. To achieve those high-level savings, you’d need to save an average of £16,000 a year, every year, from the age of 21 onwards.
There is a calculator on the Playing With Fire website you can try out to estimate how long you’d need to save to be financially independent.
Therefore, FIRE isn’t necessarily achievable for everyone and has been criticised as only for the wealthy since living on £4,000 a year isn’t realistic.
However, if you earn £70,000 a year and save 25 per cent of those earnings, you can hit that target.
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Extreme Savings Products Aligned With FIRE
Saving and investing hard makes FIRE achievable, but you need to understand the returns you might expect on your investments.
The first point is that outright homeownership is essential, as rent or mortgage repayments are far from compatible with radical savings.
Your minimal withdrawals each year after retirement are intended to cover low living costs and won’t be enough to cover the expense of property outgoings.
Another vital point is that, while we talk about a pension or retirement fund, this investment product probably isn’t a traditional pension since most won’t allow you to make any withdrawal until you’re at least 55.
Instead, FIRE participants look to alternatives, such as:
- Buy to let property investments
- Stocks and shares ISAs
- Cheap investment tracker funds
The other solution is to earn more by taking on a second job, starting a side hustle business, retraining to attract a higher salary, or simply asking for a pay rise.
Once you’ve established a sufficient income stream to make those sizable investments or savings, you’ll also need to spend very carefully.
Most FIRE savers give up any non-essentials and save money in any way possible. That could be giving up a takeaway coffee, never taking a holiday, or buying only second-hand clothes – it’s all dependent on which strain of FIRE you follow.
Finally, a crucial component is having a contingency fund in reserve.
If investment returns slump and you have retired from employment, it could be a recipe for absolute disaster.
Therefore, if you want to give FIRE and substantial savings a go, you’ll need to set up an emergency reserve, usually with three to six months of living expenses, to tide you over as a last resort.
FIRE and Extreme Savings FAQ
It depends on how much you earn, how much you need to live, and how much income you can save.
Added to that the vast fluctuations in investment returns, and of course the element of risk, and it’s likely to be different for everybody.
Most advocates of FIRE put around 25 per cent to 50 per cent of their income towards their retirement, with an average retirement target of about 20 years.
However, Fat FIRE subscribers might aim to retire ten years early, whereas a Lean FIRE strategist might retire much sooner.
The driving force behind FIRE was the book by Joe Dominguez and Vicki Robin – Your Money Or Your Life, published in 1992.
Robin has often said that she didn’t anticipate the book’s impact and intended only to promote more conscious consumption.
Still, due to popular demand, the book has already been republished several times.
Jacob Lund Fisker’s book, Early Retirement Extreme, and accompanying blog about saving towards financial independence has added to the movement.
Not at all – FIRE might be about intense savings, but it’s possible to adopt the principles at any age.
In many cases, you won’t earn a high enough salary to save an ample amount until you have some career experience, so many people start heavy savings strategies in their 30s, 40s or 50s.
Suppose you were to adopt an advanced savings plan in your 50s, for example.
In that case, you might be able to retire earlier than 65 or 70 by putting away a large chunk of your income, paying off all debts, and then living frugally on the returns for the foreseeable future.
The drawback is that you need to have sufficient income and assets to live on, to have paid for your house in full, plus have a contingency fund to avoid being left in a situation where you need to go back to work, and yet could be past retirement age.
Most people need to save between 25 per cent and 50 per cent of their post-tax income to retire earlier than anticipated.
The exact percentage depends on how much you need to meet your goal and how quickly you wish to retire.
As a guide, you can retire when you have around $1 million in savings, or 30 times your annual expenses.
The four per cent rule considers spending your savings against rates of inflation.
To maintain financial independence, you need to spend a maximum of four per cent of your savings after retiring, and the amount increases annually every year after any rise triggered by inflation.
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