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Using the FIRE movement to retire early

How to retire early?

How to retire early is an incredibly popular internet search. It seems more and more of us want to move into the retirement phase of our lives earlier than either originally planned or earlier than our normal retirement age.

In recent years social media has been alight with the ‘fire’ movement. Fire simply stands for ‘financial independence, retire early’. Whilst the concept has gained popularity and a new jazzy title, it is essentially what financial advisers have been talking to clients about for years.

The fire movement originated in the US during the 90’s in a book titled ‘Your Money or Your Life’ by Vicki Robin and Joe Dominguez. The rise of social media has grown the popularity of the movement substantially.


What does fire entail?

The core idea behind fire is to achieve financial independence and retire from traditional employment at an earlier age than the conventional retirement age, often in one's 40s or 50s. This movement emphasises a frugal lifestyle, disciplined savings, and strategic investing to build a nest egg that can sustain individuals throughout their lives.

Whilst retirement between 40’s-50’s might be unrealistic for the average person; the movement does have some key concepts that most financial advisers would welcome.

Fire principles:

  1. Frugal lifestyles and disciplined savings

A friend and I regularly joke about my supposed “poor” status which is how I execute my own financial discipline. For me, it’s my own internal debate about whether to buy something, and how to afford my latest greatest plan. My starting point is always that I can’t afford it and I must be totally convinced to change that viewpoint before spending.

The fire method, however, takes frugal living to an even further extreme and beyond what my self discipline manages.

The fire concept suggests that you should be saving 70% of your annual income to be able to build a pot to retire early. Ambitious numbers!

Whilst I appreciate that the fire movement is attractive to the younger generation where an increasing number choose to live with parents so the ability to save 70% of income may be realistic, I suspect most of us would struggle to get to these numbers. Let’s face it, we are currently living through a cost-of-living crisis, and it certainly feels like my essential bills account for more than 30% of my income.

When I first trained as a financial adviser, we used to talk about the 30, 30, 30, 10 rule:

  • 30% of income to keep a roof over your head.
  • 30% for essential needs such as food,
  • 30% for future (savings and pensions) and
  • 10% for wants.

From my experience even these numbers have mixed success so if you are not saving 70% of your income, I would not despair just yet. The fire movement, whilst perhaps unrealistic in terms of numbers, does certainly work to prick your conscience.

  1. Conscious Spending

Caroline and I have forged our advice on concepts just like conscious spending. In previous blogs we have talked about lifestyle creep and budgeting so we can certainly encourage anyone to look at this element of the fire movement.

Conscious spending is often associated with mindful or intentional spending. It encourages individuals to be thoughtful and deliberate about how they allocate their money. In essence, it is about creating budgets and great financial habits that help achieve long-term goals rather than succumbing to impulsive or unconscious habits.

  1. Repay Debts

This is a concept I can get on board with. We always promote repayment of debt before reaching retirement. For most your income will significantly reduce at retirement so getting rid of debts as soon as possible makes absolute sense in financial terms and once debts are repaid you can then focus on reallocating that money to further building up savings, pensions or investments which will form part of your retirement planning.

Whilst we were living in a low interest rate environment, this has been a tricky thing to persuade people to do. However, whilst once low, interest rates can invariably go up and in recent months we have seen them climb. This situation would be particularly difficult to navigate in retirement if you have a lower fixed income. Repaying debt of all variety should be high on your financial planning to do list.

  1. Invest wisely!

To try to maximise your pot of money for early retirement, the fire movement promotes investment into stock market-based investments as part of your strategy. The logic for this is that if you only invest in low interest savings accounts, your savings pot will be eroded by inflation. Investing gives your savings the potential chance of growing.

I am keen to not get drawn into the investment debate as part of a blog or we could be here for a while. What I will say is that how to maximise your retirement pot needs careful consideration and should not be ventured into without expert advice. Every situation is different and what’s right for your best friend may not be right for you.

Before dashing out and investing willy nilly, I would always recommend that you seek advice from a financial adviser and that you fully understand the risks and potential rewards before considering investing. That’s not to say don’t invest, but if it’s your life savings and you genuinely plan to retire early, then having someone with expert knowledge to support you is vital.

It’s also worth pointing out that if you have been saving into a pension and plan to retire early, you can not access a pension in the UK until the age of 55 years though this will soon rise to the age of 57years from 6th April 2028.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. Equities do not provide the security of capital which is characteristic of a deposit with a bank or building society.


How to calculate your magic number

The fire movement suggests you need to build up a net worth of 25 times your annual expenses to achieve financial independence. So, if you think you will need an income from retirement of £25,000 per year then you would need a retirement pot valued at £625,000 at the time of retiring.  The concept suggests that you would then be able to withdraw 4% from your pot each year to live on.

Bearing in mind the whole idea of fire is to retire between age 40-50, I must confess this feels very unrealistic for three reasons.

First, at 4% a year you would hope that your pot is still growing while you are withdrawing but there may be years when this does not happen. Without growth the pot would only last 25 years. Even if you retire at 55, the pot would only last to age 80 at which point it would be exhausted. Average life expectancy is already beyond this age and rising.

Second, is inflation. If you need £25000 at age 55 this needed amount will increase which in turn erodes your pot more quickly.

Third, if you exclude the value of your home in my experience many 55+ individuals do not have this level of retirement pot, let alone someone in their 40’s.

So how do you calculate your magic number? Fortunately, St. James's Place have a handy pension calculator which will help you figure out if you are putting enough money away for retirement, or if you need to save more. You can access it here.


Just because you can, doesn’t mean you should.

If you want to retire early but you barely save anything, the chances are that early retirement is entirely unrealistic. Particularly if you wish to maintain the same standard of living as you have during your working life.

If your biggest financial priority is to retire early then saving 70% of income, following the fire steps and living the frugal lifestyle will do you no harm financially.

Whilst I have been called tight far too many times in my life, even I think 70% of income is extreme. It will be interesting to see if in years to come anyone who follows the fire movement can actually stick to it long term.

Sadly, having seen numerous people not make it into their 40’s let alone 50’s or 60’s, I think finances should be about balance, so don’t forget to live and enjoy today whilst keeping a close eye on the future.

Understanding what your retirement looks like, getting advice and planning for the future with a realistic number that works for you and your circumstances is more important than this one size fits all approach.

No Magic Wands

Whilst I am not completely sold on the one size fits all approach to this movement, as I said at the start this is an extreme version of what financial advisers have been recommending for years. The fact that the fire movement is making people think about how they spend and use their money can only ever be a positive thing.

The reality is that unfortunately there is no magic wand to be able to retire early, it takes years of planning and commitment.

We both love to help people to plan and dream big when it comes to retirement. We have helped many clients to find their magic retirement number, cash flow modelled all the scenarios, put a plan in place and reviewed it regularly. What we do not have is a magic wand. Whatever your retirement plans, planning early and not sleepwalking into retirement is the best gift you can give to your future self.

For more help and advice, call us on 01482 275540 or complete our contact form here. We also offer no obligation financial advice in our complimentary guide, covering wealth management, retirement, and inheritance tax planning.

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