If you’ve found yourself reading about the FIRE (Financial Independence, Retire Early) movement and it’s captured your imagination, you might think it sounds pretty appealing. After all, many people dream of being able to stop work long before they reach their 60s, while others love the idea of being able to shut the laptop and walk away from a job once they’re no longer enjoying it.
So compelling are these ideals that there is now a new micro-culture of millennials who call themselves the ‘FIRE’ generation. More followers joined the movement post Covid, as people reassessed their lives –and their priorities – during lockdown. But unless you’re a big earner or have a vast inheritance, being able to retire early is going to require some serious saving – and some serious sacrifices. Here we take a closer look.
What will it involve?
Being able to stop working by 55 is going to mean saving hard. Bring this forward to retiring in your 40s – or even in your 30s (as some followers of the FIRE movement hope to) – and it’s going to mean saving extremely hard. It’s also likely to mean living (to put it somewhat bluntly), like a pauper. That way, you might just be able to put a large slice of your income into investments each month.
How much do you need?
According to the principles of FIRE, you need to aim for a pot worth 25 times your annual spending (this is not the same as your annual salary). Say, for example, you think you can get by on £10,000 a year when you retire, you’ll need to amass £250,000. Double this to £20,000, and you’ll need a cool half a million.
Are there any other requirements to become FIRE?
You need to have an emergency savings fund of between three- and six-months’ salary tucked away (typically in an easy-access savings account). You also need to own your home outright, which means clearing your mortgage in its entirety – and ensuring all other debts are paid off.
The key, beyond this, is growing your savings by investing in cheap funds that track the stock market. And, once you’ve hung up your boots (as far as work is concerned), only withdrawing 4% of your money annually from the pot you’ve amassed.
Reap the benefits
While this might sound like a lot of hard work, for those prepared to put in the hard graft, there’s the holy grail of not having to bust your guts until your late 60s. You stand to reap the rewards of freedom and flexibility. You’ll also get to pursue your passions and hobbies and potentially to live a happier – and healthier – life.
Obstacles in the way
The problem is, tucking money away just got that bit trickier thanks to the cost-of-living crisis. With everyday prices hitting wallets hard, squirrelling money into savings is no mean feat right now. At the same time, increasing mortgage costs (and rocketing rents) are also leaving people with less disposable income to invest.
And if you throw children into the mix – with all those associated costs – retiring early becomes an even more distant reality. In short, saving the levels of money required to retire early is a big ask at any age – especially when some advocates of the movement suggest tucking away up to 70% of your take-home pay in order to achieve this.
Is FIRE actually achievable?
So, while you might dream about quitting the day job sooner rather than later so you have more time to do the things you love, you need to be realistic about what is actually doable. You can’t access the state pension until you turn 66. And the goalposts are about to move, as this age will start nudging up gradually from April 2026, reaching 67 two years later.
Even when it comes to a private pension, you can’t access this pot before 55. And this age is set to increase to 57 in 2028. So, if you want to retire before this birthday, you’ll need to give some serious thought not only to pension saving but also to non-pension saving, such as ISAs – or perhaps even buy-to-let property
Tips to help you fast-track your way to early retirement
There are some steps you can take to help you on your way:
- Draw up a detailed budget tracking all income and expenses, looking at areas where you can cut back. Keep a close eye on this, and be prepared to adjust as necessary
- Explore additional sources of income, such as side hustles, freelance work or part-time jobs
- Make overpayments so you can clear your mortgage early
- Save hard into tax-incentivised products such as ISAs as well as pensions
- When it comes to investing, ensure you have a diversified portfolio with an eye on minimising fees and maximising returns
- Review this regularly to ensure it aligns with both your risk tolerance and financial goals
- Be comfortable with the idea of living more simply when you stop working; in other words, lower living costs
Be prepared to make sacrifices
To achieve financial independence in your 40s or 50s, one of the biggest choices you are going to have to make in your younger years is being willing to live exceptionally frugally. That means making compromises on your standard of living, such as foregoing nice restaurants, weekly takeaways, posh coffees, gym memberships, concert tickets, regular holidays and so on.
Instead, you’ll need to adjust to making use of public transport, cooking meals at home, and finding cost-effective ways to enjoy leisure activities. Pete Hykin, CEO and co-founder of private pension provider, Penfold, said: “The FIRE strategy requires meticulous planning, a strong commitment to financial discipline, and a willingness to make substantial lifestyle changes.”
Your focus needs to be on building long-term resilience. You need to be happy with the idea of investing money, as opposed to spending it. Fail to do so, and you run the risk of running out of money early – meaning you might just have to go back to work after all.
Learn from the underlying principles
The reality is, the vast majority of people are not saving anywhere near enough to stop working in their mid-60s, let alone two decades earlier. But even though FIRE measures may be beyond the reach of many individuals – or may feel a bit too extreme – you don’t need to dismiss the movement entirely. After all, the underlying principles of financial discipline are ones which we should all take on board.
We would all do well to contribute between 10-15% of our income each month into a pension – and more if possible. In fact, save and invest carefully, and you could find you shave even just a few years off your expected retirement age – which would be a very welcome bonus.
Photo by marekuliasz on Canva
