Your comprehensive guide to FIRE: Financial Independence, Retire Early

The FIRE movement is a saving and investing method which sees adoptees invest a large proportion of their earnings early in their careers to achieve the required financial independence to retire early.

At present, the state pension retirement age is at 66 years old, and is expected to increase as the UK demographic shifts in favour of the elderly.

While early retirement is the primary goal for many FIRE investors, others care more about having the financial freedom to decide when to work, and what type of work to do. This can include reducing working hours earlier in life, or pursuing a passion that pays less than their current job.

Also consider: Best Stocks and Shares ISAs

Who is the FIRE movement for?

The FIRE movement is for people who are prepared to:

• Be as frugal as possible
• Use extreme saving methods achieve financial independence
• Use these savings to retire sooner through passive income

If this already sounds like economic torture, then the movement may not be for you.

However, the long term goals can be attractive for the right type of person who might:

• Want to retire early
• Want to be free to pick passion projects
• Have low outgoings
• Prioritise free time over money

Understanding the FIRE movement: Financial independence retire early

The covid-19 pandemic has been key to FIRE’s increasing popularity in the UK. Extended lockdowns, remote working, and furlough saw many build up additional forced savings, while also experiencing a taste of the workless life.

For many, furlough was the first time receiving income without sacrificing their time in exchange.

According to the ONS, household savings as a proportion of household resources increased significantly during the pandemic, peaking at 23.9% in Q2 2020. [1] This peak ‘coincided with government-imposed restrictions on social contact and economic activities resulting in significantly reduced household spending.’

Meanwhile, the average UK house price shot up to £283,000 by May 2022, a full £32,000 more than just 12 months prior. [2] In addition, the stock market and crypto both enjoyed a near two-year bull run.

And together, forced savings, additional equity from increasing house prices, and the market bull run saw households accumulate an additional £140 billion of savings, further propelling the Financial Independence, Retire Early movement.

Aviva research suggests 25% of people now want to enter retirement by 60, and 20% of people by age 55. [3] Many FIRE investors even want to retire earlier.

What are the key principles of the FIRE movement?

The FIRE movement includes:

• Saving as much income as possible
• Living exceptionally frugally
• Paying off all debt, with mortgage-free status an important element
• Many FIRE savers advocate building up a net worth of 25x estimated annual expenses
• They then advocate a maximum withdrawal rate of 4% from this investing pot per annum

For example, a FIRE hopeful who calculates they need £30,000pa in retirement will need to build up a savings pot of £750,000 for financial independence, and then withdraw no more than 4% (£30,000) each year.

How does the Financial Independence Retire Early method work?

1. Start saving an emergency savings pot of between three and six months’ worth of expenses. Most keep this fund either in an easy access savings or Premium Bonds account.
2. Invest all additional money earned, usually in cheap tracker funds. The FTSE World Index or iShares Core FTSE 100 UCITS ETF are popular UK choices.
3. Pay off your mortgage as soon as possible. This leaves investors far with far more financial independence.

How much do I need to retire at 55?

It is possible to beat the expected retirement age. However, the trade-off required isn’t for everyone. You must be incredibly disciplined with money, perhaps to an unhealthy degree, and also make big sacrifices to achieve your financial goal, compared to a more normal lifestyle.

Further, you usually need a well-paid job.

According to the ONS, the average UK salary for a full-time worker is £31,772. [4] After tax and NI contributions, this leaves just £25,032.71pa. Any student loan repayments reduce this sum even further.

Moreover, workers enjoying a high salary are hit with the higher tax bracket on earnings over £50,271pa, making investing more money into personal pensions incredibly tax-efficient. However, you then can’t access these retirement funds until age 55, to rise to 57 in 2028.

This makes retiring before 55 an extremely tough goal.

Is FIRE a little unrealistic?

Before you start panicking about trying to retire early, it’s worth noting key findings from this excellent Finder UK research piece [5] :

• 1 in 10 Brits (9%) have no savings at all.
• In 2020, the average person in the United Kingdom (UK) had £6,757 saved.
• A third of Brits have less than £600 in savings.
• 41% of Brits don’t have enough savings to live for a month without income.

Echo chambers are very real. The personal details of the type of person reading this page is likely to be a high earner, surrounded by people of similar economic means.

But for lower earners, investing is still a smart move. And the earlier you start, the better your return through the magic of compound interest.

In addition, there are different levels to the FIRE movement to suit all income types.

Is retirement possible in your 40s?

If you want to retire even earlier than 55, then I hope you’ve started extreme saving.

To retire early will require, at the very least, a completely paid-off mortgage. According to Halifax, the average first-time buyer is 32 years old, and buys with a 25 year mortgage term [6]. However, with house prices at record highs, 30, 35, and even 40-year terms are becoming increasingly common.

Sadly, this makes an early retirement at age 40 a pipe dream for most.

How much money do you need to retire at age 40?

The Pensions and Lifetime Savings Association’s Retirement Living Standards report pitches three levels for a single person’s retirement income [7] :

• Minimum (£10,200pa)
• Moderate (£20,200pa)
• Comfortable (£33,000pa)

The minimum standard covers basic needs plus enough for participation in a few social activities. By contrast, the comfortable standard includes an annual three-week European holiday.

If you could accept just the minimum standard of £10,200pa, a FIRE investor wanting to retire at 40 would need to save £255,000 in post-tax income.

For perspective, assuming early movement at 21, this would require saving £13,421pa until age 40, excluding compound returns. While potentially achievable to the exceptionally frugal, this would likely come at the expense of enjoying your youth.

Further, the average UK adult’s life will last 81.2 years [8]. To retire early at 40 means subsisting on investment income for more than four decades, and potentially more. This exponentially increases the chance of being hit by a once-in-a-lifetime crash that could force you back to work.

Tell me the pros and cons of starting a radical early retirement plan?

These terms have been coined to describe the different sacrifices required for each type of FIRE investor:

• Fat FIRE — for the saver who wants to save substantially but refuses to reduce their current standard of living. This usually requires high earnings and a risky investment style
• Barista FIRE — for those who want to quit their full-time jobs, but will happily take part time roles in later life to top up investment income with extra cash.
• Lean FIRE — the minimalist individual, who gives up almost all luxuries in pursuit of financial independence. Requires strict discipline, but most are happy to end their working life on the minimum standard of income.

Understanding the FIRE movement

1. Save, save, save

Most FIRE savers put aside between 25% and 50% of their income every month for early retirement. This usually requires significant lifestyle changes and cutting out all non-necessary expenditure.

2. Invest carefully

This is becoming much harder. CPI inflation is at 9.4% and expected to exceed 13% by the end of the year [9]. And with the base rate at 1.75%, debt is becoming more expensive, while sterling’s’ spending power is decreasing rapidly.

Simultaneously, almost every index has fallen substantially in 2022. But while it can be scary to invest in bear markets, the commercial relationship between quality companies and their share prices means many are now trading at a discount to their true value.

Moreover, index funds have never failed to deliver in the long term. The US benchmark S&P 500 is up 70% over the past five years, even including the pandemic crash and 2022 bear market.

Rather than panicking about doomsday headlines, try to stay calm, invest your money, and retire early.

3. Boost income

Staying on the average income makes achieving financial independence extremely difficult.

Options include:

• Taking a part-time job
• Freelancing on the side
• Acquiring a pay rises
• Changing jobs- often the most effective method, though according to KPMG economists, this is becoming harder [10]
• Retraining for a better-skilled job
• Mastering additional qualifications

4. Reassess all spending

Most FIRE savers live life avoiding all luxury spending and cut outgoings down to the bare essentials. Gone are the takeaway coffees, dining out, and even cinema trips. So too is relying on the state pension age.

Instead, they find more appeal in paying down their mortgage, or investing for the future.

Should I open a pension, ISA or both?

If you’re asking this question, it can be worth contacting an independent financial advisor. A couple of hours of advice may set you back maybe £200, but this is often very worth it as your personal tax treatment depends on a variety of complex factors.

Advantages of pensions:

• Pension contributions attract tax relief (between 25% and 45%)
• The first 25% of your pension pot is tax-free, as long as you are over the age limit.
• A workplace pension offers employer contributions.

However, ISAs also offer their own benefits:

• Any cash taken out of an ISA is tax-free.
• There are no capital gains or income taxes on ISA earnings.
• You can dip into an ISA at any age, making it far more flexible.
• The Lifetime ISA offers a major incentive if you qualify.

A mix of both investing types is best for most FIRE investors. Also read more about ISA rate changes in 2024.

How is FIRE changing as global recession looms?

I’m aware this is starting to sound like a cliché, but unfortunately, the answer to this question thoroughly depends on you as an individual.

Younger people are going to find it harder to find paid work, change career, or get a promotion. Those approaching retirement are seeing the value of their pensions and ISAs dip sharply, with further potential falls on the way.

That 4% withdrawal rule for building wealth may no longer be as safe as before.

Likewise, public sector workers in ‘safe’ jobs — teachers, nurses, refuse collectors — are unlikely to find themselves unemployed, while private sector workers are at higher risk. On the other hand, public sector pay is likely to continue to stagnate further compared to the private sector.

Any more tips for FIRE investing?

Increasing your emergency fund to more than six months’ of expenses could make sense if you are worried about the rising cost of living. Securing an additional source of income, such as from freelancing or a ‘side gig,’ could become non-optional if you want to retire.

What you must avoid is cashing out investments at a market low, crystallising a loss and also missing out when the bull market returns. And predicting the market is more an art than a science. The pandemic crash lasted just a few months. By contrast, it took years for investments to recover from the 2008 financial crisis.

In a worst-case scenario, you could find yourself using a credit card to meet living expenses, or relying on equity release. Cornwall Insight predicts energy alone will cost the average household in excess of £3,500pa through 2023 [11].

But in the long term, the investing in a recession doesn’t change the basic principles. FIRE isn’t just an investments strategy, it’s a lifestyle to make retiring early possible.

And while it doesn’t suit everyone’s individual circumstances to save aggressively, many FIRE fans this frugal lifestyle challenge makes good financial sense.

FAQs about FIRE movement UK

References

1. https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/articles/economicmodellingofforcedsavingduringthecoronaviruscovid19pandemic/2022-06-06
2. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/may2022
3. https://www.aviva.com/newsroom/news-releases/2021/12/sixty-the-most-popular-age-to-retire-early/
4. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2021
5. https://www.finder.com/uk/saving-statistics
6. https://www.lloydsbankinggroup.com/media/press-releases/2022/halifax/halifax-first-time-buyer-review-2021.html
7. https://www.retirementlivingstandards.org.uk/
8. https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies
9. https://www.theguardian.com/business/2022/aug/05/workers-asking-for-pay-rises-risk-embedding-inflation-says-bank-boss-andrew-bailey
10. UK hiring slowing down amid economic uncertainty – BBC News
11. https://www.cornwall-insight.com/

Please note:

This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.