Financial independence retire early UK
FIRE stands for Financial Independence Retire Early. It’s a movement which looks to save and invest their way to financial independence at a much earlier age than the current retirement age of 65.
The FIRE movements goal is to achieve financial independence as soon as possible, thereby making paid work optional in some cases as early as your 30s or 40’s. That’s decades before the traditional age of retirement.
Would you like to retire in your 30’s or do you want to work until your 65? Remember this could be a choice if you make some changes to your life and get serious about money.
Table of Contents
Who started the Fire movement?
The origins of the FIRE movement come in part from the best seller “Your Money or Your Life” in 1992 by Vicki Robin and Joe Dominguez. Their book popularised the idea of achieving financial independence rather than spending the best days and years of your life working in a 9-5 to make money.
What are the good bits of FIRE?
Having a vision and a plan
One of the main strengths of the FIRE movement is getting people to envision their ideal future and start to plan to make it happen.
It’s very empowering for people to learn the basics of financial planning and realise they can make a significant impact on their financial future by a few tweaks. OR make substantial advances with some more radical financial moves.
Keeping your expenses low
The FIRE movement is excellent at getting people to review their expenses, look for cheaper options and cut out things that are not adding anything to your life. The reduction of your living costs is part of the magic to a less complicated and cluttered life.
Simplifying your life with the reduction of spending and the collection of stuff frees you up to concentrate on the things that are important to you.
Boosting your income
Lowering your costs is one catalyst to FIRE, but so is increasing your income if not more so. Increasing your income through selling stuff, improving your skills or starting a side hustle has the potential to turbo your journey to financial independence and making paid work optional.
Saving and investing
The focus of the movement on saving and investing is a crucial driver of taking control of your finances and your journey to freedom and independence.
Letting less money trickle through your fingers helps to keep you focused on what you truly enjoy. Savings help to give you a safety net for when things go wrong and far more options to take different roads rather than being stuck in a 9-5 lifestyle.
Understanding investing and the power of time coupled with compound interest can help you see how even slow progress builds up over time like a snowball to result in a financial freedom eventually.
How does the fire movement work?
You get to FIRE my saving a significant amount of your income, well above what would be considered “normal”. Upwards of 50% of your income, but some manage and or advocated for 70-80%. What you then do is invest this in assets that will provide both growth and income.
Index funds and property are two of the principal investment vehicle’s people in the fire movement choose. The purpose is to use your saving to crate further capital appreciation (what you but goes up in value) and income through dividends (company pay-outs sharing their profit) or income from rents.
Once your investments generate enough income and growth to cover all your expenses, you are financially independent and paid work has become optional.
Maybe the above sounds farfetched, but it is in theory what we are all “trying” to do, i.e. make paid work optional. There will come a point when all of us can’t or don’t want to work for money anymore. Will you try and save as much as you can to set up or speed up your work optional life or depending on which country you live wait to see what the state has in mind for you?
“If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much”
How much do I need to save for Fire?
Well, this all depends on you, your current and hoped-for future lifestyle.
The principle of FIRE revolves around THE RULE of 25. This rule attempts to identify how much money you’ll need to save to be financially independent and retire. The way to use the rule is to x your current yearly spending by 25. This figure gives you the amount of money you might need to live off to retire.
|Currency £, $, € expenditure per year||X 25|
The above calculation/s may need to be done on a regular basis as what you need to be financially independent changes as your circumstances change. Some or all of the below may significantly change your cost of living and how much you need to FIRE:
- Children and or caring responsibilities
- Living costs that go up or down for good or bad reasons
- Buying or selling a house
- Moving jobs for better or worse.
- The start or end of expensive hobbies.
- Good or back luck across your and your family’s life over time.
How can I reach Fire?
You first need to start with a vision for what your FIRE lifestyle would look like. This needs to be compelling to you and whoever is coming on the journey with you.
What’s your vision for your life without the need for paid work. Does it include travelling, further education, volunteering or something else? This vision will push you through the challenges and keep you motivated when things get hard, i.e. you want to waste your money right now and not delay spending it.
Setting a goal for FIRE sets your brain working on how to do it. Once you have a how then you can get on with it.
Work out how much FIRE is going to cost. 25 x your current or predicted future spending. What do you already have and what is the gap to your FIRE number?
What’s the gap between where you are now and your FIRE number?
Could you cut your expenses to get you closer? Earn more money to speed you along the journey? Could you do both?
All the above may sound daunting, but you do have the 8th wonder of the world on your side compound interest.
What is compound interest, and how does it work?
Compound interest is interest earnt on top of interest. So, when you deposit money, it earns interest. And then the next year your original money and the initial interest earns further interest. And on and on its goes as long as you don’t touch the money.
Obviously, with small amounts of money, it mounts up slowly, but over time as your money grows so does the interest on the interest. Just like rolling a snowball in the snow, it gradually gets bigger and bigger.
The longer the compounding goes on, the more significant the amount of money, the faster the compounding will happen. The compounding will work even faster if you keep adding more and more money to the pot also.
How do you not run out of money when you FIRE?
So, once you have saved up 25x your yearly spending, you now need to live off that fund. But how do you spend it without running out of money? Enter the 4% rule.
This rule of thumb gives you a steer to how much money you can withdraw without running out of money. However, it’s a rule of thumb so might need adjusting at times if or when things change for the worse.
What is the 4% rule?
The Four Percent Rule states that you should withdraw 4% of your portfolio each year in retirement to maintain your lifestyle. It was created using historical data on stock and bond returns over a 50-year period.
The 4% rule was put forward as a safe withdrawal rate in an academic paper from Trinity University in 1998. The paper looked at the various scenarios a portfolio of shares could go through and what would be a safe way to withdraw money without running out.
Is 4% rule still valid?
The case against
- The Trinity Study was completed in 1998 and based on a portfolio of US stocks. A lot of things have happened since then that has changed the world: Dotcom crash, the great recession and now Coronavirus. What worked before and historical rates of return may or may not be possible in the future.
- We are living a lot longer now so the sequence of returns or how your portfolio performs must work for many more years. This is especially true if you retire early, i.e. you can expect to be retired for much longer than previously thought.
- The cost of everything keeps going up but especially housing and health care making an accurate prediction of how much money you might need in your old age challenging to calculate but probably more than you think.
- Inflation may also affect the amount of money you need in the future, and this can be difficult to calculate with much accuracy.
- Maybe it’s better to be safe than sorry and use a lower withdrawal rate to ensure you can maintain your lifestyle for longer. Below are a few examples of lower withdrawal rates and what you might need to build up to make it possible.
How much do I need to save for FIRE at different withdrawal rates?
|Annual Spend amount needed||25 X your spend or 4% withdrawal||33.5 X your spend or 3.5% withdrawal||33 X your spend or 3% withdrawal|
|£ 30,000||£ 750,000||£ 855,000||£ 999,900|
|£ 40,000||£ 1,000,000||£ 1,140,000||£ 1,333,200|
|£ 50,000||£ 1,250,000||£ 1,425,000||£ 1,666,500|
|£ 60,000||£ 1,500,000||£ 1,710,000||£ 1,999,800|
|£ 70,000||£ 1,750,000||£ 1,995,000||£ 2,333,100|
The case for the 4% rule of thumb
- Some still feel the 4% rule of thumb is good enough to get you close to your FIRE number. Great podcast available here (Bigger pockets) which argues that the 4% rule is based not on a best-case scenario but a worst-case one.
- If things get tricky either personally or in the stock market, you can adjust your withdrawal down to 3% or 3.5% to cope with choppy water.
Given the above, you could make some changes in your calculations to consider a leaner or fatter version of FIRE.
What is lean FIRE?
Lean Fire is as it sounds a lower level of spending to get you to financial independence asap. It would mean retiring on the lowest income you can, having led a very frugal life up to now.
This could mean living off £20k-£40k a year depending on how frugal you wanted to go or what frugal meant to you. In this case, it would mean saving something between £500,000 – £1million. Based on 25 times, your income and withdrawing according to the 4% rule of thumb.
This means a much more frugal lifestyle and avoiding or cutting out many or most of life’s luxuries. It might include living in a low cost of living area, forgoing holidays abroad and keeping things simple when it comes to day to day spending. Think of your days as a teenager or a student, and that’s the sort of lifestyle you might live.
Is there a fatter alternative I hear you say?
What is FAT Fire?
Fat Fire is a more luxurious way to live while perusing FIRE. You do enjoy luxuries and some of the fine things in life but are also focused on maximising the money you save and invest. This leading to FIRE but at a higher cost of living.
This most likely means you are earning and spending higher than the average person or family. Large houses, nice cars, and foreign holidays would all be part of this.
Now you might think, isn’t this what most people already doing? Yes and no. The average person living like this has little or no plan to retire early. They are probably not saving much and almost certainly not investing for early retirement.
Fat FIRE might look like a lifestyle of £60k-£80k or more a year. At this level, you should be able to enjoy most of life’s luxuries.
This would mean saving something between £1.5 – £2million. Reaching this level is likely to need a significant salary and savings rate.
What’s wrong with the Fire movement?
The criticisms of the FIRE movement include:
That a lower withdrawal rate between 3-3.5% should now be considered instead of 4% rule of thumb, much has changed since the Trinity study so some feel investors be more cautious now.
Maybe the Fire movement is just a club for people with very large salaries who even with modest lifestyle changes can easily save significant amounts of money. It was thereby making this a rather exclusive club for high paid IT consultants, engineers or doctors.
Financial independence retire early is not without some risks
Are the high stock returns of the 2010s still possible or should people be more conservative in their expectations? Meaning that people would need to save much more into their investments to come near to their Fire number.
Retiring early comes with many nice problems, but it’s not without its trickier questions. If you retire early, you are going to have a lot longer without an income. As we are all living longer and longer, it could mean you are going to be retired decades longer than you worked. Can your savings and investments last 40 or more years?
Maybe the pursuit of Fire might be the wrong goal for you. Should you be looking more to find the career you like rather than no work at all?
Once you have Fired what will you do with yourself? Yep, beaches and parties will be good for a while, but then what? What will be the purpose of your life, and how will you now use your time?
None of the above can take away from being financially independent and not needing to work. You just might like to work but luckily now that you have reached FIRE you don’t “have” to work, which would be an excellent place to be.
FAQ: Financial independence retire early UK
Can I retire at 55 with 300K UK?
- You could it depends on what you hoped your life will look like from then to the final curtain.
- What sort of lifestyle are you hoping to live?
- An invested fund of 300k might throw off 12k a year, possibly more if you want to end up with nothing (ideally on the day you die and not before)
- Read more here about what might be possible with 300k.
How much do I need to retire early UK?
- The rough rule of thumb is 25 x your annual spending needs invest in the great companies of the world.
- This way there is a reasonable expectation that you would be able to take out 4% from the fund each year without running out of money.
- Enough to have a dignified, secure, independent and comfortable lifestyle – how much would you think that would cost in your situation?
How can I be financially independent and retire early?
- Live well within your means
- Get out of and stay out of debt
- Pay yourself first.
- Increase your financial literacy through, books, podcasts, coaching or advice.
- Know your numbers, saving, spending, net worth and freedom numbers.
- Get yourself a GAME Plan
- Set Goals for what good looks like
- Take Action everyday overcoming roadblocks as they appear.
- Figure out what Means you have now and need. Increase income and or create new sources of income.
- Execute your plan, review, revise and take action again.
How much do you have to earn to be financially independent UK?
- You can become financial independent on any salary in this case size is not important.
- Obviously the more you earn the easier it is to save but its more about what you get to keep that what you earn. If you spend all your money it doesn’t matter what you earn.
- The greater your savings rate the sooner you will become financial independent.
Summary: Financial Independence retire early UK
- Have a clear vision for your ideal lifestyle and set out a plan to achieve it.
- Save a lot more than you spend. Do as much as you can to grow this gap
- Keep your costs as low as you can. Food, accommodation, travel, utilities, banking and investing. This includes ensuring you are as tax efficient as you can. Use tax-efficient savings wrappers like an ISA or Pension to reduce your tax bill.
- Protect yourself from disaster. Set up an emergency fund of 3-6 months or more depending on how safe you want to feel. Insure yourself against significant misfortunes. This might be through savings, so self-insuring or through health, life, critical illness and or income protection insurance.
- Invest your surplus savings into assets that will grow in value and produce an income, i.e. shares and or rental properties
- Continue your financial education. Read books or blogs, listen to podcasts get a financial coach.
- Raise your income. Could you work for a promotion at your current job? Move to a new role for more pay? Start a side hustle connected to your experience, hobbies or interests?
- Is your life, job and financial admin in a mess?
- One or two months away from financial disaster if you quit?
- Not enough time or money to achieve what’s most important to you?
- No idea how to plan, save and invest to become financially secure?
What’s likely to be the outcome if you don’t make some serious financial plans and start saving?
Without making some clear plans you are at real risk of having nothing to fall back on when things change for the worse.
Financial life coaching and planning will give you the support, guidance, and accountability you need to succeed with money and life building your savings and wealth.
- Get you financially organised
- Build your savings cushion for when things go wrong
- Help you figure out how much money is enough
- Help you understand and build wealth to never run out of money
Start building your money confidence now because waiting will only make it more expensive and painful to achieve later.
Plan, build and enjoy your money.
Taking you from life and financial crisis to happiness.
Contact us here for a free chat about building your money confidence and what options you might have for creating wealth in every area of your life.