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Are You FIREd Up For An Early Retirement?

Updated: Jul 18, 2022

The Financial Independence, Retire Early (FIRE) Movement Encourages a Program of Extreme Savings and Investment. What Lessons Can You Gain From It?


Financial Independence. We all want it, don’t we? To not be beholden to The System. To be free. To have choices around work and life.

Retire Early? An ambition for some, but not necessarily to everyone’s taste.

Many people consider the suggestions made by FIRE to be overly aggressive and that there needs to be better balance between spending more today, to enjoy the moment, and saving for freedom tomorrow.

Whatever your personal ambitions, on both the ‘FI’ bit as well as the ‘RE’, we think there are some valuable universal lessons we can all learn from FIRE.

In fact, we can’t think of any other movement that so succinctly encapsulates some of the key principles and trade-offs that you will face with your personal financial planning.

WITHOUT A TARGET YOU ARE DIRECTIONLESS

In any plan you have, it pays to have a target and a reason to believe that the journey you are undertaking will achieve that target. Otherwise, you are likely to get disillusioned along the way and possibly give up.

You wouldn’t enter a running race if you didn’t know how far away the finishing line was. That would be torture!

FIRE provides a target number for personal financial plans.

Followers who take it to the extreme aim to save and invest 75% of their income so as to build up a pot of assets of at least 25 x their annual expenditure as rapidly as possible. They then take the view that this equates to being financially independent.

In reality, few people have the ability or desire to save 75% of their income.

But if you can’t save anything, you’re not going to be on a path to your ideal retirement. So, you need to find your happy middle ground.

And you will then have a target that you can track your progress towards, and gain motivation from this.

YOUR EXPENDITURE IS THE KEY TO YOUR FINANCIAL INDEPENDENCE

The FIRE movement’s suggestion of building up 25x your annual expenditure figure is simplistic, but it starkly highlights the importance of what your expenditure number actually is, both pre and post retirement.

So, if you want to be able to spend £30,000 p.a. you’ll need a £750,000 pot. Raise that to £40,000 and you need £1,000,000. For £60,000 you need £1,500,000.

Everyone would rather have £60,000 per annum than £40,000, but if you worked out that it would cost an additional half a million pounds, after tax – and think about how many years of extra work you will have to do to achieve that – is it really worth it? How much extra pleasure is that leap in income going to give you?

It’s your life and your choice but at least the simple mathematics of FIRE forces you to consider those trade-offs.

USE LOW COST FUNDS FOR YOUR INVESTMENTS

Any article or blog you read on FIRE will encourage you to invest in a low cost manner. If your financial independence equation focuses on avoiding unnecessary waste (as it should), it follows that you shouldn’t pay unnecessary fees for expensive fund management.

Every pound that you pay to a fund manager is a pound less of potential return, a backwards step on your FIRE journey.

Of course there will be expensive funds that beat an index in the short term - chance alone dictates that there will be - but how likely is it that you can pick those in advance?

Research shows that, historically, over the long-term, lower-cost investments have tended to outperform their higher-cost peers.

YOUR FINANCIAL INDEPENDENCE AND YOUR RETIREMENT MAY BE DIFFERENT

Not everyone wants to retire early or even to retire at all. But it would be a nice choice to have, wouldn’t it?

That’s the essence of financial independence. You might call it financial freedom.

The emotional and psychological freedom you gain from knowing that everything you do in life, including work, is being done on your terms. Being done because you want to, not because you have to.

This might mean leaving your main job and moving into a part-time or freelance role.

Perhaps you’ll choose a vocation that will be more enjoyable, but less well paid (the term Barista FIRE has been coined for this more flexible form of FIRE).

GENERATE A FINANCIAL PLAN AND LINK IT TO YOUR LIFE PLAN

Whatever your financial independence and retirement ambitions, being conscious of your spending and deliberate in your saving, the key tenets of the FIRE movement, can help you achieve them sooner.

If that can link with a clear set of life goals that you are working towards, you’ll be well on the way to financial freedom.

If you would like to discuss how you could best achieve financial freedom, please call us on 0203 488 9505.



The value of your investments can go down as well as up, so you could get back less

than you invested.

Tax and Estate planning is not regulated by the Financial Conduct Authority.


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