The FIRE movement (Financial Independence Retire Early) is sometimes regarded as a Millennial fad. Or perhaps as something only for the very rich. Perhaps that’s true about the purest forms of FIRE. But there are some sound underlying principles that we can all learn from.
It’s not what you earn, it’s what you spend
Retirement becomes feasible when income from pensions and savings is sufficient to support your desired lifestyle. That much is obvious. The FIRE approach is to be frugal while earning, thus rapidly building up savings. The difference from traditional retirement planning is in degree, not kind. Building up a retirement fund generally requires spending less than you earn. With a typical auto-enrolment arrangement, you get to save 8% of your earnings (including the employer top-up) towards a pension. Many commentators argue that this savings rate may be insufficient for a comfortable retirement at typical retirement ages.
On the other hand, a FIRE person might well save 50% or more. Suppose you saved 50% of net (after tax) income. Then every year of earning would fund one year of retirement. Say you started age 25. Then by age 50 you could fund 25 years of retirement. This is simplistic but it gives you the idea. Hopefully investment growth would mean the savings would fund more than 25 years.
The point is, by cutting down on spending, you automatically save more. And this brings forward the age at which you can retire at the same standard of living. This illustrates a principle that often features in retirementā€‘planning discussions.
What if they FIRE you?
Not everyone is in a hurry to retire. The government is steadily pushing back the state pension age, which is encouragement to work longer. But for some, events can scupper plans. A health crisis or redundancy can create a situation where prolonged employment is impossible. So if you’re relatively young, building a retirement plan that assumes you’ll work till you’re in your late 60s or later may be risky. This suggests that planning for an earlier retirement date can provide additional flexibility. If it turns out you can work longer, it may improve your financial position. If not, then you won’t have been caught out with insufficient savings.
Planning a retirement date
Many FIRE proponents like to base their planning on the 4% rule, a rule of thumb often used to estimate a sustainable withdrawal rate from savings. However it’s only a rule of thumb, and unsafe to rely on. If you plan a very early retirement date, then your savings will need to last decades longer than a typical retirement. The 4% rule was created assuming a life expectancy of around 30 years. If you retire early, your life expectancy will be longer, and so your safe withdrawal rate will be lower.
Rather than relying on rules of thumb, you may find it helpful to use our intelligent planning app. Whilst not specifically designed for FIRE, it follows similar underlying principles.
So even if you’re not a FIRE aficionado, don’t dismiss it out of hand. It has valuable lessons for all of us.