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
You can retire when income from your pensions and savings can replace your earnings. 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. In order to build up a retirement fund, you have to avoid spending every penny you earn. With a typical auto-enrolment arrangement, you get to save 8% of your earnings (including the employer top-up) towards a pension. Most experts agree that this is far too low a savings rate to achieve a comfortable retirement by normal retirement age.
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 is an important principle of prudent retirement planning.
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 a slightly earlier retirement is prudent. If it turns out you can work longer, you’ll be even better off. 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. This is supposed to be the safe withdrawal rate from savings once retirement. 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 use rules of thumb, you’d be better of using our own intelligent planning app. Whilst not specifically designed for FIRE, it follows the same 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.