FIRE and retiring early demands big sacrificies: Could you do it?

The ‘Financial Independence, Retire Early’ movement captures many people’s imagination – but it requires strict discipline

Scrimping your way through young adulthood to achieve early financial freedom takes huge discipline.

The ‘Financial Independence, Retire Early’ movement captures many people’s imagination, but you may well baulk at some of the extreme tactics of its ardent followers.

Its fans aim to retire in their 40s by boosting their earnings as much as possible, saving 70 per cent of their income by living simply, and building up their savings by investing. 

Of course, it’s possible to follow just some of the FIRE rules, or adapt the movement to your own lifestyle, and still end up wealthier and more independent at an earlier age than most.

There is no exhaustive ‘how to’ guide to FIRE success, but we have explored some of the most common strategies and got money experts to run the rule over them below.

We also wade into a couple of controversies raised by FIRE. Can you – or should you – pursue this life goal if you have children? And do you have to be rich or very well-paid to even toy with this idea?

FIRE money strategies: Could YOU follow these rules to reach financial freedom?

1. Live with extreme frugality to cut your expenses to the bone

‘Going without rarely provides an individual with an enjoyable lifestyle,’ says Ray Black, chartered financial planner and managing director of Money Minder.

‘As much as I am a firm believer in the phrase “life’s too short,” I don’t believe that choosing to go without life fulfilling experiences in the first 20 years of adulthood is likely to be a good idea for the majority of people.

‘Making memories in your 20s and 30s whilst young and motivated to do so will help to shape a long term view on the world.

‘Living in “extreme frugality” is likely to hamper an individual’s ability to make some of those really important memories and could even lead to a lifelong habit of forever “putting things off” until later. However, what if later never comes?’

Lisa Caplan, director of the OneStep Financial Planning arm of Charles Stanley, says: ‘I think it’s good to get people to look at what they are spending money on.

‘To do this, people have to make a trade-off between spending now and spending in the future. It sounds harsh but you have to tell people to forgo their daily latte for the future.’

But she believes many people would put property ownership ahead of retirement on their list of ambitions. 

‘People find it very hard to focus on other financial goals until they have bought a house,’ she says. 

And Caplan adds that life can send you unexpected curve balls, noting: ‘We just lived though a pandemic that made people question their life choices and what was important to them – it’s not always money.’

2. Save 70% of your income

‘Saving so aggressively is likely to be too extreme an approach for many people but there are aspects of the FIRE movement that we can all adopt,’ says Jenny Holt, managing director for customer savings and investments at Standard Life.

‘There’s also the question of how realistic saving a majority of your income is in the current environment, where unavoidable basic costs like food and fuel are on the increase.

‘Those who follow a FIRE approach may also miss out on the most efficient ways of saving. Pensions are only accessible from age 55, a figure that is set to rise in the coming years, but they come with tax relief on contributions and, in the workplace, an employer contribution.

‘Those who need the money sooner are going to miss out on these added benefits which can make all the difference.’

Black says if you have a high income and low day-to-day living expenses, saving 70 per cent of the money coming in may well be possible.

But he agrees with Holt that the most attractive and tax-efficient savings schemes for retirement are pensions, which are ideal for building the financial independence required to retire early, especially if you are a higher rate tax payer.

And like her, he cautions: ‘Generally speaking, money can’t be drawn out of a pension plan before age 55 and from 6 April 2028, this rises to age 57.

‘This means that anyone wanting to retire earlier than these ages will need to look at complementary savings options, like investment Isas, to bridge the gap tax efficiently. Furthermore, the road to an early retirement could be very restrictive and much less enjoyable for someone aiming to save 70 per cent of their income each year.’

Caplan says: ‘It’s really hard for people to save with this degree of intensity. For most people, I don’t think this is possible. Think about rent, mortgage, tax, food – I think for most this is a pipe dream.’

3. Work out cost of things you buy in terms of ‘working hours’ 

 Most people have some measure they use to decide if a non-necessity is worth buying, and using working hours is just one of them.

Another way is to divide how often you are likely to use an item, wear a piece of clothing or take advantage of a service into its cost.

Lisa Caplan: ‘We just lived though a pandemic that made people question their life choices and what was important to them – it’s not always money’

For example, going to the gym every day for a year reduces the cost per visit and makes a membership deal much more worthwhile than if you end up going once a fortnight.

But there are also qualitative considerations to weigh up in a decision like this, such as the health benefits of going to the gym even if you only end up going once a week.

Black says: ‘From time to time, many of us will have probably worked out roughly how long it took to earn the amount of money that we needed to pay for a large item like a car or a holiday.

‘However, in my opinion, living life like that every day runs the risk of becoming so obsessed with money that it could make even Scrooge look positively generous!’

He suggests simply asking yourself ‘do I want it, or do I need it’?

‘If you need it, working out how long it took to earn the money to pay for it has no relevance, because you need it,’ Black explains. 

‘However, if you want it but don’t actually need it, you’ll know that the choice you have is more an emotional one. You may change your mind before you spend hard-earned cash on a luxury that isn’t required, and may be better off put towards savings instead.’

Caplan says it is useful to have some measure in mind when you make important spending decisions, and she personally works out how much of her disposable income, after deducting tax and fixed costs, a purchase will use up.

Holt notes: ‘Looking at how much little luxuries add up over time can be sobering and there are tools out there which will bring these figures to life. There’s nothing wrong with treating yourself but being mindful about your spending will pay dividends in the long run.’

4. Use credit cards for points and rewards, but always pay off the bill

‘I quite like this strategy, as long as the individual is regimented enough to always pay off the outstanding balance and has enough money set aside to do so, even if the wages that they were expecting to come in don’t arrive as expected.’ says Black.

‘As companies do their best to secure your business, there are some great rewards available on many credit and loyalty cards these days.

Ray Black: Living in ‘extreme frugality’ is likely to hamper an individual’s ability to make really important memories as a young adult

‘However, it’s really important to read the small print and try not to incur any interest charges on outstanding balances if this option is to work well.’

Caplan says she pursues this strategy herself, and holds credit cards for spending on different things, for example keeping one simply for grocery shopping.

She warns that it is easy to overspend and get into trouble, but if you can avoid that and are good at paying off your credit card bills every month, doing this will also help with your credit score over the longer term.

5. Increase your earnings as much as possible

‘Having a great work ethic and high quality skills in a chosen area that they are passionate about is the way the majority of self-made financially successful individuals achieve their short and long term financial goals,’ says Black.

‘Taking on more work via a second job, or setting up a well-run business as your main or a second income, is highly commendable and can definitely help some people to achieve more income.’

But Black adds that in his experience, successful, high earning, hard-working individuals who enjoy their jobs tend to have a fulfilling career, and some choose not to retire early even though they have the financial security to do so.

6. Don’t increase your spending as your income goes up

‘A basic premise of FIRE is that you control your costs,’ says Holt. ‘A good rule for the average saver is to ensure that when your income does go up, you try and ensure your costs don’t follow.

Jenny Holt: Pensions are only accessible from age 55, but come with tax reliefs which FIRE followers could lose out on

‘So-called “lifestyle creep” can really eat into people’s ability to save, and automatically putting extra money aside before you get used to it could ensure you hit your savings targets sooner.’

Black likes this financial tip because it helps you to live within your means and get out of debt early.

But he says: ‘It’s not easy to do because as income increases, the choices of what to spend the surplus money on are wide and varied for all of us.

‘If there is enough left over to put some extra money side each month whilst also enjoying some rewards for the promotion or change of career that lead to the increase that could potentially be a good balance for many.’

Caplan also reckons this is a good idea when you get a pay rise.

‘You haven’t got used to it and yet it’s natural for your lifestyle to change because your income goes up. This is powerful. It can make a big difference. You just save so much more.’

7. Invest aggressively – which means taking bigger risks

‘Investing aggressively is likely to lead to much more fluctuation in the value of your investments,’ warns Black.

‘After all, bigger risks don’t always lead to higher returns, they can also lead to higher losses. A balanced approach to investing is much more appropriate for the majority.’

He goes on: ‘Behavioural economics would suggest that most people are twice as upset about the losses they incur as they are happy about the gains they make.

‘In which case, an aggressive investor would also need to be very comfortable with the investment decisions they make to avoid future stress and disappointment if things don’t go to plan.’

8. Retire in your 30s or 40s on around 25 (or 33 if conservative) times your annual expenses – your FIRE number – then withdraw 3-4% of your savings each year

‘People get a lot more from work than money – social contact, stimulation, participation in society,’ says Caplan. ‘I don’t think that stopping work in itself is a good thing.’

She adds that if you are not in work you won’t be making National Insurance contributions to a state pension, which at around £20,000 a year for a couple both on the full rate makes a significant impact to retirement income. (You can make voluntary NI contributions to keep building up your state pension – find out how here.)

She also repeats Holt and Black’s warnings above that you will potentially miss out on employer contributions and tax relief from the Government into your pension, if you stop paying in and opt out of taking the traditional route to retirement.

Caplan adds that the original FIRE goal of taking 4 per cent from your investments every year is based on an old US study of pension withdrawals in retirement.  She says she would question whether that is appropriate and still applies today.

Black says: ‘This may be OK for those people who are absolutely sure that they will have plenty of friends and family to spend time with in their 30s or 40s, or for example, those who have a passionate desire to travel the world before they reach the age of 40.

‘However, in reality, there are very few people that achieve this goal and even if they do they are likely to be so successful that when they reach the time that they could do that, they realise that they are not quite ready to give work up.’

He adds: ‘At age 25, age 40 seems a very long way away and retirement at 40 can seem like a brilliant idea in your mid 20s.

‘Even if that goal is achieved, the reality will be that to have done so will mean that the individual is either very frugal or very successful.

‘Either could decide to decline the opportunity because they had worked so hard to achieve this goal, they would feel as though they lacked purpose and may even feel as though they would lose out on some of their current social interactions if they retired at such an early age.’

Regarding the FIRE number, Black says long-term cash flow forecasting and modelling up to age 99 is a better way of calculating what you might need, because it will take tax, rates of return and inflation into account.

But he adds: ‘To have a goal in place, even if it has been calculated in a very simple way, is a great place to start.’

Can you follow FIRE if you have children?

There are moral as well as practical questions to consider here.

The issue at stake is not whether or not a FIRE follower should have children. It is whether, once you do have children, you should continue to pursue a FIRE strategy regardless.

Your children are dependent on you and your financial decisions for their welfare and development, and making those choices wisely is an important parental responsibility.

To keep pursuing FIRE strategies like extreme frugality, you would need to be prepared to deny your children both material goods and experiences you could otherwise afford for them, in pursuit of your own life goal to stop working as early as possible.

It’s also worth considering that if you miscalculate and run out of money when you are too old to earn it back, you might end up financially dependent on your offspring.

‘Children are often referred to as “dependents” in financial jargon on the basis that as well as being part of the family, they also come with costs,’ says Holt.

‘Various studies have put the cost of bringing up a child to age 18 at as much as £200,000, with food, clothing and factors like early years care costs all contributing to this figure.

‘In addition to the costs there is the challenge of explaining to a child why they can’t have certain things or experiences on the basis that every penny must be saved.

‘Peer pressure is likely to be just as significant for children as it is for adults who choose not to conform with traditional spending and working patterns.’

But Holt says a possible upside of pursuing FIRE when you have children is that it would encourage them to consider the value of money and learn how to budget from an early age.

Black agrees that teaching children the value of money is really important, and for some families a shared FIRE strategy could help the younger members understand how to save as well as keep down day-to-day living costs.

But he adds: ‘If this becomes an obsession that means children and their parents go without things, it could lead to those children being almost afraid of spending any money in the future, even on the important things that they actually need.

‘Therefore, subjecting children to an extreme FIRE strategy that involves going without and/or saving up to 70 per cent of household income each year could, in the long term, be detrimental to their lifestyle.’

Can you be a successful FIRE follower on a low income?

One of the controversies the FIRE movement has ignited is whether it is a financial strategy only open to people on high incomes.

People on lower incomes, who might be in vocational jobs that are more socially useful and important than higher paid ones, or a carer in their family, or volunteering a lot of their time for free, are unlikely to be able to retire early however hard they work or save.

Holt says: ‘FIRE will be incredibly challenging for those on low incomes. The PLSA recently published an update to their retirement living standards which put the minimum income required in retirement at £12,800 for an individual.

‘This sum only covers a very basic lifestyle, and assumes no ongoing mortgage or rent payments, so the minimum income requirement for those at earlier ages is likely to be higher.

‘If someone earning £20,000 wanted to save 70 per cent of their income for 20 years to age 40, this would leave them with only £6,000 a year to live on over that period.

‘This level of saving might accumulate around £550,000, which sounds like a lot, but this sort of sum could be difficult to live on if it needs to stretch another 40 years or more. Typically FIRE is going to be much more doable for those on higher earnings and with lower financial commitments.’

Black says the only way someone on a low income could make the FIRE strategy work is if they have a low expectation of expenditure and lifestyle once they reach their early retirement age, for example centred around self-sufficiency or surviving predominantly ‘off grid’.

‘For the majority of wishful early retirees, they’ll need to have significantly more money coming in each month than they actually spend to get close to enjoying an early retirement.

‘As such, low income earners are likely to need to become high income earners before they retire for a FIRE based financial planning strategy to really work.’

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