This is a big one! A game changer! Today I’m going to walk you through the principles of Financial Independence Retire Early, aka the FIRE movement. The vast majority of this world follow a standard pattern. We are born, we go to school (to varying levels), we get a job for a depressingly long time and then if we are lucky, we retire around 65 years old. When you reach retirement your state and job pensions were generally enough to look after you.
Things have changed considerably, and we all need to be on top of our game to ensure we can even retire! This is where the principles of Financial Independence Retire Early – FIRE movement will help you.
The current pensions crisis
Before we look at the principles of Financial Independence Retire Early let’s take a look at the state of play at the moment. Spoiler, the current state of pensions is quite bad. Let’s have a look at some findings from the Financial Conduct Authority on pensions in the UK alone. The US figures are very similar:
Just over 645,000 pension plans were accessed to buy an annuity, move into drawdown or take a first cash withdrawal in 2018/19.
4 in 10 of all the pension pots accessed had a value of less than £10,000.
Over 350,000 pension pots were fully withdrawn at the first time of access; 90% of which were less than £30,000 in value.Financial Conduct Authority
Of those 645,000 pensions plans, they totaled a pot of £40.1bn. Wow, you might say. No. That works out to approximately £62,000 on average. That would get you an income of £2,500 a year plus the minimal state pension. So, there are hordes of people happily going about things with no visibility of the shitstorm approaching.
However, there is a growing trend, a movement if you will, of those of us who are focused on changing our fates. Many people around the world understand that they do not have to work until they reach 65 years old. You may have heard stories of people leaving their jobs earlier. That rare breed of workers who are eagerly taking early retirement to enjoy their life.
They have an objective to blaze a new path on the way to retirement by following the principles of the Financial Independence Retire Early movement – FIRE movement. I have always lived a relatively money-conscious lifestyle after my brushes with debt, although like everyone I’ve had my hiccups along the way, it was only in the last year and a half (Mid 2018) that I was able to put a label to it and ultimately provide a focus to my strategy. This was the Financial Independence Retire Early movement.
Now is the right time to explore the basics of the FIRE movement and make a better-informed decision about how you approach life.
The craziness of the COVID-19 (in full swing as I write) will hopefully have opened people’s eyes to what happens you’re your job is put at risk. FIRE can help you to make plans for the unexpected even if you ultimately, decide that not all the principles are for you.
I have chosen an approach where I want to focus on Financial Independence and not the Retire Early element. Let me know in the comments what you think. Even if you decide it’s not for you I hope it makes you take a look at your pension contributions.
What is the Financial Independence Retire Early (FIRE) movement?
Financial Independence Retire Early (FIRE) movement is a popular lifestyle movement with an aim to become financially independent and retiring early. The movement is getting increasingly popular through online communities, such as Reddit, via lots of information shared in discussion forums, podcasts, and blogs. In short, the theory is, to save as much money as possible into tax-efficient accounts and create enough passive income to retire early.
The focus can run from being more financially aware and focusing on your savings through to complete frugality to drive down any expenses and live on a minimal amount of money.
This second part tends to be the focus in more main-stream media publications and has a tendency to portray the movement as the fancy of extreme people who live off bags of rice and tins of beans. There are people like that, but lots of more “normal” types who are just eager to improve their circumstances.
As a benchmark, fans of the movement aim to have a savings rate of around 50-70%, but the more you delve into the community the more you see how accepting most are of whatever you are able to do in your given situation.
There are different methods to increase the savings rate advocated by those in the FIRE movement. However, the two main methods are decreasing expenses and increasing your income.
Everyone with an interest to achieve their goal of FIRE is looking to accumulate their assets until they have enough passive income to provide financial support for their living expenses. At this point paid work becomes optional and you have achieved financial independence.
Origins of the FIRE movement?
The origin of the principles of Financial Independence Retire Early could be said to come from when Vicki Robin and Joe Dominguez published Your Money or Your Life in 1992.
This book popularised the concept of achieving financial independence instead of spending the best years of life working in the usual 9 to 5 job and make money. The core concept of this book is that almost everyone floats through life by exchanging the time for money. We then trade that money to buy things which do not matter. Rinse and repeat.
In more recent times Mr. Money Mustache (MMM) has been one of the more popular figures in the community and an entry point for many, including myself. In his own words, he is a “freaky financial magician who retired along with a lovely wife at age 30 in order to start a family, as well as start living a great life”
In the UK Monevator.com is very popular and is written by two contrasting writers. The accumulator and the investor providing different, but well researched and expert viewpoints on a number of topics.
How does FIRE work?
There are some general rules to follow and these are constantly being debated to what level you take each of them in the FIRE movement, but as a rule of thumb the principles of Financial Independence Retire Early are:
- Clear your debt
- Create an Emergency Fund of three to six months of expenses, more if you can.
- Take advantage of pension matching within your company pre-tax
- Depending on what stage of your journey you are at:
- Continue to fill up your pension making the most of the pre-tax savings
- Create a bridge fund in a tax-free investment vehicle once you’ve been paid i.e. after-tax on your salary
- If you are in the lucky position to have maxed out pension and tax-free allowances look at other investment vehicles to stash your cash in that offer reduced tax liabilities.
Each month your aim is to save as much as possible after your living expenses. This will vary for different people. Don’t compare yourself to others! For some, this may be 10-20% or lower and for others, it maybe 70-80%. Impressive savings. It all depends on the timeframes that you are aiming for.
For me, I end up at approximately 60-70% saving per month from my income. I can do better and I will strive to.
This is something that is very different from what is seen as the norm. As people increase their salaries it tends to come with life creep. More money leads to a bigger house and the accompanying mortgage, more luxurious holidays or a bigger, better car. Adhering to the principles of Financial Independence Retire Early can be as much of a psychological mindset change that anything physical.
How much money will I need to retire on?
A good question. To cut a long story short the consensus is that you take your living expenses and multiply them by 25. This comes from research called the Trinity Study that proposed, based on historical returns, that a Safe Withdrawal Rate (SWR) to live on was 4%.
This number is often debated, and research shows that this number is weighted towards the US Market. UK studies have come in closer to 3.6-3.8, but for the purpose of starting out the 4% rule is fine. As you learn more about the movement and investing you will likely change this.
For example, let’s say your current expenses are £30,000 a year. Your savings for retirement should be £750,000. If you are more risk-averse and reduce it down to 3.8% then you’d need £810,000. Ignore the pounds signs and simply replace the numbers with your chosen currency, but remember it’s worth checking out the accepted SWR in your country.
“Wait, hold on. What’s this SWR you keep banging on about”, I hear you say. The SWR is simply the % of your total savings you would take out from your savings pot each year to live on safe in the knowledge that the savings pot is likely never to run out…according to statistics.
How do I save that much for retirement?
Well, it’s not easy and I feel the majority of people are sleepwalking in a very bleak retirement. There are a few pieces of advice on how to go about it. We’ve covered the approach to saving, but we left out one crucial part. The power of compound interest.
Simply put, compound interest is where you start with a principle figure, let’s go with $1000. Your Year One investment. This is invested and hopefully makes a return. Let’s say it makes you an average annual return of 5% over ten years. Please note numbers are used for the sake of simplicity.
Compound interest means that in year 1 you make 5% on your $1000. In year two you don’t make 5% on your $1000, instead you make 5% on the $1000 plus the interest you accrued so its 5% on $1050. It is easier if we view this in a table:
As you can see, with the power of compound interest you invested $1000 in Year One and after that nothing, however the total value of your investment has increased by $551 or 55% without you doing anything other than having it invested. Why don’t you have a play with a compound interest calculator to see what that would mean for you?
What is the best way to invest my money?
Firstly, the disclaimer. I am not a financial advisor and I am not responsible for how you invest your money. The ideas within this section are the general approach most within the FIRE movement take. As always do your own research and only invest when you are completely sure.
You have probably come across various different ways to invest your money everything from buying individual stocks in companies through to crowdfunding. I will do a more detailed post on this later, but there are a couple of lines of thinking on investing for FIRE, which are backed up by some pretty big hitters in the investment world:
- The earlier you start the better, however, if you’ve started late then you need to increase your savings to catch-up or add in a lump sum if that is an option
- Invest in passive index funds such as the Vanguard Life Strategy funds. These are low commission funds that track certain Indexes. These are not sexy, thrill-seeking investments rather steady investments that have consistently delivered good results over time.
- Time in the market is better than trying to time the market. The basic sentiment is around trying to catch a falling knife or sell at the top. Invest for the long term
- As you approach your retirement age your portfolio should change to limit your risk. For example, when starting out you may go for a 100% equities (stocks + shares) approach that allows you to build funds quicker. This is called your accumulation stage. As you progress nearer and nearer to retirement you may want to change your risk profile so that you aren’t impacted by fluctuations in the market such as COVID-19 at the moment or another bubble bursting. You would reduce your allocation in equities and increase in government bonds or even cash for example.
“My money…is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will…My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers.”Warren Buffet – Berkshire Hathaway Shareholders letter
Are there different variants of the FIRE Movement?
Depending on your situation there are a few different variations within the FIRE movement, although the fundamental principles of the Financial Independence Retire Early movement stay the same. The differences come with what you set your living expenses at and therefore your final number:
- Lean Fire tends to be someone who is planning to retire with household expenses of $40k/year or less. This is in US terms, which due to a lack of national health care services such as the NHS in the UK means that their number is higher than the UK. In the UK it would be around the
- Barista FIRE is where you have an aim to get almost all the way there, but you have no problem picking up a part-time jobor a side hustle to cover the last part of your expenses. This is probably the closest to what I am after. The freedom to not have to do the corporate 9-5 (I wish it was those hours!).
- FIRE – Standard Financial Independence Retire Early on what would be assumed to be around an average expense
- Fat FIRE is the beast amongst the group. Fat Fire is for those very wealthy. Totals are generally in excess of £/$4m. Typically business owners looking to retire, but also an element of building their legacy for future generations.
Who is FIRE for?
It is for everyone, but it may not suit everyone. The FIRE movement is very much a mindset and not everyone has that. For many, it may be counterintuitive to work so hard and then just squirrel away that money into savings.
For every 1 person saving frantically, there will be 10who want to keep up with the Jones’. Buy that new house, car or holiday. These tend to be the people who have let life creep in and are probably living paycheque to paycheque despite earning a good salary.
You will need patience and determination. This is not a get rich quick scheme and in fact half the time it will feel like an absolute drag, but you will hit milestones along the way that are very rewarding. Your date to Fi will start to reduce and become more real.
If you talk to friends and family about the likelihood is, they simply won’t understand. They can’t fathom saving all that money or are too institutionalised in the normal ways of working to even contemplate retiring early. They will always have a blocker. A reason why you are lucky and it could never happen for them.
Help is on hand because the community is thriving. I think after the carnage of COVID-19 the FIRE movement will start growing even bigger, probably alongside the Prepper community! Like in any community be respectful of others, try to help those who are new and try not to compare yourself to someone else’s journey.
The best resources for the FIRE movement
The number one book in the FIRE movement community is Tim Hale’s Smarter Investing and a must for anyone interested in FIRE or just generally in investing. The book itself is not explicitly a FIRE book, but it lays out the investment approaches that most follow.
I also highly recommend David Sawyer’s Reset. Even if you are familiar with the principles of the Financial Independence Retire Early movement this is a great book or audiobook to listen to. David is still on his way to FIRE, but details all the things you’d need to approach it plus so bonus bits that you may not have thought about.
My favourite communities are the Reddit subs:
- UK Fire
- FatFIRE – It’s a different world.
- UK Personal Finance
- Personal Finance – more of a US slant
- Financial Independence
and there are many more like chubbyFIRE and SemiFIRE!
The Wrap Up: The Principles of Financial Independence Retire Early movement
The principles of the Financial Independence Retire Early – FIRE – movement can seem daunting, but even if you decide not to go all in the fundamental principles are something that will help you in the long-term, even if it is just to give you a clearer picture of what your future could hold.
Are you on your way to FIRE? Does it sound interesting? Leave me a comment below and we can discuss! If you’ve enjoyed this post please feel free to pin the image below on Pinterest.